<article>Indonesia&#8217;s fintech lending scene is on the verge of a major overhaul.</article>

Indonesia&#8217;s fintech lending scene is on the verge of a major overhaul.
The Financial Services Authority (OJK) is currently finalising the contours of a draft legislation to replace the four-year-old POJK 77 code, which currently governs online P2P fintech lending in the country.
The sector regulator hopes to implement the draft once it has received inputs from industry players, and approval from its own board.
&#8220;This Wednesday [December 23] , we met with AFPI [Indonesia&#8217;s fintech lending association] to discuss the draft. The next step is to ask for direction and approval from the OJK Board of Commissioners. We want to implement [the bill] soon,&#8221; said Bambang W Budiawan, OJK’s head of department, non-bank financial industry supervision.
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While fintech lenders have raised many apprehensions, the OJK is of the view that the current POJK 77 norms can no longer cater to the needs of the fast-expanding fintech sector. The industry &#8220;needs to be directed&#8221; to ensure quality and to increase its contribution to the economy, said Budiawan.
To put that growth in context: Loans disbursed by P2P lending platforms have grown from a cumulative Rp2.56 trillion ($173 million) as of December 2017 to Rp137.66 trillion ($9.7 billion) as of October 2020, a growth of 56.07 times, according to OJK.
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By 2025, revenues of digital financial services companies in Indonesia are projected to rise to $8.6 billion, growing at a compounded annual growth rate (CAGR) of 34 per cent from 2020, shows a research report by Bain &amp; Co, Google, and Temasek.
OJK temporarily halted the registration process for all new fintech firms early this year, as the industry was growing at a much faster pace than what the regulator could monitor.
The draft law, therefore, also signals a coming of age of the fintech sector.
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<h3 role="group" aria-label="Message shortcuts" data-qa="message-actions">What the proposed law entails</h3>
The draft law touches upon, among other things, consumer protection. &#8220;Preventing shadow banking is one of the consumer protection measures, especially for lenders. The shadow banking issue in China is a concern for us. We have implemented mitigation steps so that it won&#8217;t happen in Indonesia,&#8221; Budiawan said.
The draft includes changes to eleven elements and 22 new clauses including significant changes to the minimum paid-up capital required for a P2P fintech lender.
Under POJK 77, the paid-up capital required for a platform to get registration is Rp1 billion ($71,108 ). To become a licensed fintech lender, the paid-up capital required is Rp2.5 billion ($176,263). Under the new draft law, platforms will be required to have at least Rp10 billion ($705,504) paid-up capital to get a licence. A registered fintech lending platform has one year to get a licence from the regulator.  
Another significant change is in ownership of the company. Under the current regulation, the platform&#8217;s shareholders can be Indonesians, foreigners, or a domestic or foreign company. 
Under the draft bill, the shareholders will be limited to Indonesians, local companies, or foreign companies in the financial services sector or IT sector. The law also requires shareholders who are not Indonesian citizens to transact through the stock exchange.
Other draft clauses cover funding caps, funding distribution outside Java Island, electronic signatures and more.
<a href='#' class='tablepress-expand-button btn btn-sm btn-primary'>Expand Table</a><h2 id="tablepress-788-name" class="tablepress-table-name tablepress-table-name-id-788">What's new in Indonesia's draft fintech law</h2>

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<caption style="caption-side:bottom;text-align:left;border:none;background:none;margin:0;padding:0;"><a href="https://www.dealstreetasia.com/wp-admin/admin.php?page=tablepress&#038;action=edit&#038;table_id=788" rel="nofollow">Edit</a></caption>
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	<th class="column-1">Category</th><th class="column-2">POJK 77</th><th class="column-3">Draft law</th>
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	<td class="column-1">Paid-up capital</td><td class="column-2">1. For registered status, the paid-up (core) capital required is at least Rp1 billion ($71,108) 
 
2. For licence status, at least Rp2.5 billion ($176,263) is required</td><td class="column-3">For licence status, the operator's core capital should be at least Rp10 billion ($705,504)</td>
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	<td class="column-1">Funding limitation</td><td class="column-2">Maximum lending limit is Rp2 billion ($142,216)</td><td class="column-3">1. The limit for giving loans to each borrower is a maximum of Rp2 billion. 
2. The funding limit for each lender and its affiliates is 25% of the outstanding loans. 
 
