“Big risk” in small loans from unregistered players – Business

ISLAMABAD: As fintech nano-lending gains popularity among the country’s unbanked population, several unlicensed companies have joined the fray and authorities are powerless to stop them.

Out of the eight non-banking finance companies (NBFC) in the country, only two are engaged in instant digital lending business, offering loans of up to Rs 25,000 to customers in less than half an hour.

SeedCred (Barwaqt) and Sarmaya Microfinance (EasyLoan) are the only two licensed companies offering nanocredit.

Nanocredit refers to small loans as low as Rs 50 that the poorest of the poor can get through their phones for days or weeks. Artificial intelligence determines their creditworthiness and the lender pays the sanctioned amount to the borrower’s account within minutes without human intervention.

Within a year of launch, the business volume of these digital lending platforms surpassed Rs 10 billion in FY 2021-22.

The SECP convenes a meeting with nanolenders on Tuesday, amid heavy criticism

At the same time, many unlicensed and illegal nano-lenders have been popping up on social media without the approval of the Securities and Commission of Pakistan (SECP).

Some popular names on social media are AiCash, OliveCash, FlexiMoney, etc.

A senior SECP official said several complaints had been received against many such fintech companies, but since these platforms were unregistered, the matter had to be taken up with the Federal Investigation Agency (FIA) as it was illegal to conduct financial transactions without registration make.

Besides, the Pakistan Telecommunications Authority (PTA) should also crack down on those instant digital lending platforms that are promoting their services through social media, the official said.

Responding to a query, the SECP spokesman said the regulator had “regularly spread the message that collaborating with such illegal platforms is highly risky and can lead to financial losses for borrowers, rather than improving access to finance.”

SECP, Nano Lenders Meeting

Aside from these unregistered companies, there are also concerns from the public and financial analysts on social media that the nano-credit fintechs are charging exorbitantly high interest rates, even blaming the regulator for failing to keep mark-up rates at reasonable levels.

Based on these criticisms, the SECP convened a meeting with these nano-lenders on Tuesday, and the regulator is expected to issue guidelines for an enhanced redress mechanism after reviewing the number and nature of the complaints.

Sources in the SECP said the fintech companies would likely be instructed to provide periodic reports on complaints and their resolution.

evolutionary stage

On the other hand, Sarmaya Microfinance CEO Habibur Rahman said that digital lending is a new concept in Pakistan and shares many similarities with the growth of the credit card sector about two decades ago.

“There was a time in the early 2000s when a lot of people threw away their credit cards after using them,” Mr Habib said. “Many also assume that they can escape the system after taking out the digital loan – but that was not possible because all the customer data is available from the Schufa.”

He said that the cost of funding digital platforms is always technically higher than traditional lending platforms because of the higher risk, instantaneous and unsecured nature of the personal loans offered.

“But only those who don’t have access to the banking system and are required to borrow from traditional moneylenders are opting for digital loans when they need money in an emergency,” he added.

However, currently there has been no legal obligation in the system to set a cap or limit on credit prices, spreads or interest rates and these are determined by market forces and bilateral agreements between lenders and borrowers.

The nano-lenders argue that the average mark-up rate for the fintech is between 25 and 28 percent, which is similar to microfinance rates, and these digital lending platforms charge no service fee if the loan is returned within seven days.

The first digital lending platform in Pakistan was SeedCred, which launched in June last year. In less than a year it has served eight million customers who have paid out over Rs 4 billion and the company now plans to double that number in the new financial year.

Abrar Saeed, CEO of SeedCred, said that digital nanocredits are in the development phase in Pakistan, but these lenders will eventually evolve into digital banks disbursing large loans.

However, there are currently only two digital instant loan companies in a country where more than 100 million people are unbanked.

As nanocredit is expected to grow, so too will complaints of customer default and exploitation by lenders.

Published in Dawn, July 3, 2022

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