Keeping Loan Sharks Away From Indonesia’s Fintech Archipelago

• Regulator hopes transparency will lower P2P interest rates
• Aims to restrict fundraising to registered fintech firms

Indonesia is planning to tighten regulation of its vibrant financial technology sector, imposing new rules on companies which it hopes will stand at the forefront of efforts to extend services to more of the country’s 260 million people.

The Financial Services Authority, known as OJK, plans to issue new rules by June that will compel fintech firms to be registered with authorities. Unregistered companies won’t be allowed to tap financial markets or raise money from banks, said Nurhaida, vice chairman of the regulator, which also supervises Indonesian banks and the stock market.

“People who have no access to conventional financial institutions can be reached by fintech players,” Nurhaida, the only female member on the board of OJK, said in an interview in Jakarta last month. “However, we will regulate fintech and establish transparency. With transparency, the lender will better understand and calculate risk, and we hope that they can lower interest rates.”

Greater internet penetration and the use of smartphones has helped Indonesia make the most progress across East Asia and the Pacific in reaching its unbanked over the past three years, rendering fintech crucial to a population scattered across hundreds of islands. However, loans by fintech companies have surged, pushing the OJK to review peer-to-peer lending rules.

OJK recognizes about 44 fintech companies and the Fintech Association of Indonesia has more than 130 members. While these service fishermen and farmers who lack the paperwork or collateral to get loans from traditional banks, interest rates are often much higher. Draft guidelines had proposed capping borrowing costs at seven times the central bank’s policy rate, though the OJK’s final regulations in January 2017 didn’t include this suggestion.

Minimum requirements already proposed for banks and their fintech partners include core capital of at least 1 trillion rupiah ($70 million) and satisfactory risk ratings. Peer-to-peer lending jumped 38 percent in the first two months of 2018 from a year earlier, hitting 3.5 trillion rupiah, and OJK director Eko Ariantoro said in March that regulators “don’t want these developing fintechs to become loan shark-like businesses.”

Indonesia allows foreign ownership of 85 percent in fintech and caps lending to individual borrowers at 2 billion rupiah for peer-to-peer lenders. These rules won’t be relaxed anytime soon though the regulator won’t set an interest rate band for these companies, Nurhaida said.

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