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A General Perspective On Peer-to-Peer Lending in Indonesia

Let’s take a big-picture look at this growing sector by answering some of the most frequently asked questions posed to us at Schinder Law Firm.

  1. What is Peer-to-Peer Lending?

    The definition of Peer-to-Peer (P2P) Lending or FinTech Lending in the Financial Services Authority Regulation (POJK) Number 77 / POJK.01 / 2016 is the provision of financial services by bringing together lenders with the borrower in the context of borrowing and lending agreements directly through an electronic system using the internet network. Article 3 of the POJK also stipulates that the ownership of P2P Lending organizer shares by foreign citizens and / or foreign business entities is at most 85%. There are two approaches to the concept of P2P Lending either as Borrower or as Lender or Investor.

  2. How Does It Work?

    There are two parties who play a role in P2P Lending namely Borrower and Lending or Investor. The first role as a Borrower mandates the upload of all documents that are required to apply for loans online which include documents containing financial statements within a certain period of time and the borrower’s purpose for the loan. Of course, loan applications can be accepted or rejected depending on various factors. If the borrower’s request is rejected, then the borrower must fix or revise the factors or reasons given for the refusal of the borrower’s request. Then if accepted, the loan interest rate will be applied, and the borrower’s loan application will be made available to the marketplace, so that all funders can see the borrower’s loan application.

    The next role to be played is as Investor. According to POJK Number 77 / POJK.01 / 2016 Article 6, the maximum loan limit shall be set at Rp.,00 (two billion rupiah). The investor will have access to browse the data on the loan submission on the dashboard provided. The investor also can certainly see all the data on each loan proposal, especially the relevant data about the borrower such as income, financial history, borrowing objectives, and the reasons, etc. If funders decide to invest and approve the loan, the fund itself can directly deposit according to the purposes setforth by the investment fund. The borrower will repay the loan funds every month, and the investors will benefit in the form of principal and interest. The amount of interest depends on the interest rate of the loan invested.

  3. What is the P2P Growth in Indonesia?

    According to OJK, P2P Lending has shown a very positive trend. OJK stated that, until September 2017, the growth of fund disbursement through FinTech P2P Lending reached Rp. 1.6 trillion. Meanwhile, the value of funding outside Java increased by 1.074% since the end of last year to Rp. 276 billion. This is supported by an increase in the number of lenders outside of Java by a whopping 784% and the equally staggering increase of 745% in the number of borrowers. Clearly, the market shows its reaction and continued potential.

    According to the official OJK report, until March 2018, Fintech P2P Lending fund providers amounted to 145,965 entities or an increase of 45%. The number of borrowers reached 1,032,776 people or increased 298%.

  4. What are the Benefits and Risks Involved With P2P Lending?

    The clear advantage for the Borrower is the low interest rate compared to the interest rate set by authorized financial institutions such as the Bank. For example, a P2P loan may have an interest rate that rests between 12-20% less than the rates of most financial institutions and even most credit card companies. Another plus for the Borrower is the simplified process of applying for loans. The P2P process is much faster and easier. In addition, the Borrower is not required to meet or subjected to difficult conditions in order for the loan to be approved. If the Borrower has a bad reputation in the financial lending sector, the Borrower has the opportunity to explain the reasons involved. In addition, the Borrower can also apply for a loan for any purpose as long as there are people who will potentially invest the money. In addition, P2P Lending is a non-collateralized loan, which means no warranty is required.

    Now while these advantages certainly paint a perfect picture for a Borrower, the is another side that must be considered. One disadvantage is that the interest rate on P2P Lending loans can soar as the Borrower’s creditworthiness falls. If the borrower is delinquent with a payment, the penalties will be very significant. Along the same lines, if a Borrower fails to pay the enitre loan, the amount to be paid later can skyrocket. In addition, P2P loans are generally only suitable for the short term because the longer the loan period, the bill will continue to rise. Also while it’s possible that the Borrower’s loan needs can be met in their entirety, there is no guarantee that all of the loan funds will be fulfilled. For example, if the borrower requires a loan of Rp. 150 million but only Rp 75 million is met, then the loan application is a failure, and the collected funds will be returned to the Investor.

    On the Investor side, there are distinct benefits. Legal provisions are in effect since Funders or Investors in P2P Lending are officially regulated and overseen by OJK through POJK Number 77 / POJK.01 / 2016, which inhereently provides a sense of structure and protection. In addition, the loan funding in P2P Lending is very easy and fast and allows Investors with an excess of unallocated funds to be productive. Of course, the interest rates received have significant value, making it more profitable. The last advantage for the Investor is that the P2P Lending system also facilitates the ability to diversify the initial investment, thereby increasing the opportunity to reap greater profits.

    On the other hand, Investors need to be aware of some drawbacks. One disadvantage for the Investor is that in P2P Lending, the Investor cannot withdraw the money invested at will as in other types of investments or bank deposits. In addition, the most obvious risk is the possibility of the Borrower failing to repay or refund the loan, causing significant losses with little means of recovery since loans are not secured by collateral.

  5. What are the Requirements to Establish a P2P Lending Company in Indonesia?

    In accordance with POJK 77, the requirements to establish a P2P Lending company in Indonesia are:

    1. Organizing legal entities should be in the form of limited deposits or cooperatives and can be established and owned by citizens of Indonesia and foreign legal entities.
    2. The Operator shall apply for registration and permission to OJK. Organizers who will carry out P2P activities must submit an application for registration to the OJK. Meanwhile, an organizer who has been conducting P2P activities prior to POKL 77 is given a maximum of 6 months to register and is obliged to complete the licensing within one year from the date registered with OJK.
    3. In accordance with POJK 77 Article 4, the Operator shall have a minimum capital of Rp. 1 billion at the time of registration and Rp. 2.5 Billion at the time of the application for the permit.
    4. Organizers by foreign nationals and / or foreign legal entities, both directly and indirectly, are limited to at most 85% (eighty five percent) ownership. This means that the minimum Indonesian ownership is 15% in P2P services.
    5. The Operator must provide, manage, and operate the Lending Technology Borrowing Service from the Lender to the Borrower whose source of funds is from the Lender.
    6. Borrowers in P2P must originate and domicile in Indonesian jurisdiction. However, investors (lenders) in P2P may come from within and outside the country. The maximum loan amount limit is Rp. 2 Billion.
    7. The Organizer must have at least 1 (one) member of the Board of Directors and 1 (one) member of the Board of Commissioners who has experience for at least 1 (one) year in the financial services industry.
    8. P2P operators are required to provide virtual accounts for each lender
    9. Agreements in P2P Lending are implemented by using electronic signatures.

    Clearly, this article only provided a broad snapshot of P2P Lending here in Indonesia. For in-depth assistance, please contact us at Schinder Law Firm. We are well-versed in this exciting yet complex sector.

by Wisnu Tikoariaji SH.

Schinder Consultant London Ltd.


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