The hidden hazard of online lending

May 14, 2023

Online platforms that offer short-term loans with little regulation and credit checks have become a widespread problem

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nline platforms that offer short-term loans with little regulation and credit checks have become a widespread problem in Pakistan, especially among low-income segments of society. These applications typically operate by offering loans with easy and fast approval processes, often within minutes or hours, without standard verification or credit history checks. According to recent reports, there are more than 100 of these loan applications available on Google Play Store that have been downloaded millions of times.

The lack of financial inclusion and literacy among low-income and vulnerable segments of society, who are often excluded from formal banking channels and have limited access to credit, makes them vulnerable to the promise of easy credit. The absence or inadequacy of regulatory oversight and enforcement by the relevant authorities, such as the State Bank of Pakistan and the Securities and Exchange Commission of Pakistan (SECP), who are responsible for licensing and monitoring lending activities, creates a regulatory vacuum that may allow lenders to operate irresponsibly.

Easypaisa is one of the leading digital payment platforms in Pakistan, offering various services such as mobile phone wallets, bill payments, remittances and loans. Easypesa’s lending business, called Easy-loan, provides instant credit of up to Rs 25,000 to customers through its app. According to its disclosures, Easypaisa increased its digital lending portfolio to Rs 1.46 billion in 2022, from Rs 505.9 million in the previous year. It reported a net profit of Rs 1.1 billion in Q1 of 2022, after five consecutive years of losses.

The digital lending landscape in Pakistan has witnessed a surge in growth, with many established players like Easypaisa expanding their loan portfolios. Meanwhile numerous new entrants have emerged in the form of nano-credit apps. Applications like Asaan Qarza are not registered with the SECP as non-banking financial companies and operate in a legal grey area.

Asaan Qarza is one of the 74 loan apps that the SECP has identified as being downloaded over a million times from Google Play Store. According to the SECP, only 10 of these nano-credit apps are registered with the SECP as non-banking financial companies. The commission has requested the public to avoid using the apps not on this list, as their operations are illegal. Musarrat Jabeen, the SECP chief spokesperson, says these apps are liable for action under the Prevention of Electronic Crime Act, 2016, and the Anti Money Laundering Act, 2010, due to their improper lending behaviour.

Digital lending in Pakistan has witnessed growth, with established players like Easypaisa expanding and new entrants emerging in the form of nano-credit apps.

There may be cases where customers are not fully aware or informed of the costs and risks involved in borrowing online, such as interest rates, service charges, penalties and repayment periods. Many borrowers end up trapped in a cycle of debt and poverty, as they have to borrow from one lender to repay another, and pay interest rates and fees that consume their income and savings.

Unregulated lending can also be linked to transnational criminal networks or terrorist financing activities, as they may use the funds collected from borrowers for illicit purposes or launder money through offshore accounts. The lack of oversight and regulation of loan apps can make them a hotbed of illegal activities, such as money laundering, terrorism financing or drug trafficking

To address the growing popularity of loan applications in Pakistan, several solutions and recommendations have been proposed. Strengthening the legal and regulatory framework for digital lending by establishing clear rules and standards for transparency, disclosure, data protection, consumer protection and fair business practices is necessary.

The SECP has liaised with the Pakistan Telecommunication Authority (PTA), the Federal Investigation Agency (FIA), Google and Apple to crack down on these loan apps. In January and February, it reported 75 unauthorised apps to Google and Apple for removal from their app stores. The SECP spokesperson also said that digital lenders will only be authorised to operate in the country if they have obtained a licence and approval from the SECP and certification from the PTA.

The question remains, will the government and the industry stakeholders take effective measures to address this issue, or will they continue to turn a blind eye to the plight of millions of borrowers who are struggling to make ends meet?

The writer is a freelance journalist and a master’s student at IBA Karachi

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