As the backbone of ASEAN’s fast-growing economy, small and medium enterprises (SMEs) must possess considerable support for all their operations to thrive, including through funding access. Currently, funding access is lacking for various reasons, including the significant number of unbanked populations and low digital literacy. This situation is critical as limited access to financing is essential to encourage SMEs to thrive in the global market (OECD, 2020). Acknowledging this issue, ASEAN incorporated the matter in the ASEAN Strategic Plan for SME Development 2016-2025 through an outcome of “Institutional framework for access to finance will be developed and enhanced”. Many financial technologies have emerged ever since, attempting to increase funding access. One of the most popular fintechs is peer-to-peer (P2P) lending which serves as the “marketplace” for investors to meet with the SMEs to fund. However, despite its popularity and successes, P2P lending also possesses some risks that need to be acknowledged and regulated strongly to create a more conducive ecosystem for SMEs to grow.
With its fundraising operations, P2P lending has started to show its success in increasing financial inclusion. It operates by utilizing a fundraising model and acts as a pool where many people lend sums of money to the SMEs as the borrowers and then receive a legally binding commitment to repay the loan with a certain timeline and interest rate. According to a report by the OECD, P2P lending could potentially address the financing gap in ASEAN SMEs that previously could not be fulfilled by banks as it could reach the unbanked populations—those with limited credit history and limited collateral for a bank loan (OECD, 2020). With its nature of reaching the unbanked population, P2P lending seems reliable in increasing ASEAN SME funding access.
Like any other technology, P2P lending poses complex risks to be acknowledged and strongly regulated. The first one is the interest rate calculation. P2P lending imposes higher interest rates and other costs because they bypass traditional banks’ bureaucracy. This could be disproportionate and disadvantageous for the funded SMEs (Segal, 2015; OECD, 2020). Considering that this is a business practice after all, it is important to analyze the cost and benefit proportion according to each stakeholder’s capability and resources. This correlates with the quality of the creditworthiness assessment of the borrowers. As a financial technology, P2P lending’s operation tends to use various systems to assess borrowers’ creditworthiness, including big data and other analytical tools such as loan screening through algorithms (OECD, 2020). This system poses certain risks as it is difficult to audit because the system is set for the algorithm to ensure fair treatment for borrowers. Technology preparedness then becomes an essential variable to support the assessment. Otherwise, it is safer to go back to conventional creditworthiness analysis. Lastly, the human capital risk. Considering P2P lending as a fintech would still be operated by humans, such massive technology and money would then still be controlled by a human. If thorough licensing – including fit and proper tests – is not done, the risk would expand into fund misuse and fraud.
Taking an example from Investree Indonesia, Indonesia’s Financial Service Authority (OJK) revoked Investree Indonesia’s business license and ordered it to shut down all its operations. This revocation was triggered by the company’s failure to meet minimum equity of 7.5 billion rupiah (USD466.712) (Valenta, 2024). In Indonesia, Investree also experienced a skyrocketed non-performing loan (NPL) at 16 percent, much higher than the maximum permissible NPL set by OJK – 5 percent (Kapronasia, 2024). According to Investree management, the high NPL is due to the unrecovered business due to the pandemic experienced by some borrowers (Untari & Fitriani, 2024). Additionally, the former CEO, Adrian Gunadi, was dismissed at the beginning of 2024 due to fraud allegations and breach of contract which resulted in legal action. He allegedly diverted Investree Fund into his personal account and used the company as a guarantor for his other businesses (Valenta, 2024). At last, OJK named him as a suspect and sent out a Red Notice for him as he is now out of the country (Hasan, 2024).
Reflecting on the Investree case and P2P lending risk, some takeaways would be beneficial for the betterment of the ASEAN fintech regulatory landscape. First, is the creditworthiness system. Investree has several types of business loans, some loans combine human intelligence and AI for creditworthiness analysis – for example, Working Capital Term Loan – and some implement full AI – for example: Buyers Financing (Putri, 2023). They claim that the combination of human intelligence and AI would result in high accuracy, but that is worth questioning. According to the OJK report on P2P Lending Statistics, from September 2023 to September 2024, the P2P lending NPL rate is in the range of 2.38-3.36 percent (Otoritas Jasa Keuangan, 2023; Otoritas Jasa Keuangan, 2024), meaning that Investree’s 16 percent NPL rate is an anomaly compared to other players in the industry. Non-performing loans due to the pandemic is a valid reason, but tech-based creditworthiness assessment after such economic downturns may not be the answer due to the anomaly created by the pandemic in the borrower’s finance history. Furthermore, the former CEO’s fraud allegation also did not help the company’s crises. It shows poor management, governance, and leadership. If not handled properly such a case would tint the promising ecosystem of P2P lending in both Indonesia and ASEAN.
This event calls for ASEAN policymakers to expand their policy-making focus from P2P lending market preparedness to P2P lending operations errors and robust business continuity plans, including compensation mechanisms. Indonesian’s OJK has taken robust measures to regulate fintech through Regulation No. 10/POJK.05/2022 on Information Technology Based Collective Funding Services and POJK 22/2023 on Consumer and Public Protection Within the Financial Services Sector and has taken the necessary measures to handle the Investree case. However, it would be helpful for OJK to re-evaluate its regulation concerning the creditworthiness assessment method; should AI and big data 100 percent handle the creditworthiness assessment? If not, how far? Furthermore, it may also be fruitful for OJK to re-evaluate its fit and proper test by learning from other ASEAN countries, for example from the Monetary Authority of Singapore with its Securities and Futures Act.
Beyond Indonesia, this event also provides an avenue for all ASEAN Member States (AMS) to collaborate and become knowledge-sharing partners. ASEAN currently has different degrees of fintech penetration, and with meaningful collaboration, the region could increase financial inclusion together for the betterment of the region’s economy through its SMEs.