The Vietnamese government wants to facilitate the growth of a sharing economy. But it lags behind other ASEAN nations with regulations governing the peer-to-peer (P2P) industry.
By Joelyn Chan
Peer-to-peer (P2P) lending has been around since 2005. Lenders are connected to borrowers and earn money through interest charges on loans. Everybody wins. Borrowers receive cheap credit, investors earn interest and P2P firms derive revenue from service fees.
According to Transparency Market Research, P2P lending will surge by 48.2% annually in the 2016-24 period. Vietnam already has 10 fintech firms providing P2P services connecting investors to borrowers. Yet in 2019, Vietnam still lacks specific laws governing or regulating P2P lending activities.
The practice does not fall under the purview of a financial authority. Fintech companies offering P2P services do not have to register as a credit institution. As the P2P market expands, consumers are left vulnerable to predatory lending practices and market collapse caused by a wildly unregulated industry.
The Vietnamese government is taking steps towards regulations. It announced the development of a pilot program that will allow P2P firms to act as intermediaries connecting investors to borrowers. But P2P lending companies are also prevented from mobilising capital. After the pilot implementation, an official regulatory framework is expected, but this ‘wait and see’ approach to regulation will stymie Vietnam’s growth as a regional fintech hub.
A “wait and see” approach fails to capitalise on market opportunities
Vietnam has taken a similar ‘wait and see’ approach to fintech regulation in the past. Previously, the State Bank of Vietnam (SBV) observed neighbouring countries before setting up its own Steering Committee on fintech.
Deputy Prime Minister Vuong Dinh Hue said, “the approach is to facilitate the development of a sharing economy, not to let it develop freely or ban it.”
Singapore, Malaysia and Indonesia already have regulations for P2P. Vietnam is still being a passive player. While optimists would believe that it is better late than never, such caution slows the nation’s progress. Following the regulatory lead of other nations will prevent Vietnam from emerging as a fintech leader and capitalising on the economic opportunities that come with it.
Regulation brings in additional revenue
According to the World Bank, 79% of the population, or 76 million people, in Vietnam cannot access official financial services. In 2018, there were 5,000 lenders and 800,000 clients using Tima, a P2P firm. Successful transactions from Tima alone exceed VND15 trillion (US$646 million). The market still has massive growth potential.
The government hopes to generate additional revenue from the emerging P2P industry. According to the Vietnamese ministry of planning and investment (MoPI), “promoting the development of a sharing economy together with a proper framework for management will help improve budget revenue, enhance resource efficiency, encourage innovation and offer abundant choices for customers.”
Beyond government revenues, the development of a regulated and controlled P2P sector has huge implications for small and medium sized businesses (SMEs). In Singapore, the three largest P2P lenders have provided S$10 million (US$7.4 million) in loans to SMEs. In Indonesia, 30 firms have allowed investors to provide S$235 million (US$173 million) to SME borrowers between 2015 and 2018. In an underbanked country like Indonesia, this increase in readily available capital is driving business expansion across the archipelago.
Vietnam may have too much on its plate
Before the nation can think further about fintech, it needs to have its basic needs met. In November 2018, 86.19% of Vietnam’s 12th National Assembly approved the state budget projection for 2019. There will be a deficit of VND 222 trillion (US$ 9.6 billion), equivalent to 3.6% of the country’s gross domestic product, the highest in the region. The government will increase borrowing to maintain public spending, increasing public debt.
Additionally, a deficit has not stopped the government from increasing social benefits. The basic monthly salary will increase from VND 1.39million (US$56) to VND 1.49million (US$64). Also, starting from 1st July 2019, veteran revolutionaries’ pensions and benefits will increase.
P2P lending regulation is not high on the government’s list of priorities. The nation’s tax system is in need of reform. In the fintech landscape, the government has the goal of reducing cash usage to 10% of all market transactions. The deadline was 2020. However, there is no inkling the nation is approaching its goal.
Indonesia got ahead of the legislative curve on P2P lending. Now, it is beginning to reap the rewards. Its P2P companies have started to bridge the annual infrastructure-financing gap of Rp 1,000 trillion (US$73.9 billion). If Vietnam wants to emerge as a fintech hub and enjoy the wealth of opportunities it brings, it needs to stop waiting for other countries to take the initiative and take the lead on legislation. If it doesn’t it cannot reasonably expect to become a leader.