A few bad apples: How illegal lenders are abusing consumers in Indonesia’s P2P lending sector

Jakarta's skyline. Photo:Rizky Maharani

P2P lending offers Indonesian SMEs valuable access to credit. But a spate of complaints against illegal lenders has cast a pall over the nation’s fintech sector.

By Preetam Kaushik

Since 2018, two hashtags have gained widespread currency on Indonesian social media – #korban_pinjaman and #korban_fintech. A direct translation of these tags to English would read, “#victim_loans” and “#victim_fintech.”

The phenomena alluded to in the hashtags are a symptom of fast-growing issues in the Indonesian fintech scene. According to The Jakarta Post, peer-to-peer (P2P) lending became the third most complained-about sector in Indonesia in 2018. 

Around 14% of all complaints received by the Indonesian consumer watchdog Yayasan Lembaga Konsumen Indonesia (YLKI)in 2018 were related to online loans. The situation is so bad, even the industry bodies have acknowledged the issue. Kuseryansyah, executive director of the Indonesia Fintech Lending Association (IFLI), admitted there is a “dark side” to fintech in Indonesia.

Fintech is often seen as a light of technological progress in the ASEAN region, with Indonesia’s fintech sector standing among the regional leaders. So, what has gone wrong? The key to understanding the issues lies in the nature of the complaints.

Online lenders behave like loan sharks

According to social media posts and data compiled by the YLKI, an overwhelming majority of the consumer complaints are related to the debt collection tactics employed by online lending operations.

Many of the tactics described are blatantly criminal, with instances of online harassment, misuse of personal data, and extremely high-interest rates imposed on late payments. The abuse of personal data by lenders is also a particularly odious practice employed by lenders in some instances.

Horror stories of female borrowers being harassed and abused online, with their photos showing up in fake adult ads, circulate in the media. In other cases, lenders threatened to post compromising photos of defaulting customers online if they did not repay the debts on time.

Lenders did not limit their harassment to the customer. There are verified stories of family members and friends of borrowers receiving messages from lenders or their collection agents on social media platforms like Whatsapp and Facebook. Driven to desperation, some borrowers have even taken their own lives.

Most of the perpetrators are illegal lenders

According to the official estimates from the Indonesian Financial Services Authority (OJK), there were over 1,000 active P2P lenders in Indonesia in 2019. Shockingly, only a tenth of these are considered legitimate businesses and are registered with the authorities (around 127).

The rest are all illegal lenders, many of them with suspected ties to criminal elements. Some originate overseas. An estimated 40% of the illegal lenders are from China. In 2017, the Chinese P2P lending market suffered severe contractions following an official crackdown on illegal lending. Many of the Chinese operators shifted their attention overseas, with the huge Indonesian market offering an easy target.

Since the upsurge of consumer complaints in 2018, the OJK has shut down nearly 900 illegal operations. But it is easy for lenders to create new websites, apps and social media profiles to continue attracting customers. The OJK is embroiled in a game of whack-a-mole, trying to shut down illegal lenders while more pop up online.   

The authorities are taking a cautious approach 

The scale of the fintech market in Indonesia is formidable. There are close to 300 million individual consumers and 60 million Small and Medium Enterprises (SMEs). But less than 30% of the population has access to credit, leaving a huge void for perfect for fintech and P2P lending to step into. 

According to the OJK, the annual demand for credit among SMEs in the country was 998 trillion rupiahs (roughly US$96 billion).

The OJK and the Indonesian government are counting on the new fintech sector to bridge the credit gap and propel the Indonesian economy. The focus in recent years has been on facilitating the growth of P2P lending in Indonesia, with minimal regulatory pressure.

The Indonesian Financial Services Authority (OJK).
Photo: Baaqii

Pandu Aditya Kristy, CEO of MEKAR, a P2P lending startup, credits the regulatory support provided by the OJK. “I do not think P2P lending companies need to worry about regulation. In general, the current regulation has been accommodative to the business,” says Kristy.

Further regulations on debt collection and consumer protection would allow for strict punishments on predatory lenders

The OJK is understandably reluctant to bring a heavy regulatory hand down on the industry, given its immaturity and the potential economic benefits it offers.

Despite its aloof approach, the Indonesian government is ahead of their Chinese counterparts in regulating the domestic fintech sector. In China, the disastrous collapse of the P2P lending market was attributed to the government’s lack of regulation and oversight mechanisms. Learning lessons from the Chinese, the OJK has was quick to outline regulations in the early days of P2P lending.

They released the first set of regulations governing P2P lending in the country in 2016 and have regularly revisited them.

The vast majority of complaints have been levelled against illegal lenders. The legitimate startups which have applied for registrations are mostly up to date when it comes to compliance. They have even created self-imposed limits on interest rates (0.8% daily) to prevent predatory lending.

But it is clear from the complaints that the authorities have failed to adequately protect consumers. Debt collection tactics and consumer data protection laws need urgent attention. The OJK and the Indonesian government need to add more teeth to existing regulations to rein in abuse of consumer rights.

“Although the current regulation has been supportive to the growth of the P2P industry, we need to have a stronger regulation that can be used by law enforcers to prosecute illegal fintech players,” says Kristy, echoing a general sentiment shared across legitimate actors in the P2P lending industry.

Further action is also required to limit oversea access to the Indonesian P2P lending market. That will be a tough ask, in the modern, digitally connected world.

There is no doubt that the Indonesian government sees P2P lending as a potent engine of economic growth for the country. But it needs to do more to create a safe and reliable industry for consumers and legitimate companies.

The presence of illegal, predatory lenders hurts the fintech sector as a whole by eroding consumer confidence and increasing public distrust. In a market that already grapples with public security and safety perceptions, and still depends on venture capital and overseas investors, this could be highly damaging.