FINANCIAL technology (fintech) peer-to-peer (P2P) lending services are able to penetrate the administrative difficulties experienced by banks in providing micro and ultra-micro credit to the public and micro, small and medium enterprises (MSMEs).
Affordability of access is often not accompanied by customer education, resulting in many implementation problems.
In addition, the interest rate and fines are still very high, making financial inclusion an illusion.
For this reason, a breakthrough in risk management is needed through adequate information support by the Financial Services Authority (OJK).
Meanwhile, the government can provide stimulation to address the need for financial inclusion by modernising cooperatives through the use of digital technology.
The OJK said in October that cumulatively there were 106 registered fintech firms that had thus far distributed funds of up to 260 trillion rupiah (US$18.5bil or RM76.6bil) to 508 million accounts.
From January to October of this year, there were 82.6 million lender accounts and 128 billion in loaned funds. Meanwhile, from the borrower’s side, there were 271 million accounts with total loans reaching 129 billion.
Most fintech customers use these services for consumption. They often also neglect the contract so that they are entangled in accumulating interest and aggressively imposed fines.
This is in line with massive offers and advertisements for the urban consumer segment, through pay later or credit for consumption needs.
Although the interest and fines mechanism has been regulated in OJK regulation 77/POJK/2016, the limits provided are very high, far exceeding the conventional banking average, especially when compared to subsidised MSME credit schemes such as the microcredit programme (KUR).
The OJK states that licensed fintech providers are allowed to charge 0.8 interest per day or 24% per month and have a fine limit of up to 100%, which means that fintech is cumulatively allowed to demand interest equivalent to 288% per year. Whereas the average conventional bank loan is in the range of 12% to 14% per year.
Meanwhile, KUR loans are only about 5% to 6% per year. The very high-interest rate certainly does not allow business actors to utilise fintech for business or working capital financing. The ideal business capital requirement should be below the potential net profit it generates.
Thus, fintech is actually targeting the urban middle class for short-term consumptive needs, compared to groups of micro-enterprises that need cheap and flexible funds. Ease of access that is not accompanied by rational costs is certainly only an illusion in developing financial inclusion.
However, in the middle of the fintech industry based on P2P lending, there are several fintech firms that have a more inclusive business vision to help people in certain groups, for example, Tani Hub, I-Grow and e-Fishery, which are engaged in financing agricultural and fisheries investment based on P2P lending to finance selected prospective projects.
This scheme has the opportunity to make a positive contribution, where the difficulty of access to financing that has historically been faced can be overcome with the collective support of investments facilitated by the application.
The companies try to select projects prudently and are also committed to accompanying them down from the production process (planting, nursery or maintenance) to marketing their products.
From the project side, the calculation of the results has been carried out using a profit-sharing mechanism between business actors and investors in a more rational manner.
The application provider will benefit from the services both from the investor side or from the project financing side. Usually this is done by cutting administrative costs and insurance. There is also a percentage for the project results at the end.
For investors, they can also monitor the progress of the project. In addition, they are also protected by a project insurance scheme where project failure is not fully borne by investors, but application providers apply risk insurance for major force factors by refinancing by insurance for repeat business so that investors have hope for a return on their investment – the risk is only a time delay.
Failure rate
The project failure rate is minimised by the application provider to ensure consumer confidence in it. The OJK seems to need to issue breakthrough policies not only to give permits and restrictions on interest and fines but also to provide information and education channels to the public.
First, the OJK can provide support to customers to choose fintech according to their needs by providing an integrated information base to review the programmes offered by each fintech and provide categorisation so that potential customers can choose the most appropriate use of fintech according to their needs.
Second, periodic surveys can be carried out by requiring fintech providers to give customer satisfaction surveys that can be accessed in real time by the OJK. The results of the survey can later be used. Customers can see the processed survey results and ratings for each fintech.
In terms of financial inclusion policies, the government can take advantage of the fintech scheme implemented by the OJK by digitising cooperatives.
The cooperative offers a unique scheme where even though there will be a large amount of interest paid by the customer, the profits will return to the cooperative’s members according to the contribution size, meaning that those who borrow more will get more cooperative dividends.
Thus digital cooperatives can be used as a public financial solution for urgent consumption needs.
The digital cooperative development scheme should be initiated by the state as a pilot project by encouraging the collaboration of SOEs with financial support from SOE banking services and the Cooperatives and MSMEs Ministry to reform cooperatives that can facilitate large-scale financial inclusion.
Membership can be opened to the public at large, where the cooperatives provide financial inclusion learning standards for members. Later, the existence of digital cooperatives will encourage better competition in the fintech market so as to encourage the rationalisation of fintech costs.
These cooperatives will be able to collaborate with existing digital cooperatives to build a collective financing consortium to encourage better financial inclusion performance.
Fintech empowerment with rational costs (competitive interest rates) will be very helpful in accelerating economic growth during and after the Covid-19 pandemic. — Jakarta Post/ANN
Hafidz Arfandi is a researcher at Innosustain Consulting focusing on public policy, corporate social responsibility and sustainability. The views expressed are the writer’s own.