ASEAN is not China: Why the ASEAN P2P lending market will avoid the Chinese pitfalls

Recent market shifts in China have raised serious concerns regarding the long-term stability of P2P lending. But ASEAN is not China. It will not suffer the same fate.

By Preetam Kaushik

To say that 2018 was a rough year for peer-to-peer (P2P) lending businesses in China would be a gross understatement. It was nothing short of a bloodbath, mirroring in many ways the US sub-prime mortgage crisis of 2008-09.

Much like the American crisis, this one was also primarily attributed to a lack of adequate regulations. Given free rein, Chinese P2P lending platforms multiplied, with risky and downright fraudulent behaviour becoming all too common.

When the authorities tried to rein in the situation, it became clear that even the biggest players would fail to fall in line with the basic compliance requirements set forth. This sparked an investor panic, leading to a flight of funding in 2018.

As the Chinese P2P sector faced an impending disaster, several South East Asian economies were getting their first taste of this alternative financing model. Countries like Singapore, Indonesia, and Malaysia have all been at the forefront of a fintech evolution in the region since 2016.

The signs are encouraging. There is enough evidence to suggest that chances of the Chinese crisis replicating itself in these markets are slim, at least for the foreseeable future.

P2P lending is bringing hope to the unbanked

There is a highly disruptive determination behind the P2P lending phenomenon. After all, it is driven by the same technological forces that gave us social media, Uber, and other revolutionary agents. But the success of P2P lending is also driven by a genuine void in many markets around the world.

China, despite its economic power, shares the following crucial features with smaller markets in South and Southeast Asia:

  • A large percentage of small-to-medium enterprises (SMEs) and individuals without access to traditional banking services
  • High mobile penetration among the population
  • Easy access to investor funds, both domestic as well as international

These factors have allowed alternative financing models like P2P lending to thrive. But there is one difference: China is already an economic behemoth with a well-developed traditional and shadow banking system.

The relatively smaller economies of Southeast Asia provide a different set of challenges and opportunities.

For instance, in Indonesia alone, nearly 50% of the population does not have access to traditional banking. A McKinsey Global report suggests that nearly 39 million SMEs (51%) across the region lack access to any kinds of credit.

Despite having limited access to credit, SMEs contribute 40% of the region’s total GDP. It is also home to a combined total of 640 million people, which is more than half the population of China.

If P2P lending can bring SMEs universal access to credit and bridge the estimated US$175 billion financing gap facing SMEs in the region, it could result in economic growth and prosperity on a scale never witnessed before within ASEAN.

The Southeast Asian approach to P2P lending regulation is more proactive than the Chinese model

In the heydays of P2P platforms in China, the authorities pursued more of a “wait and watch” approach. In marked contrast, the regulatory bodies of Southeast Asian economies have adopted more pro-active steps to regulation.

Unbridled growth of the P2P lending market forced the Chinese authorities’ hand into attempting a belated crackdown, with disastrous consequences. In places like Singapore, Indonesia, and Malaysia, the focus has been to pre-empt such a situation by creating a balanced regulatory standards system.

In Singapore, the hotbed of P2P platforms in the region, the firms are regulated by the Monetary Authority of Singapore (MAS) and need a Capital Markets Services license to operate.

Indonesia’s financial authority, the OJK, has provided licenses to nearly 50 P2P lending firms and plans to develop a regulatory sandbox for fintech firms to promote organic growth.

The Malaysian Securities Commission has so far licensed half a dozen platforms in the country, and in Thailand, the Securities and Exchange Commission (SEC) and Bank of Thailand are working together to create a regulatory framework for P2P lending platforms.

These are still early days in the evolution of P2P lending in the region, but prompt intervention and a proactive approach to regulation are already paying off. In Indonesia, the OJK identified nearly 200 illegal online lending platforms. It is working with the companies to get them registered under the OJK. Those that are uncooperative are being blocked by the Communications and Information Ministry and their details are being handed to the police.

This zero-tolerance approach to illegal lending is essential for maintaining investor confidence in the P2P market and maintaining investor confidence is key to maintaining a healthy P2P lending market.

The erosion of this confidence was one of the key factors that caused the Chinese P2P market to spiral. The only way to preserve investor confidence is through enforced transparency and the maintenance of impeccable business standards.

Chinese P2P platforms also collapsed because of their over-reliance on investor funding that led to an inevitable bank run. For improved long-term stability, P2P firms need access to more traditional, diversified sources of capital.

In Singapore and elsewhere, the ASEAN markets are taking steps to promote capital diversification. There is a growing focus on developing mixed portfolios of investors, combining individuals, VCs, and other large institutional entities.

Despite being geographical neighbours, China and Southeast Asia are worlds apart in the way P2P lending has evolved in their respective economies. While the Chinese government was slow to react, governments in Singapore, Indonesia, Malaysia and Thailand have made a point of regulating their growing P2P lending markets from the outset.

The Government’s role in business is, in many ways, like gardening. Leave the plants to its course and you will soon end up with a jungle on your hands. But a nurturing and caring environment will deliver meaningful growth. ASEAN’s has green thumbs and a robust regulatory system. It should be more than enough to keep the P2P jungle in check.