Financial Inclusion or Financial Predation? Indonesia’s Microfintech Rates in a Global Comparison with China, the U.S., South Korea, and South Africa -By Fransiscus Nanga Roka

Indonesia defines microfintech as a right of financial inclusion a raod for the unbanked to be lifted above the poverty line. But the other side of this story is not heartwarming; if inclusion must pay nearly one third of one percent per day, then it is no longer empowerment but may well turn out simply to mean exploitation and this time even has legal protection. At first look,succeeding in making this look a little technical. In essence, they are political figures. At 0.3% per day, the daily interest burden is far greater than even the most expensive of conventional credit products. Compare this with the interest rate on a credit card in Indonesia, capped at around 1.75-2% per month, or Kredit Usaha Rakyat (KUR) interest, which is reduced to somewhere between 6% and 9% annually. The difference is not small, it is one of nature. It is not just a question of prices but also regulatory philosophies, banks only protected if everyone else is revealed to risk. A disaster waiting to happen if a considerably worse flood were to hit. This is the first place where the facade of “financial inclusion” begins to crack. The global trend in microfinance and fintech legislation has headed toward tightened consumer protection not relaxed. After a period of explosive growth in fintech, in China regulators imposed strict caps and restructured platforms to curb systemic risk and predatory lending. In the United States, while the interest rate ceilings vary by state, a dense network of federal and state level regulations on consumer protection truth in lending requirements, bans on unfair practices, and enforcement by bodies like the Consumer Financial Protection Bureau add a barrier with teeth to abuse. South Korea has taken this a step further. It has drastically cut maximum interest rates and given stronger protections to borrowers, specifically recognizing that high cost lending can destabilize households and by extension also damage a country’s economy. South Africa, despite its own share of problems, has the National Credit Act which limits interest and requires affordability assessments normatively at least embedding in principle that credit should not be structurally hurtful.

Indonesia, on the other hand, seems to have taken a different tack: not only tolerating high cost lending, but turning it into business as usual.

The logic of this is predictable: microfintech caters to high risk borrowers normally excluded by the banking system. When the risk is higher, rates must naturally follow. Such an argument, though, does not stand up to scrutiny. So long as one price is no one hundred times or astronomic several times as many multiples of earnings as are considered moderately generous in China, the notion that this is compensation for risk becomes weakened; really Ethical behavior?

Even more oppressive than the high rates themselves is the way these fast payback cycles come due biweekly or even more often unlike monthly credit schedules which give some breathing space (and room for error. These tight repayment rounds send a constant flow of cash back into the hands of usurers, binding debtors over and again with building up still more unendurable debts. It is not enough that loans can be had cheaply; equally important is how they are repaid. In that regard, microfintech increasingly looks less like a framework designed to be paid back and more akin with one made to feed dependency.

Here it is, the uncomfortable truth: as at present conceived, financial inclusion may be functioning as a mechanism of redistribution that transfers wealth from the poor to financial institutions.

On a deeper level, can a regulatory system which permits structurally disproportionate burdens claim still to protect borrowers? Or does it in effect turn such an economic device into a form of coercion?

The answer to this question depends on whether law is considered a value neutral means of servicing markets and economic interests, or alternatively a code designed to prevent exploitation particularly where the playing field is manifestly uneven. In Indonesia’s context of microfintech, that disparity is stark. Borrowers are profiled digitally, coaxed into certain behaviors through marketing ploys and bound by contract with terms that lie hidden from view. Meanwhile, their guardians measure compliance against formal metrics rather than meaningful content.

The result is the production of a system that is lawful but ever more difficult to defend as fair.

If there’s any lesson to be drawn from global trends it’s this: left unchecked, digital lending at high cost not only widens access but also increases inequality on a larger scale. China came in to rescue systemic risk. The U.S. enforces law. South Korea adjusted ceilings. South Africa gave clarity in writing. Each of them recognized in their way that access without protection is not inclusion; it’s exposure to risk.

Now Indonesia faces a choice. Will it continue to hold microfintech out as an inclusion success story, or will it face up to the possibility that a system has been created where legality is used to mask exploitation?

For when the price of inclusion is perpetual debt, it’s no longer a question of whether the system is functioning.

The question becomes: who benefits from such a system?

Fransiscus Nanga Roka

Faculty of Law University 17 August 1945 Surabaya Indonesia