P2P lending regulations critical for Vietnam amid Chinese crackdown

For years, an informal credit market shaped by loan sharks has plagued Vietnam’s economically vulnerable citizens, whose status prevents them from accessing formal channels to borrow money. Borrowers have to bear extremely high interest rates and violent harassment if they are unable to pay back their short-term loans on time.

With high internet penetration and a boom in mobile phone ownership in the country, it’s inevitable that “black credit” has moved online. Earlier this month, the Ministry of Public Security issued an official warning regarding the dangerous proliferation of lending apps that charge up to 1,600% per annum in interest rates and use illegal, violent means to intimidate borrowers – sometimes by even seizing borrowers’ property.

Under pressure from loan sharks, some borrowers have even resorted to attempting suicide.

Photo credit: Guido da rozze

Peer-to-peer lenders offer an alternate mode to obtain credit. But without a legal framework to regulate this new business model in Vietnam, analysts say things can backfire, exposing consumers to even more risks as they are unable to differentiate reliable service providers from those that use dubious lending schemes or even commit outright fraud.

The inevitable rise of P2P lending

About 70% of Vietnam’s population does not have bank accounts, according to the World Bank Global Index 2017. And even among those who have their savings in banks, many do not qualify for loans from conventional financial service providers.

Asia-focused consulting firm YCP Solidance believes that the number of Vietnam’s unbanked population has dropped, and the country still lags behind some of its Southeast Asian neighbors when it comes to banking penetration.

The firm also estimates that Vietnam’s overall fintech market could process US$7.8 billion in transactions by 2020. That development has been largely driven by the growth of digital payments.

The State Bank of Vietnam (SBV) estimates that there are about 150 fintech companies in Vietnam, 40 of which are operating in the lending segment.

Players have been drawn to the lucrative business potential in Vietnam’s micro consumer lending sector due to elements such as “favorable demographics, rising consumerism, and a large underserved and unbanked population,” according to Fitch Ratings’ Consumer Lending in Vietnam report.

However, micro consumer loans, including those that are provided by P2P lenders, are inherently of higher risk because the borrowers generally fall outside the target of conventional financial institutions or consumer finance providers, largely due to their lack of formal credit records.

Legal loophole

Without a legal framework for P2P business in place, most companies generally can act as a connecting platform to connect borrowers and lenders, according to a Vietnam P2P lending report published by law firm Allens.

This, however, comes at the risk of having no legal protection for both borrowers and lenders. A legal loophole also hinders the development of the sector as a whole, as lending companies may become involved in “banking activities” that should not be performed by non-credit institutions.

Well-known P2P platforms like VayMuon or Tima, which raised US$3 million in series B funding last year, are often mentioned as notable players in Vietnam’s fintech ecosystem. However, a quick browse on the App Store in the country indicates a litany of other unrecognizable lending apps.

Concerns due to Chinese crackdown

Regulatory sandbox