Indonesian civil servant Fajar took out his first online loan after seeing a pop-up advert on social media in 2019.
“It said I could get IDR 5 million in just five minutes,” he said. But from that initial loan, just over USD 310 at December’s exchange rate, he ended up paying back nearly triple the amount. “Every month, the repayment amount kept changing, and within six months, I had paid IDR 13 million for that quick cash.”
Fajar, who lives 35 kilometers south of Jakarta in the city of Bogor and declined to give his full name, soon found himself trapped in debt across several lending platforms. By 2022, his total outstanding debts had ballooned to IDR 102 million (USD 6,324).
He is far from unique. Some 137 million Indonesians—about two-thirds of the population aged over 15—held a combined IDR 66 trillion (USD 4.1 billion) in outstanding debt through digital lending platforms as of the end of September, according to Indonesia’s Financial Services Authority (OJK). This is classified as loans not repaid at the end of their term, which is usually one month.
The total has surged over the last five years, rising from 18.6 million borrowers owing IDR 13.16 trillion (USD 81.6 million) in 2019.
The value of loans disbursed via digital platforms in the first nine months of the year totaled IDR 218 trillion (USD 13.5 billion), OJK said, up from IDR 72 trillion (USD 4.5 billion) for the whole of 2020.
“The sharp increase occurred as many people, particularly in the middle class, struggled with the post-pandemic economic decline while maintaining pre-pandemic levels of necessary spending,” said Izzudin Al Farras, a digital economy researcher at the Institute for Development of Economics and Finance (INDEF).
He said that a shift from formal to informal employment among the middle class following mass layoffs across many sectors forced many to seek quick financial support.
The peer-to-peer lending sector, which includes online digital platforms, took off in Indonesia in 2016. Initially, it was designed to provide small businesses, who were often ineligible for bank credit and were easy targets for traditional loan sharks, with an alternative source of financing.
The mechanism was later expanded to allow individual borrowers to access the facility, including through personal loans and via “buy now, pay later” schemes integrated with e-commerce platforms.
Since 2022, the proportion of such loans to individual borrowers has exceeded business loans on digital platforms. They have accounted for 71.43% of all disbursed loans this year, according to OJK.
Investors include some of the biggest names in Asian finance. Standard Chartered invested in SPayLater, a pay-later entity integrated with Shopee. Ant Financial and Sequoia Capital invested in AkuLaku. Mizuho Bank invested in Kredivo, and Credit Saison invested in Julo.
The loans are also heavily concentrated in Java, which accounts for about 56% of Indonesia’s population but almost 80% of borrower accounts.
Fia Arista is one of the tens of millions of borrowers in West Java province. “It started with IDR 500,000 back in 2019, and I haven’t been able to stop relying on online lending platforms since,” said the resident of Cianjur.
The high school graduate got her first job in 2019 as a store clerk at a traditional market near her hometown. Earning IDR 1.2 million (USD 74.4) a month, she now has debts amounting to ten times her income.
“The amount ballooned because I used loans from one platform to pay off debts on another platform,” she explained.
Arista is part of what Farras of INDEF described as a financially illiterate demographic that does not understand how credit and interest work.
“These illiterate users focus only on the amount they think they’re going to receive without understanding their responsibilities and the risks of the loan,” he said.
Government data released in August put the nationwide financial literacy rate at 65% of the population aged over 15.
The Indonesia Fintech Association (Aftech) acknowledged the urgent need for financial literacy education.
“Aftech realizes that the importance of keeping the growth [in digital lending] must be aligned with financial literacy on wise use, financial planning and awareness of the risks,” Aftech deputy general secretary Firlie Ganinduto told Nikkei Asia.
In response to the growing debt crisis, OJK has capped the interest rate for digital lending at 0.3% per day, or 108% annually. This figure is set to be lowered to 0.2% per day (72% annually) in 2025 and 0.1% per day (36% annually) in 2026.
