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Indonesian P2P industry seeks regulatory clarity

A member of the staff of Indonesia's Financial Services Authority passes banners relating to tax evasion and gratuities at the agency's headquarters in Jakarta. (Photo by Ardi Wirdana)

JAKARTA -- Peer-to-peer (P2P) online lending is surging in Indonesia, prompting regulators to prioritize the establishment of a legal framework to protect the industry -- a move that participants say is essential to fulfil its potential.

The market is growing rapidly, driven in part by the 65% of the population of 250 million that is excluded from the banking system. The value of online transactions will reach $14.8 billion in 2016 from $8 billion in 2013, according to Bank Indonesia, and is expected to grow to $130 billion by 2020.

Lending through the platforms of Indonesian peer-to-peer operators such as Investree is booming. (Photo by Ardi Wirdana)

The Financial Services Authority, known by its Indonesian initials OJK, has made financial technology regulation a priority, and is focusing on the payment services industry, which is seen as the sector with the highest growth potential.

"Regulations are made so every P2P player can provide the perfect service to their users, so that fintech can give maximum impact without slowing down the speed of its business growth," said Jonathan Bryan, head of marketing at Koinworks, a P2P platform.

The P2P industry, which provides user-friendly online platforms for investors to connect with creditworthy borrowers, is one of many financial technology sectors that are the subject of OJK regulatory consultations. Sebastian Togelang, co-founder of Kejora Ventures, an Indonesian venture capital firm, said regulation is much-needed for the burgeoning industry.

"What we need is a sandbox approach in which the regulator gives startups the freedom to be creative in a market but in which quality and quantity can be controlled by the regulator," he said. The term "sandbox approach" refers to a safe environment in which companies can experiment creatively but within boundaries.

Kejora has invested an undisclosed amount in Investree, a startup P2P lender that has lent more than 22 billion rupiah ($1.64 million) in six months. According to Kejora, Indonesia's small and medium sized enterprises face a 988 trillion rupiah funding gap, creating strong demand for new sources of funding.

Togelang, who is also a co-founder of the Indonesian Fintech Association, said that protective measures were needed urgently to protect consumers and the reputation of the P2P sector, including a requirement for minimum qualifications for startup founders and a security framework to prevent fraudulent practices.

Fraud concerns

The OJK has said that security and consumer protection are its main concerns, given Indonesia's history of fraud in various business sectors. It has also taken heed of a large P2P scandal in China, in which Ezubao, one of China's highest profile P2P lending sites, cheated more than 900,000 investors of $7.6 billion.

Some P2P platforms in Indonesia have established partnerships with custodian banks to prevent such crimes from occurring. Modalku, a P2P lender backed by Sequoia India, teamed up in February with Indonesia's Sinarmas Bank, which manages the funds that flow through the company.

"This way our fund management can only be done by the bank," said Reynold Wijaya, co-founder of Modalku. "Through this, we eliminate Ponzi schemes and we eliminate money laundering, so that everything is safe."

Modalku's move was followed by Investree, which has established a similar partnership with Indonesia's Bank Danamon. The OJK said in October that it planned to make it obligatory for P2P lenders to use custodian banks to manage their funds.

While the OJK's move has been viewed positively by the market, there are still concerns that the regulator lacks sufficient financial technology knowledge to be able to establish an effective legal framework. Some P2P companies have described the agency as inexperienced in financial technology matters, urging it to involve the industry in discussions about regulations and laws.

"Of course in coming up with the regulation, the OJK needs to be in consultation with industry players like us, through the (Fintech) Association, and with other experts, and also study best practices that have been implemented abroad," said Aria Widyanto, vice president of Amartha, a P2P lender.

The OJK has engaged in frequent communication with the Fintech Association on general purpose regulations such as electronic "Know Your Customer" systems and requirement for digital signatures, and in October 2016 introduced a range of general financial services regulations.

These included measures opening the pawnshop business, previously a monopoly, to private sector players including online lenders. Some P2P lenders operate much like pawnshops, requiring collateral for loans.

The OJK said it needs more time to understand the complex P2P industry. But Hanafiah Ponggawa & Partners, a law firm that advises Modalku, said that while an in-depth study of the P2P business was required, the risk of leaving the industry unregulated was too big.

"While waiting for the P2P regulation to come out, we advise the regulator to issue some kind of basic guidelines for fintech and P2P players," said Erwin Kurnia Winenda, a partner at Hanafiah Ponggawa.

A lack of data infrastructure is also problematic for the industry. Aidil Zulkifli, co-founder of UangTeman, an online lender, and a consultant for startups, said it would be "insanely hard" to run a P2P lending platform in Indonesia because of the country's limited credit scoring services, which are essential for lenders to help determine creditworthiness.

Indonesia also lacks a secondary market in which P2P lenders and investors can offload risk to secondary buyers, which is regarded as crucial for P2P businesses in profitable but risky emerging markets.

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