State Approved Predatory Lending: Excessive Interest Rates, Biweekly Repayment Schemes, and Regulatory Failure in Indonesia -By Fransiscus Nanga Roka

In Indonesia, online lending was supposed to mean a financial innovation that opened up credit, aerialists, and strengthened economic inclusion. But for most people it has turned into something quite different The guise of legality has permitted exploitation to go on as Well! When licensed online lenders charge interest that is effective in excess of the regulatory limit, adopt biweekly repayment schedules to make borrowers pay more even if they are only borrowing over the same period of time and continue to function without effective sanctions the inevitable question arises: in practice has Predatory lending become a state-protected economic activity? If the above is not clear, let me give an example. Indonesia’s Financial Services Authority (OJK) issued regulations supposed to protect the fair practice of lender businesses. In print, the system looks to be okay. But on the ground the divide between rule and enforcement is so vast that many borrowers encounter unfair practices as a matter of course and even when these shark lenders are fully certified, one of the most controversial problems is effective interest rates. Regulations set ceiling levels, but borrowers often find out that they are being charged for everything including penalties and faster repayment schedules make a borrowing that was supposed to be spread over time more expensive in the end. A nominal rate can be found that accords with regulations or the loan is repaid every two weeks instead of monthly, but once all costs are included, the effective return climbs even higher yet this illustrates a key fault in regulation. A rule that can be circumvented by changing shape is not one that protects consumers. If lenders can obey the form of regulation while disobeying its spirit, then our system has become a merely legal facade instead of real protection.

Recurrent payments often perpetuate the problem. Refinancing on an ongoing basis generally results in new fees, new commissions and yet further debts. This is a circumstance that fosters an ongoing burden for lower income borrowers. What begins as mere reliance on credit can quickly spiral out of control. Although they may break no laws strictly speaking so long as the terms of the agreement are disclosed, the ultimate issue of how ethical they can be classified. Characteristically, modern financial regulation has arisen out of an acute recognition that formal agreement is no guarantee against exploitative bargaining power. At what point consumers are victimized through insufficient negotiation options, a regulator has a duty to act, not merely watch idly. More important than all else is the question of enforcement. If breaches of interest limits, transparency rules or consumer protection principles do not command effective penalties, regulation loses legitimacy. Advisory notices issued without vigorous follow-up tell purchasers on the street that they can choose whether or not to observe. In such an system, responsible lenders are crippled and scamartists make money. Indonesia, however, is not the only country to face this dilemma. Around the world, regulators are torn between supporting fintech lending which fosters innovation and ensuring that customers are well protected. But the example from outward is unmistakable: standards have to be obeyed not one way but another. Interest ceilings must take in all elements of the cost of credit, not just its quoted rate. The real economic impact of payment structures should be investigated, rather than simply their written form. And penalties must be not only visible enough to frighten away abuse but also genuinely effective.

If licensed borrowers charge more than the law allows, public confidence in the entire financial system wanes. The borrowers feel that the law offers them no protection. When this occurs, the damage done is far more widespread than a few bad debt cases; it tends to undermine the very legitimacy of regulation itself.

In point of fact, financial exclusion also leads to practices which are bordering on exploitation. Nor can we permit innovation simply to become an excuse for bore rental. Further, regulation can hardly be called successful if those it was intended to protect still bear the greatest risk. Indonesia has the legislative means to prevent predatory lending, but must provide the muscle to make sure that these means work in reality deally, not just on paper. For when usury, short payment plans and lax enforcement are all acceptable in the same place, it isn’t simply one breakdown of the rules but a system. A sort of system that seems to approve directly those very practices it was made to prevent.

Fransiscus Nanga Roka

Faculty of Law University 17 August 1945 Surabaya Indonesia