 
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	<td class="column-1">Human Resources</td><td class="column-2">Must have human resources personnel with expertise/ background in IT field</td><td class="column-3">1. Directors, commissioners, and those one level below the board of directors must have certified expertise in risk management financial technology. 
2. Must have human resources staff who have authority to develop, change or erase electronic systems. 
3. Foreign workers can work for a maximum of five years. 
4. Can submit part of the work to a third party</td>
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	<td class="column-1">Electronic signature</td><td class="column-2">1. Agreement (between the platform and lenders or lenders and borrowers) must be implemented using electronic signatures. 
2. Other agreements must also use electronic signatures.</td><td class="column-3">1. Agreements must be implemented by using electronic signatures. 
2. Other agreements can also use electronic signatures.</td>
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	<td class="column-1">Funding to productive sector</td><td class="column-2">Unregulated</td><td class="column-3">Must provide financing for productive sectors of at least 25% of the outstanding funding, in stages: 
1. 5% by the end of 2021; 
2. 15% by the end of 2022; 
3. 25% by the end of 2023.</td>
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	<td class="column-1">Fund distribution outside Java</td><td class="column-2">Unregulated</td><td class="column-3">Must provide financing for productive sectors of at least 20% of the outstanding, in stages: 
1. 5% by the end of 2021; 
2. 15% by the end of 2022; 
3. 25% by the end of 2023.</td>
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	<td class="column-1">Health level</td><td class="column-2">Unregulated</td><td class="column-3">1. The platform/providers must at all times have equity of 0.5% of the outstanding or a minimum of Rp7.5 billion. Fulfillment of obligations done in stages: Rp 2.5 billion at the end of 2021, Rp5 billion at the end of 2022, and Rp7.5 billion at end of 2023 
2. Providers are obliged to maintain quality funding consisting of: 
a.Smooth 
b Special Mention (1-30 days) 
c Less fluent (31-60 days) 
d. Doubtful (61-90 days) 
e. Default (> 90 days)</td>
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	<td class="column-1">Ownership</td><td class="column-2">The owner of the organiser can be an Indonesian citizen, Indonesian legal entity, foreign citizens, or foreign legal entity (maximum 85%).</td><td class="column-3">1. The owner of the organizer can be an Indonesian citizen, Indonesian legal entity, 
2. Foreign citizens, and/or foreign legal entities (maximum 85%) 
3. Foreign companies must be active in financial services institutions or IT, including being direct shareholders or indirectly at the Financial Services Institution or IT 
4. Foreign citizens can participate only through stock exchange transactions.</td>
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	<td class="column-1">Submitting report</td><td class="column-2">Operators are required to submit monthly reports, quarterly reports, and annual reports. 
</td><td class="column-3">1. Reports that must be submitted are periodic reports and incidental reports through pusdafil 
2. Periodic reports consisting of real time reports, monthly reports and audited annual financial reports 
3. General provisions related to the submission of periodic reports</td>
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	<td class="column-1">Risk Mitigation 
 
</td><td class="column-2">Arranging cooperation with the operators technology-based other information, ability to be SLIK members, and escrow users and virtual account. 
 
