P2P lending in Indonesia is at a crossroads

Written by Kapronasia || March 26 2024

The tumult in Indonesia’s P2P lending industry should not come as a surprise. It is exceedingly difficult to both regulate this industry fairly and allow it to maximize financial inclusion benefits. Strict regulation such as is practiced in Taiwan and South Korea (though Seoul may make some changes soon) minimizes malfeasance but also limits the usefulness of the platforms. Amid the current meltdown of P2P lending platforms, which is hitting retail investors hard, the sector faces an inflection point in Indonesia.

In recent months, some of Indonesia’s largest P2P platforms have hit some big bumps in the road. The highest profile debacle has occurred at Investree, which terminated its CEO Adrian Gunadi on January 31 following media reports that he had resigned due to alleged misconduct. Gunadi allegedly diverted Investree funds to his personal account while using the company as a guarantor for another company he owned. Additionally, Investree also seems to have a non-performing loan (NPL) problem. The company’s current NPL rate is 16%, according to CrossASEAN Research cited by DigFin. Since Indonesia’s maximum permissible NPL level is 5%, Investree is facing heavy regulatory pressure for its problematic loan book.

Investree is not the only Indonesian P2P platform in trouble. According to Indonesian media, Tanifund is being sued by at least three investors that allege the company is in breach of contract given stalled debt repayments. That litigation is probably the least of Tanifund’s problems when one takes into consideration it currently has an NPL ratio of 60%, according to Fitch Ratings.

Another P2P lender in trouble is the rural finance specialist iGrow, which is facing a lawsuit by 40 former retail lending partners who claim they lost more than US$33.4 million. It is surprising iGrow has ended up in this situation given it is owned by the large state-backed e-wallet LinkAja.

Despite the real losses suffered by retail investors in P2P lending, institutional investors such as banks, multifinance entities, pension funds and insurers actually provide the lion’s share of financing for the sector at more than 88%, according to Indonesia’s financial regulator, the OJK. Given the small share of funding retail investor contribute, it is questionable how vital they are to the industry’s growth.

The overall industry continues to grow briskly. Cumulative funding provided by P2P lenders reached 739 trillion rupiah (US$ 47 billion) as of November 2023, nearly 50% higher than the 494 trillion provided as of November 2022, per OJK data.

Regulation that extends customer protection beyond borrowers to individual lenders might help to reduce the losses of retail investors in P2P lending, but ultimately, they are not likely to have the same tools at their disposal to evaluate risk as large institutional investors.