Digital lending platforms have made strong inroads in Southeast Asia over the past few years. In 2016 alone, peer-to-peer (P2P) business lending generated US$115.01 million—more than half of Southeast Asia’s total alternative financing market that year.
This growth can be attributed to a combination of two factors:
- A high mobile penetration rate of 133%, with some people having two phones (or SIM cards) or more
- A massive funding gap, where micro, small, and medium-sized enterprises (MSMEs) have unmet financing needs amounting to US$300 billion, despite the fact that small businesses account for 40% of Southeast Asia’s gross domestic product (GDP) and 70% of the region’s workforce, according to a Deloitte report
However, the things that make P2P lending attractive to consumers—such as the absence of the traditional trappings of banking, low barriers to entry, and much more competitive interest rates—are also the same things that can make investors apprehensive about it. Just this year, investors in China are reported to be facing losses of over $115 billion due to failed lending platforms.
Fortunately, different countries in Southeast Asia have enacted regulations with P2P platforms and other fintech (financial technology) companies in mind.
Singapore has long established itself as a global hub for fintech. In August 2020, the Monetary Authority of Singapore (MAS) announced that it would commit S$250 million (US$185 million) in the second tranche of investments in the local financial sector to drive innovation and technology adoption. At present, Singapore is home to 1,000 fintech companies—a significant increase over the 50 firms just five years ago.
Singapore’s regulations for P2P platforms
Fintech companies are regulated by the Monetary Authority of Singapore (MAS) and the FinTech & Innovation Group (FTIG), a division created in August 2015. A key initiative that attracts fintech companies to the region is the FinTech Regulatory Sandbox initiative, which enables local firms to pursue innovative fintech solutions in a secure environment with relaxed regulatory pressure.
While there are technically no specific regulations that apply to P2P lending in Singapore, fundraising through these platforms is regulated by the MAS under the Securities and Futures Act (SFA) and the Financial Advisers Act (FAA).
Both laws have licensing requirements. Specifically, Chapter 289 of the SFA requires P2P platforms to apply for a Capital Markets Services (CMS) license from the MAS. Chapter 110 of the FAA may apply if the P2P lending platform provides financial advice to investors.
Meanwhile, P2P platforms that operate a “payment system” or “stored value facility” are regulated by Chapter 222A of the Payment Systems (Oversight) Act PSOA (PSOA). However, this and other provisions of the PSOA were recently consolidated under the new Payment Services Act 2019, which took effect in January 2020.
Individuals looking to become Accredited Investors in Singapore must present proof of the following:
- Income in the last 12 months of not less than S$300,000
- Net personal assets above S$2 million
- Net Financial Assets exceeding S$1 million
Investing corporations must also have net assets valued over S$10 million in their latest balance sheet.
As Southeast Asia’s largest economy, Indonesia presents a massive opportunity for fintech firms to serve what has historically been an underbanked market. According to PwC, as of January 2020, there have been 164 P2P companies registered with Otoritas Jasa Keuangan (OJK), Indonesia’s Financial Services Authority—almost double the number of registered firms at the end of December 2018.
P2P platforms are also generating interest from investors, in particular, institutional entities. For example, Akseleran, a lending platform focused on SMEs, said that 35% of its lenders at the end of 2019 were institutional investors.
Indonesia’s regulations for P2P platforms
OJK began regulating the P2P lending market in late 2016, but that hasn’t stopped the industry from flourishing. The Nikkei reports that the number of P2P lender accounts grew by 192% from December 2018 to December 2019. Some of the regulations that specifically address P2P lending include
- OJK regulation No 13/POJK.02/2018 on Digital Financial Innovation in the Financial Services Sector, which replicates the sandbox regime and pre-audit mechanism created by Bank Indonesia (BI) for fintech companies in the payments industry
- OJK Regulation No. 77/POJK.01/2016 regarding IT Based Lending Services, which, among other things, restricts foreign shareholding of P2P platforms to a maximum of 85%, creates a two-stage process licensing process for P2P providers, and prohibits balance sheet lending
Bank Indonesia (BI), the country’s central bank, also issued Regulation of Bank Indonesia No. 19/12/PBI/2017 on Financial Technology Implementation in November 2017, requiring P2P platforms to register with BI and adhere to the principles of consumer protection and risk management.
Investors with an annual turnover of at least 500 million rupiah (US$34,000) can purchase shares through equity crowdfunding of no more than 5% of their annual turnover. The threshold doubles for investors with an annual turnover of 500 billion rupiah (US$35 million). These regulations do not apply to legal entities with securities accounts held for at least two years before the P2P platform’s share issue.
P2P lending is in its early, nascent stages in Thailand. It was only in June 2020 that the Bank of Thailand (BOT), the country’s central bank, approved a trial of DeepSparks, the country’s first P2P lending platform with a limited number of users. More recently, two more platforms, Nestify and PeerPower, also tested their services in the BOT regulatory sandbox.
