ISLAMABAD: As nano-lending fintech gains popularity among the unbanked population of the country, several non-licensed companies have entered the fray and the authorities are unable to stop them.

Of the eight non-banking finance companies (NBFC) in the country, only two are in the instant digital lending business providing up to Rs25,000 loans in less than half an hour to clients.

SeedCred (Barwaqt) and Sarmaya Microfinance (EasyLoan) are the only two licensed entities providing nano loans.

Nano-credit refers to small loans amounting to as low as Rs50 that the poorest of the poor can obtain for days or weeks through their phones. Artificial intelligence determines their creditworthiness and the loan provider disburses the sanctioned amount to the borrower’s account within a couple of minutes without any human involvement.

Within one year of the introduction, business volumes of these digital lending platforms crossed Rs10 billion in the 2021-22 fiscal year.

SECP calls meeting with nano lenders on Tuesday amid barrage of criticism

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

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

A senior SECP official said several complaints had been received against many such fintech companies, but since these platforms were not registered, the matter had to be taken up with the Federal Investigation Agency (FIA) because it was illegal to conduct financial business without registration.

Besides, the Pakistan Telecommuni­cation Authority (PTA) should also act against these instant digital lending platforms promoting their services through social media, the official said.

Responding to a query, the SECP spokesperson said the regulator “has been regularly floating the message that engaging with such illegal platforms is highly risky and can lead borrowers to financial losses instead of improving access to finance”.

SECP, nano lenders meeting

Apart from these unregistered firms, there are also concerns from the general public and financial analysts on social media that the nano-lending fintech companies are charging exorbitantly high interest rates and even blamed the regulator for failing to maintain the markup rates at a reasonable level.

Based on this criticism, the SECP has called a meeting with these nano-lenders on Tuesday, and it is expected that after reviewing the number and nature of complaints, the regulator will issue directives for an improved complaint redress mechanism.

Sources in the SECP said the fintech firms were likely to be directed to regularly submit periodical reports related to complaints and their resolution.

Evolution stage

On the other hand, Sarmaya Microfinance CEO Habibur Rahman said digital lending was a new concept in Pakistan and it had many similarities with the growth of the credit cards sector some two decades ago.

“There was a time in the early 2000s when many people would throw their credit cards after using it,” Mr Habib said. “Similarly, many people assume that they can evade the system after taking the digital loans — but it was not possible because all details of the clients are available at the credit bureau.”

He said that technically, the cost of financing digital platforms would always be higher than conventional lending platforms because of the higher risk and instant and unsecured nature of personal loans on offer.

“But only those who do not have access to the banking system, and are obliged to take loans from traditional money lenders, opt for digital loans when they need money in an emergency,” he added.

However, currently there was no legal obligation in the system to place a cap or limit on loan pricing, markup or interest rates, and these are determined by market forces and bilateral agreements between lenders and borrowers.

The nano lenders argue that the average markup rate for the fintech ranges between 25 and 28 per cent, which is similar to that of the microfinance rates and these digital loaning platforms do not impose any service charge if the loan was returned within seven days.

The first digital lending platform in Pakistan was SeedCred, which was launched in June last year. In less than a year, it has served eight million clients disbursing over Rs4 billion, and the company now plans to double this figure in the new fiscal year.

SeedCred CEO Abrar Saeed said that digital nano loans were at the evolution stage in Pakistan, but these lenders would eventually develop into digital banks, disbursing large loans.

However, there are currently only two companies in the instant digital lending sector in a country where more than 100 million people don’t have bank accounts.

With growth expected in the nano loans sector, complaints of defaults by clients and exploitation by lenders too will rise.

Published in Dawn, July 3rd, 2022

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