The dark side of Indonesia’s online lending boom

Dini (not her real name) has used online lending apps since early 2017 and, by most accounts, was a good borrower. She paid her bills on time and did so consistently enough to have her credit limits increased.

But not long after Dini left her job to care for her ill father, her husband got laid off. Devoid of income, she borrowed from other lending apps to pay off existing loans that were due.

Meanwhile, both Dini and her husband struggled to find full-time work. When she failed to make the next due payments, the collectors started calling her multiple times per day and sending WhatsApp messages, threatening to shame her as a loan defaulter to everyone in her contact list.

Dini contacted the lenders to explain her predicament, making sure to mention her punctual payments in the past.

“Some offered an installment plan, but others insisted on immediate full payment,” she tells Tech in Asia. “Another claimed that they never received my payment, even though I transferred the funds to the bank account they gave me.”

For now, there isn’t much that she can do. She has pawned off their motorcycle and continued applying for jobs – with the sole purpose of paying off her loans.

“I’m just trying to save money and slowly pay them off one by one […] so I can live in peace,” she says. “But what can I do? The money just isn’t there yet.”

Dini is hardly the only borrower with such problems. At the Jakarta branch of the Legal Aid Institute, a nongovernmental organization that provides pro bono legal advice, the first fintech-related case came in May 2018 – a debt collector had contacted the borrower’s employer, which led to a firing.

“Initially, we thought it was a typical civil case [as opposed to a criminal one]. But the complaints kept coming,” says Jeanny Sirait, a lawyer at the institute who handles fintech cases.

In November, the institute opened a complaint center specifically for fintech lending cases, and in just three weeks, they received a total of 1,330 complaints. News about the center traveled through local media, and by the end of February 2019, it had received almost 4,000 cases in its Jakarta branch alone.

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A vast proportion of Indonesians are still unbanked, with little access to credit. When someone is in need of financial assistance, the traditional path is to borrow from family and friends, failing which they would go to a pawn shop or loan shark.

And then there were fintech lending apps, which came to fill the void by connecting lenders with borrowers. Consumers responded positively: According to data from Otoritas Jasa Keuangan (OJK), Indonesia’s financial services authority, these peer-to-peer (P2P) lending platforms distributed US$1.4 billion worth of loans last year – a 681% increase year-on-year.

While everyone from Grab to the likes of Modalku (Indonesian brand of Singapore’s Funding Societies) operate in the space, most of these bigger players provide business loans, which tend to involve less risk. There is, however, a subgroup of fintech lenders that target individual borrowers, specifically those from lower socioeconomic backgrounds. According to Sirait, among the cases handled by the Legal Aid Institute, about 80% of the loans amounted to less than 2 million rupiah (roughly US$141).

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