</td><td class="column-3">1. The scope of the provider's obligation to mitigate risks includes methods to carry out risk mitigation such as conducting credit analysis, and verification of the truth. 
Users facilitate the transfer of the recipient's default risk, and/or facilitate the transfer of risk on collateral, expansion of provisions 
Operator membership of regulatory information service system, and arrangements regarding the period of placement of funds. 
2. Obligations related to data exchange cooperation in the agreement confidentiality and responsibility of each party. 
3. Arrangements regarding the time limit for funds deposited in the Provider's escrow account and accommodate the development of lender fund accounts in regulations. 
4. Certify that User funds in the escrow account are separate from assets.</td>
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<h3>Expect fewer new players</h3>
While the new bill aims to mitigate risks in the fintech lending sector, it may limit the emergence of new fintech companies, the smaller players in particular.
Budiawan admitted that the new bill will reduce the number of new players, as not everyone can meet the higher loan quality standards.
The CEO of an online lender, requesting anonymity, told DealStreetAsia that some sections of the new draft could be burdensome for small fintech players. &#8220;The recommended methods to mitigate risk will eliminate fintech platforms&#8217; ability to come up with new products. The source of data collection through technology is only photos, so it is difficult to analyse borrowers&#8217; behaviour,&#8221; the CEO said.
On the other hand, Ivan Tambunan, the CEO and co-founder of Akseleran argued that the new bill is reasonable but needs to be carefully reviewed, especially the rules that will impede growth and inclusion, or the rules that increase bureaucracy. 
Tambunan is concerned about the clause that limits lending for each lender at about 25 per cent of the platform&#8217;s total loans outstanding. &#8220;This can impede funding growth, so the industry is asking for the threshold to be increased to 50 per cent instead,&#8221; he said.
Nailul Huda, a researcher at the Institute for Development of Economics and Finance, said the new bill will reduce the interest in the space from new fintech players. Huda further said that existing players will have to look at M&amp;As to survive when the new regulation is implemented.
Also, currently, fintech penetration is concentrated mostly in the populous Java island. The total accumulated loan disbursement in Java island between December 2019 and October 2020 was Rp117 trillion ($8.2 billion), meanwhile, outside Java island, it was Rp19.84 trillion ($ 1.4 billion), based on OJK statistics.
With the new requirement to increase core capital, fintech lending platforms will likely need to make fast returns on their investment from Java island, compared to other islands in Indonesia.
This outlook might hamper the government target of 90 per cent financial inclusion by 2024.
<h3>Six P2P platforms shut down in 2020</h3>
The draft rules come as six Indonesian P2P lending platforms have shut down operations this year, according to OJK data, which DealStreetAsia obtained.
The six companies are PT Minitech Finance Indonesia (Saya Modalin), PT Digital Quantum Tek (Tunasaku), PT Danakoo Mitra Artha (Danakoo), PT Investdana Fintek Nusantara (iKredo), PT Glotech Prima Vista (Do-it), and PT Solusi Finansial Inklusif Indonesia (Telefin).
Besides the COVID-19 effect, some companies faced higher operational costs in the year, also raising questions on their untested business model. &#8220;They experienced significant losses with even negative equity. A few of the companies even faced incompatibility between shareholders and management,&#8221; Budiawan, told DealStreetAsia. 
The regulator also had dealt with illegal fintech platforms a few years ago. This year, OJK has found and shut 206 illegal P2P outlets, compared to 1,494 criminal fintech firms last year.
There are currently 151 fintech P2P platforms with a registered status, but only 36 fintech lending players have already been licensed.
The prominent ones, however, have managed to attract investments this year.
Investree raised $24 million in a Series C round from BRI Ventures, MUFG Innovation Partners, and SBI Ven Capital. Meanwhile, KoinWorks secured $20 million (in equity and debt) from Triodos Bank, Quona Capital, and other existing investors.
Many new fintech platforms are raring to enter the lucrative Indonesian market, the world&#8217;s fourth most populous country, with more than 60 per cent of people in the working age.
Almost half of its adult population of around 92 million, is unbanked, and 47 million are underbanked, according to the Google-Temasek report, suggesting immense growth potential.
How the proposed new law will impact the financial services sector is an answer in the making.

While platforms have raised many apprehensions, the OJK is of the view that POJK 77 norms can no longer cater to the fast-expanding sector.

Indonesia's proposed fintech lending norms are well-intentioned but may have deep flaws

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Indonesia's proposed fintech lending norms are well-intentioned but may have deep flaws

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