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Illegal lending continues to hamper fintech sector in Indonesia

Written by Cindy Silviana Published on 

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Indonesia’s Financial Service Authority (OJK) has blocked nearly 2,600 illegal fintech lenders in the past three years.

Indonesia continues to struggle with the spread of illegal fintech lenders despite several efforts to tackle them. The Financial Service Authority (OJK) has now blocked nearly 2,600 illegal entities in the past three years, 694 alone in the first half of 2020. This is four times more than the 158 registered fintech lenders.

“Amidst the pandemic, people need more financing and sometimes they don’t have a chance to think whether the company is illegal or not,” said Tongam Lumban Tobing, head of OJK’s investment alert task force at a press conference on Monday.

To curb the mushrooming of illegal lenders, the OJK is collaborating with national police, cyber patrol units, law enforcement, and the communication ministry to detect illegal lenders and warn people about them. The OJK has also asked Google to block several apps and websites.

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Tobing revealed that these illegal entities move quickly and create new apps or websites. Many operate on social media and via text messages including links to an illegal site.

“Sometimes when we have blocked them, they change the name in the evening,” he said.

Data of the communication ministry shows that the servers of these illegal lenders are located in several countries such as the US, China, Singapore, and Russia. The OJK suspects that the vast majority of the entities have connections with the international mafia.

“This is mafia activity. There are Russians, Indian groups who seek to take profit from the society,” Tobing said.

A financial literacy problem

One reason why illegal activity continues to prosper is the low rate of financial literacy. Borrowers don’t check if it is legal, they borrow more than their income, and sometimes deliberately don’t pay, Tobing explained. Lenders will then intimidate and harass their victims. They might even create a chat group with the borrower’s mobile phone contacts to shame them publicly.

A screenshot of a complaint to the OJK showed that a debt collector called the borrower’s office and texted to all contacts including directors and managers. The borrower, who remained anonymous and said that he or she had no money to pay, was using 141 lending apps.

According to a 2019 report by Google, Temasek, and Bain & Company, there are 92 million—or almost 51%—unbanked persons among the 181 million total adult population in Indonesia. It’s an attractive market for fintech players, estimated to be valued at USD 57 billion, according to research from the Asian Development Bank (ADB).

The OJK states that total loan disbursement of fintech lending between 2018 and May 2020 reached IDR 109.18 trillion (USD 7.6 billion) for SMEs and individuals. PricewaterhouseCoopers estimates that fintech lending can add IDR 19.4 trillion to the MSME (micro, small, and medium enterprises) financing gap and increase credit access for individuals.

Photo credit: Adrian Pranata/Unsplash.

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