P2P lending hands

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Financial services authority OJK moves to control the booming peer-to-peer market, creating stumbling blocks for newcomers. James King reports.

On July 4, Indonesia’s financial services authority, Otoritas Jasa Keuangan (OJK), introduced new rules governing the conduct of peer-to-peer (P2P) lending groups. The regulation imposes a range of updated standards on the country’s P2P operators, including higher capital requirements, as well as obligations for controlling shareholders and other key ownership parties.

OJK’s intervention is aimed at strengthening governance standards and enhancing the capital structures of Indonesia’s booming P2P players which, in recent years, have emerged as a key component of the domestic financial services market. 

Raising the standard

The new regulatory requirements are a signal of OJK’s commitment to avoiding market fragmentation. For instance, the introduction of a minimum paid-up capital requirement of Rp25bn ($1.7m), which will apply to all new market entrants at the time of their creation, could make it more complex for start-ups and other new players to crack the market. In tandem, P2P operators must also have a minimum equity position of Rp12.5bn, a goal which is to be met in stages up to 2025. 

Although these modifications will likely favour large incumbents, they could nevertheless help to strengthen the P2P market in conjunction with other changes introduced in the regulation. “There are [a number of] aspects to this regulation, including some operational considerations. But promoting good governance and [stronger] capital structures is a key objective,” says Freddy Karyadi, partner at Ali Budiardjo, Nugroho, Reksodiputro, a Jakarta law firm, and member of the board of the Indonesian FinTech Association. 

Beyond capital and equity requirements, the regulatory changes also include “fit and proper” tests to determine an individual’s suitability to be either a controlling shareholder, a member of the board of directors, a member of the board of commissioners, or a member of a sharia supervisory board. This obligation does not apply to individuals who currently hold one of these positions, but it will be applied in the event that their term is extended.

In addition, a host of new requirements are now imposed on company directors and commissioners. Indonesian P2P lending players must now have a minimum of two directors, with at least half of the company’s board of directors having at least two years’ experience in the management of a financial institution.

New hurdles

Meanwhile, two of the biggest challenges stemming from the regulation concern new operating prohibitions. This includes a ban on P2P platforms securing a loan for themselves, which, alongside the new equity requirements, could present a challenge for some players’ financial positions. In addition, Indonesia’s P2P operators are now prohibited from executing automatic lending functions, underscoring OJK’s concerns about uncontrolled growth. For market operators, however, this will create additional challenges as demand for their services grows.

The biggest challenge is the prohibition on automation for P2P lending platforms

“Some provisions [in the regulation] will create new burdens for P2P lenders,” says Mr Karyadi. “The biggest challenge is the prohibition on automation for P2P lending platforms. I think this is the number one question about the regulation raised by market participants.” 

OJK’s rationale for these measures appears to be aligned with its goal of maintaining a firm grip over the country’s thriving P2P market, and avoiding situations that could give rise to systemic insecurity. In 2021, P2P operators had a total loan book of about $20.4bn spread across 103 operators, according to data from OJK.

Since then, and through additional regulatory reforms introduced in 2021, the total number of market players has reduced by one, to 102. Yet there is little sign that the south-east Asian country’s wider financial technology sector is cooling. “I still expect this industry to grow exponentially over the next five years,” says Mr Karyadi.

Controlled growth

In this context, OJK’s interventions in the P2P market are a means of managing this growth by ensuring that the sector remains firmly within the regulator’s orbit. Based on current population and economic growth trends, Indonesia is destined to be the world’s fourth largest economy by 2050, according to professional services firm PwC. As such, its 270 million-strong population presents one of the most dynamic-yet-underserved financial services markets in the world. For this reason, the Indonesian authorities are managing the country’s ascent carefully. 

“[Indonesia] has learned from the experience of China, where the fintech sector became very large. This is why the [regulator] is stepping in before the industry becomes too big and too hard to manage,” says Mr Karyadi.


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