Thailand’s regulations for P2P platforms
Thailand’s Finance Ministry requires all P2P lending platforms to seek the BOT’s permission to operate in the country. In April 2019, the central bank laid out the conditions that P2P platform providers must adhere to:
- A P2P lending platform must be a private or public company duly registered and incorporated in Thailand
- At least 75% of the P2P company’s shares be held by Thai citizens
- The company must, at all times, have paid-in capital of no less than 5 million baht (US$160,000) throughout its lifetime
- The P2P lending company cannot be a financial institution.
A month later, the Securities and Exchange Commission also advanced new regulations that brought P2P lenders in line with existing equity crowdfunding guidelines. The core elements of the new regulatory framework include:
- All P2P platforms must be duly registered in Thailand and have a proper business plan.
- Any crowdfunding activities must occur on an approved portal to ensure proper screening of applications and legal compliance.
- The results of any offerings must be reported to the SEC.
P2P startups and SMEs can raise a maximum of 20 million baht (US$650,000) from retail investors in the first 12 months and a total of 40 million baht (US$1.3 million), for equity and debt, throughout the lifetime of the project. On the other hand, non-retail investors, such as venture capital funds and private equity trusts, are not capped.
Qualified investors in Thailand must have a net value of 50 million baht (US$1.6 million) and meet the financial requirements found under Chapter 3, clauses 12 and 13 of Notification of the Capital Market Supervisory Board no. 7/2558.
Asia-Pacific-focused consultancy firm Solidiance predicts that Vietnam’s fintech market will reach US$7.8 billion in value by 2020. Tech in Asia reports that estimates by the State Bank of Vietnam (SBV) peg the number of fintech companies in the country at 150, 40 of which are in the lending segment.
Earlier this year, Vaymuon (Lendo in English), the country’s first and largest online-only P2P lending platform, announced that it was finally profitable after two years of operation. The startup has connected over 2 million borrowers with more than 400,000 lenders, achieving a 20% growth rate.
Vietnam’s regulations for P2P platforms
Vietnam’s regulatory framework is still playing catchup with the P2P lending industry. Under Vietnamese law, companies not licensed as credit institutions are prohibited from conducting any sort of “banking activities,” which includes lending and providing guarantees. However, a report by law firm Allens notes that SBV allows companies like P2P lenders to lawfully bypass this restriction if the transaction is a “lending transaction,” as described under the Civil Code of Vietnam.
In response to this potential loophole, SBV issued an official letter in July 2019 warning people of the illegal activities associated with P2P lending, such as multi-level financial activities, loan sharking/usury, disguised pawn lending schemes, and black credit schemes.
Foreign investors in Vietnam seeking to acquire equity in a fintech company are required to acquire M&A approval from the Department of Planning and Investment (DPI) for acquisition stakes of 51% or more in an unlisted firm, affecting the ability for foreign players to enter the Vietnam market. The DPI may consult with the SBV, which may impose a foreign ownership restriction in the target firm.
A strong welcome to regulations which will improve the industry
Investors must balance their excitement about these challenger platforms with ensuring a sound and continued means of doing their due diligence. Aside from understanding how each platform works, investors should be careful to check their compliance with existing laws.
Licensed by the Monetary Authority of Singapore and a registered entity with OJK, Validus has now been operating for over five years. The platform has been active since P2P lending was a nascent, relatively known industry, and in the years that have passed, we’ve seen many platforms come and go.
As a founding member of the Marketplace Lending Committee by the Singapore Fintech Association and an approved financing partner on GeBIZ, we contribute much of our success to our dedication to compliance, data and security. This safety-first approach has formed the framework for our platform’s sustained and robust expansion across the region.
The development of new regulations for P2P platform operators and investors is expected to contribute to a safer investment landscape for all stakeholders. Investors should welcome the increasing laws and rules designed to govern the industry: the end result will be a more unified, transparent, and robust SEA P2P lending economy.
Milena Naitoh is Head of Investor Relations and Corporate Development at Validus. Milena is focused on growing Validus’ Investor base on the platform, as well as driving strategic initiatives and new country expansion. Prior to her current role, Milena started her career in global operations at Novartis AG. She has worked in the Financial Services vertical of PwC Japan’s Consulting division as part of the cross-regional team responsible for building the financial risk management business and capabilities between PwC’s Southeast Asia and Japan offices. In Singapore, she transitioned to capital markets services startup Call Levels in Singapore, leading commercial operations for the company. Milena holds a Masters of Arts in East Asian Studies from Harvard University and a Bachelor of Arts (International Relations Global Business, East Asian Languages and Culture) from University of Southern California.