For platforms that boast superior debtor risk assessments and aim to compete with conventional banks, online peer-to-peer lending services have so far fell short of their promises. (JG Photo/Tabita Diela)

Higher Risk Still Means Higher Interest in Fintech Lending


AUGUST 31, 2018

Jakarta. For platforms that boast superior debtor risk assessments and aim to compete with conventional banks, online peer-to-peer lending services have so far fell short of their promises.

These services currently offer annual interest rates of 19 percent on average to their clients, most of which are small and medium enterprises. However, the Financial Services Authority (OJK) says this is still too high to attract more borrowers that generally do not qualify for bank loans.

In comparison, conventional banks offer SMEs loans at interest rates of up 10 percent, or 7 percent with the state subsidy. Ajisatria Sulaeman, director of the Association of Financial Technology (Aftech), said borrowers using peer-to-peer services are often those who do not meet banks' requirements.

It means there are risks that those banks do not want to take, hence the higher interest to adjust to the higher risk, Ajisatria said. While it is easy for peer-to-peer services to obtain potential borrowers' behavior data on social media and through the use of services such as technology startup Go-Jek, it is still costly to verify.

"Without data from the civil registry, how can we make sure that they use their own identity numbers and not those of others?" Ajisatria said.

"So data from the Directorate General of Population and Civil Registration and the Financial Information Service System are still very important. With that, we can ensure that borrowers are not fraudulent," Ajisatria told the Jakarta Globe on Thursday (30/08).

Some peer-to-peer lenders even resort back to conventional credit scoring services, such as Pefindo, but this comes at additional costs, which are passed on to borrowers in the form of higher interest rates.

"The focus is on how we can easily identify borrowers, especially those with good intentions," Ajisatria said.

He said peer-to-peer platforms will be in a better position to assess loan risks if they have easy access to the population registry data. The number of bad loans can be reduced, which in turn, will allow peer-to-peer lenders to charge lower interest rates.

Sluggish lending by banks over the past few years has seen Indonesia's financial regulator welcome peer-to-peer platforms, which usually disburse small loans to micro, small and medium businesses that banks often consider high risk.

Loan growth has dropped to below 10 percent over the past two years from 20 percent previously, central bank data shows. Chatib Basri, a former finance minister, said in March that a climate of healthy competition and a growing number of online lending firms could help to reduce high interest rates.

"This approach can be made by multiplying the firms in the market segment, which will certainly cause interest rates to decline," said Chatib, who just became an advisor to peer-to-peer lender ModalKu.

Indonesia currently has 66 registered peer-to-peer lending firms, which have paid out Rp 7.8 trillion ($525 million) in loans as of July this year, compared with just Rp 247 billion by December 2016, according to the OJK.

These firms serve to connect more than 250,000 individual lenders to 1.85 million borrowers. OJK deputy commissioner Sukarela Batunanggar said the financial regulator until now still has no intention to cap interest rates and limit the size of loans these financial technology firms can offer. Aftech, which was established in 2015 and now consists of 152 fintech startups offering various services, ranging from lending, insurance and investment, plans to issue a standard on fintech interest rates soon, but it is currently still finalizing the amount.

Economic Contribution

According to a study conducted by Aftech and the Institute for Development of Economics and Finance (Indef), fintech lending firms have contributed Rp 26 trillion to Indonesia's gross domestic product since the OJK issued a regulation on such services in 2016.

Indonesia's nominal gross domestic product was Rp 13,558 trillion at the 2017 exchange rate, according to the Central Statistics Agency (BPS).

"While this is relatively small, there is still hidden potential on fintech platforms, as until now, it has not reached those in need of loans across the country," Indef economist Bhima Adinegara said.

The presence of peer-to-peer lending firms has resulted in the creation of 215,433 jobs since 2016, with total wages amounting to around Rp 4.6 trillion.

"The government must use this potential to increase financial inclusion by issuing easier regulations to expand the sector further, so it can contribute more to the Indonesian economy," Bhima said.