Indonesia puts more constraints on online lenders, but at what cost?

In 2022, Ricky (not his real name), a 26-year-old Indonesian of Dayak descent, fell into a debt trap after being laid off from his job.

He had been borrowing money from several online lending platforms, and his growing expenses as well as high repayments – including interest rates of around 12% a month – drove him to a point where he could no longer afford to pay them.

Ricky says his predicament was made worse by a debt collector, who used harsh language and threats to compel him into paying up. The collector even pressed one of Ricky’s friends in an attempt to get money.

“I felt humiliated. I considered ending my life. But I had my brother-in-law, who helped me get out of that place,” he recalls.

However, many Indonesians facing similar pressures as Ricky are not as fortunate. From 2019 to 2023, there were 51 suicide and attempted suicide cases reportedly linked to online lending and door-to-door or doorstep loans, according to monitoring by the Center for Financial and Digital Literacy (CFDL).

The data, which was based on news reports, should have spurred the authorities and businesses to act promptly, stressed CFDL founder Rahman Mangussara. He established CFDL with Muhamad Ihsan, CEO of Indonesian business publication Warta Ekonomi.

In recent months, internet users have also expressed their concerns about how online lenders collect debt, further tarnishing the industry’s reputation.

High default rates

Debt collection, however, is just one of the complexities facing Indonesia’s online lending sector.

In January, Otoritas Jasa Keuangan (OJK), the country’s financial services authority, lowered the maximum interest rates that online lending platforms can charge.

The OJK headquarters in Jakarta / Photo credit: Porto News

Such companies can only charge a maximum of 0.1% and 0.3% interest per day for productive and consumptive loans, respectively, which will gradually be slashed to 0.067% and 0.1% by 2026. This is a decrease from 0.4% for both categories previously.

While this takes some pressure off of the borrowers, it also limits what lenders and platforms can earn.

OJK also instructed banks last week to stop lending to peer-to-peer startups that have seen defaults in repayments.

This could be a big challenge for these startups. According to OJK data, as of December 2023, banks had lent 30.4 trillion rupiah (US$1.9 billion) via P2P lending platforms, representing 62% of the 49.3 trillion rupiah (US$3.2 billion) of total domestic P2P loans.

A double-edged sword

Clearly or borderline criminal