Islamic Finance

Shariah-compliant P2P lending is the ‘Wild West’ in Indonesia

As China drives Indonesia’s e-payments players to consolidate or exit, P2P lending start-ups get competitive, digging out footholds in Shariah compliance 

Since Indonesia’s Financial Services Authority (OJK) published new rules for the nation’s fintech sector in December 2016, entrepreneurs and investors have moved quickly to carve up the market. Fintech stakeholders in the world’s largest Muslim-majority economy have scarcely been able to discuss their plans for the next 18 months without incidentally bringing up peer-to-peer (P2P) lending.

OJK has stipulated that P2P lending start-ups must get themselves registered, have $200,000 in capital before they can be approved for an operating licenses, and cap loan values at $150,000. For now, this amount should tide users over while the government observes the space’s progress and issues updated rules in the future.

The Asian Development Bank estimates there is a $70 billion credit gap in Indonesia for small- and medium-sized enterprises (SMEs), which is currently unmet by formal financial institutions. This likely makes the emerging market – with more than 250 million people, more than 50 percent of whom are under the age of 30 and tech-savvy – ripe for P2P lending.  



In June 2017, Yusuf Mansur, a famous local Islamic cleric and co-founder of mobile payments start-up Paytren told Salaam Gateway he was waiting on a license from OJK to make the platform the archipelago’s first Shariah-compliant, mobile, P2P lender. 

Mansur said PayTren could “only deal with off-balance sheet activities” and only collect a “platform fee” in a bid to keep the offering Shariah-compliant. Islamic social finance institution Baitul Maal wat Tamwil and Shariah-compliant Bank Muamalat expressed interest to becoming lenders on PayTren, Mansur claimed.

PayTren uses a credit scoring system designed by its internal analysts. The system looks at both lenders and borrowers by checking the validity of documents and other variables, said Mansur. Maturity and profit rates are agreed upon between borrowers and lenders and all other specifications must comply with OJK regulations.

Around 10 days after the Salaam Gateway story, local press reported that Mansur and PayTren were reported to the Indonesian police, following a dispute involving a hotel investment gone awry. Accusers claimed the venue would no longer be built and that the group of investors had “no clue” where their money went.   

Unrelated to the case, Salaam Gateway reached out to PayTren for comment on Indonesia’s P2P lending sector but we are yet to hear back from the company. 

That said, PayTren is not the only company jockeying to be the first Shariah-compliant P2P lender in Indonesia. Investree claims to be the nation’s “pioneer P2P lending marketplace.” The start-up was formed in May 2016 and applied for its OJK license in May 2017.


In an interview with Salaam Gateway, Investree co-founder and CEO Adrian Gunadi says he is not aware of PayTren’s market movements, but by all accounts should be. “I am not aware that PayTren is doing P2P lending,” explained Gunadi. “To my knowledge as Vice Chairman of the Indonesian Fintech Association, they are not in the lending space and are not registered with OJK. To date, we are not aware of any true Shariah-compliant P2P offering [from them].”

Gunadi admits that his knowledge of OJK’s list of P2P lending applicants is only as recent as May. This means that it is possible PayTren got itself registered shortly thereafter.

Between 2009 and 2015, Gunadi served as the former managing director of retail banking at Bank Muamalat Indonesia. Prior to that, he was the Head of Shariah Banking at PermataBank from 2007 until 2009. From 2005 to 2007, Gunadi managed global Islamic finance product structuring covering the Gulf region (MENA), South Asia, and Southeast Asia for Standard Chartered Bank. According to him, Investree is taking its Shariah-compliant offering in Indonesia quite seriously.

“We are finalizing our product structure for Shariah. We have presented the model to the National Shariah Board and are awaiting confirmation,” says the entrepreneur. “In essence, the product offering will be structured in a Shariah-compliant manner under acceptable Shariah contracts. The pricing and access will be the same as conventional ones.

“Those who prefer Shariah-compliant loans will have the same access, the same process, the same returns, and the same fees as those associated with the conventional product. This is something that the Shariah banks cannot offer against conventional banks. We hope this will be a viable solution to accelerate Islamic finance,” said Gunadi. 

Having operated for a little more than one year, Gunadi says that Investree has facilitated around $18 million in loans, 95 percent of which went to businesses, and 5 percent of which were employee loans. He claims that of that amount, there has been a 0 percent rate of non-performing loans. The average return for lenders has clocked in at 17 percent per annum, says Gunadi.

“We have 750 unique SMEs as clients and over 7,000 retail lenders. The figures above clearly indicate that we are one of the market leaders” adds Gunadi.


At the other end of the spectrum sits Aidil Zulkifli, co-founder and CEO of UangTeman, Indonesia’s self-proclaimed first digital microlender. The company is an online lending service that provides instant short-term microcredit to Indonesian consumers. It provides loans of up to 6 million Indonesian rupiah ($450) for no more than 30 days. The company claims to have processed around $7 million in microloans over the past 24 months. Zulkifli says UangTeman has nearly 7,000 unique users, 70 percent of whom are repeat borrowers, and UangTeman has only written off 1.5 percent of its loan portfolio.

With regard to whether online lending start-ups should be focusing exclusively on Shariah compliance in the archipelago, Zulkifli believes the demand may simply not be there. According to him, Shariah-compliant offerings should be part of the mix for start-ups, but not necessarily the focal point.

“We don't offer any Shariah-compliant offerings but it is currently baking in the oven. We realize Indonesia, though a huge Muslim market, has little understanding and therefore adoption of Shariah-compliant products. Less than 5 percent of its banking is Shariah-compliant versus Malaysia's, which is more than 20 percent by assets,” explained Zulkifli. (Note: Indonesia’s Islamic banking market share crossed the 5 percent mark in September last year and stood at 5.29 percent of total banking assets at the end of March this year.)

Less than 22 percent of Indonesia’s population are touched by formal financial institutions, he adds. This makes the opportunity attractive for anyone in the alternative lending space, be it P2P lending or microcredit players.

Zulkifli admits, however, that there are inevitable risks that come with any emerging market where data infrastructure remains light and unorganized. Investors should be sophisticated enough to discount for emerging market risk in their yield expectations, he explains.   

“We have barely scratched the surface in terms of alternative lending in Indonesia. I think Shariah-compliant investing will still remain a small allocation of the online lending industry if we are guided by the figures at the macro-level. There is simply no impetus for players to invest in this space as there is no impetus for banks to invest in this space. At the end of the day, Indonesians, Muslims or not – UangTeman has an 82 percent Muslim customer base – tend to be more practical when it comes to finance.”      


Ajisatria Suleiman, executive director of public policy at FinTech Indonesia, a lobbying group formed on behalf of the country’s fintech stakeholders tells Salaam Gateway that OJK seems to be genuinely putting faith in online lending as a solution to Indonesia's massive financing gap, namely for SMEs and unbanked consumers.

“Some more mature markets are consolidating – such as payments and financial e-commerce and comparison platforms – whereas the lending market is going to be crowded by new entrants before consolidation, probably not until two to three years from now,” says Suleiman.

The lobbyist admits that when it comes to P2P lending, the OJK’s new rules are still open to interpretation by innovators. In turn, this means that while Chinese giants like Alibaba and Tencent are swooping in to gobble up the e-payments and e-wallet winners, P2P lending in Indonesia will remain a ‘wild west’ scenario for the time being.   


Driven by tourism spending Chinest fintech giants move into Southeast Asia's biggest Islamic markets

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Leighton Cosseboom