JAKARTA (TheInsiderStories) – Indonesia’s vast and young population sounds like a great market opportunity for business players and investors. But there is one catch. The majority of Indonesians don’t have the financial freedom to purchase goods and services beyond bare necessities.

Out of a population of 252 million people, 28.6 million Indonesians currently live below the poverty line, according to the World Bank. People at the ‘bottom of the pyramid’ have a hard time getting access to loans because the conventional financial institutions do not have much incentive to serve this segment.

As a result, the so-called micro-finance institutions have sprung up to fill that gap, including the the rise of young, technology-driven financial technology (FinTech) startups which have taken it upon themselves to address the issue. However, some of their lending schemes, have earned a bad rap. They might ask for high-interest rates and have shady debt collecting methods.

This issue has drawn the attention of the Indonesian Financial Services Authority (FSA) before issuing a regulation on FinTech.

Recently, Chairman of FSA Wimboh Santoso alleged the technology-based peer to peer (P2P) lending as modern loan shark since they offer some loans with the high-interest rate. This allegation contradicts with the authority’s support on FinTech development in the nation.

“The interest rate is high as 19 per cent, which is quite expensive. If interest is expensive, what is the difference with a loan shark,” said Santoso, as quoted by Kompas.com.

In villages and outlying regions of Indonesia, loan shark are politely called ‘mobile lenders’, but often the most accurate description of the motorcycle lenders.

Usually traveling in pairs, these people visit the poorer communities and offer loans based upon little or no collateral, no need for formal paperwork or documentation, and instant approval.

The Insider Stories try to break down three such micro-finance sites in Indonesia which give cash without collaterals.

UangTeman offers loans from Rp1.5 million to Rp2 million (US$108.3 to $145) for 10 to 30 days, with an interest rate of 1 per cent a day. It also has additional fees for extending the payback deadline (Rp180,000; $13), a fine for delays of Rp50,000 ($3.63), plus Rp 100,000 ($7.26) for each day of delay. On top of that, a late-paying debtor is asked to pay a fee of 10 per cent of the total loaned to the debt collector.

UangTeman has been the subject of controversy due to its high-interest rate. One per cent may sound low, but here is an example of how much a loan UangTeman would cost you.

Let’s say you take a loan of Rp 2 million ($145.24) for ten days – to get you through a rough time until the next payday. On the first day, you will pay Rp2,000,000 x 1 per cent, which means Rp20,000. On day two, expect to pay Rp20,020,000 x 1 per cent, which makes your total loan on day two come out to be Rp 2.040.200.

And so on until day 10. The total sum you will have to pay back is Rp 2,209,000 (US$160), over 10 per cent more than what you borrowed.

Jakarta-based FinTech firm, Tunaiku, gives out loans starting at Rp 2 million ($143) up to Rp 10 million ($713) for a period of time between 6 and 12 months. It takes an interest of 3 per cent from the original loan. This means the interest will stay the same no matter when you pay back the loan.

But Tunaiku also asks for an administration fee of Rp 540,000 ($39) and imposes a fine of Rp 100,000 ($7.10) if you can’t pay back on time. In addition, there’s a 0.16 per cent interest rate for each day of late payment. Therefore, the longer you delay paying back, the more you will eventually have to cough up.

Meanwhile, as a pioneer in peer to peer lending industry, Modalku, sets 12-26 per cent interest rate annually.

Chief Executive Officer Modalku Reynold Wijaya outlined the loan interest is based on risks faced by investors. P2P companies that are offering high-interest rates to investors willing to take on high risk have flourished in a period of low-interest rates and bank deleveraging.

The high risks arise because P2P lending services only provide access for consumers who can’t afford loans through financial institutions such as banks. Thus, the determination of high interest is done to avoid the loss of money that has been given by investors.

In addition, consumers of P2P lending services are consumers who can borrow unreserved money (unreserved) such as banking. So, high interest must be applied in this service.

“This is high risk and high rate thing.  We are not catering cooperation such as bank, so the consumers should know the risks before applying” he told The Insider Stories.

FSA’s Double Standard 

However, the accusation shows FSA’s double standard in responding the growing ecosystem in the fintech business.

While the trend was still a drop in the ocean of overall lending, more than 250,000 people had taken out loans through Fintech. Around 30 P2P firms have extended Rp 2.6 trillion ($193.8 million) in lending as of January 2018, compared with just Rp 247 billion of lending in December 2016.

Santoso said the agency couldn’t resist if P2P lending has helped small businesses to gain access to capital.

Santoso’s reaction shows the authority’s effort in stabilizing the financial system that has been established mostly by the conventional bank, while fintech is categorized as shadow banking.

Shadow banking is heavily dependent on short-term liquidity and has no access to the central bank as the lender of last resort. When short-term liquidity is stuck, then the impact is a default.

Therefore, the OECD recommends that shadow banking is included in the regulatory framework. Shadow banking economic activity must be recorded in the national economic balance. In addition to maintaining the financial system from systemic risk, this step can also be the foundation to build the direction of economic policy to be more accommodative to the development of the times.

In Indonesia, the regulation on P2P lending has been done by the FSA. However, the arrangements are taken to protect consumers. The arrangements require the fintech P2P lending companies to enroll with the FSA, be more transparent in terms of risk, fee and interest determination.

Email: elisa.valenta@theinsiderstories.com