Bank Indonesia, in contrast, caps the annual interest rate for credit cards at 21%.
“This new interest rate provision for digital lending platforms is meant to protect the public from high interest rates and hidden fees,” OJK said when announcing the changes in September 2023.
Agusman, an OJK commissioner overseeing the digital financing industry, said the early announcement of the rate adjustment was intended to help the industry prepare growth strategies.
“The interest adjustment is also subject to evaluation based on economic conditions and industry dynamics,” he said.
KTA Kilat, one of the legally registered platforms, has taken a more cautious approach to loan disbursement due to the declining economy and to sustain the company’s bottom line.
The company’s monthly disbursements have dropped to IDR 60 billion (USD 3.7 million), compared with IDR 300 billion (USD 18.6 million) in the pre-pandemic period. “We are maintaining a low nonperforming loan rate,” KTA Kilat CEO Dino Martin told Nikkei.
OJK requires platforms to maintain a loan settlement rate of at least 95%, translating to a maximum 5% nonperforming loan rate, although this is defined as nonrepayment after 90 days on a monthlong loan. KTA Kilat currently has a settlement rate of 96.7%.
Martin criticized the interest rate cap, favoring a market-driven mechanism instead.
Another platform, Easycash, urged OJK to maintain the 0.3% daily cap for next year. “Sustaining this rate will ensure loan accessibility and liquidity for unbanked and underbanked segments,” said Easycash CEO Nucky Poedjiardjo Djatmiko in a statement.
Ganinduto of Aftech also insisted that the growth of digital loans is a positive indicator of financial inclusion in Indonesia and should not be stifled. “It has provided an alternative for small businesses and individuals in the unbanked and unbankable categories,” he said. “Aftech also enforces compliance among our members while advocating for policies that support industry growth.”
Djatmiko added that OJK should focus on cracking down on illegal lending platforms.
OJK reported that in 2022 investors and borrowers suffered IDR 120 trillion (USD 7.4 billion) of losses from illegal peer-to-peer lending platforms. As of September 2024, it said it had shut down more than 11,000 such platforms since 2017, an average of almost four per day. However there have been very few arrests in connection with these criminal outfits.
Borrowers have also alleged myriad abuses of regulations by lenders. Violations reported by OJK include unethical debt collection practices, such as threats to publish borrowers’ personal data and verbal intimidation, which have led some people to take their own lives.
Fajar, the civil servant from Bogor, said the first online loan he took out turned out to be from an illegal entity, Dana Jaya.
He assumed legally registered platforms would offer better terms and be more scrupulous. “It turns out they weren’t much better. For a loan of 14 million rupiah, I had to repay IDR 24 million,” he said.
At one point, he became overwhelmed by overlapping bills, eventually resulting in late payments he could no longer avoid.
“At first, my phone wouldn’t stop ringing all day. Then, my relatives began receiving anonymous calls accusing me of fraud on digital lending platforms. Eventually, debt collectors, some with thug-like appearances, started showing up at my house and intimidating my wife. Sometimes, they even came to my office, falsely claiming I had committed investment fraud.”
Fajar eventually secured a personal loan from a bank in 2023, using his civil servant certificate as collateral and tapping his family’s emergency savings, to end his spiraling debt from digital lending platforms.
In 2023, the government passed legislation to enforce stricter regulations on digital lending, targeting those engaging in illegal or unethical practices, including improper debt collection methods.
But INDEF’s Farras warned that declining purchasing power because of value-added tax rising from 11% to 12% in January would pile more pressure on people to seek fast financial aid.
“As indicated by data showing continuous declines in third-party funds at banks, middle- and lower-income groups are depleting their savings. Those who have exhausted their savings are turning to digital lending,” Farras said.
To prevent further unproductive debt accumulation on digital lending platforms, Farras called on OJK to tighten its oversight, which he described as inadequate.
“Supervision of bad loan rates must be strictly enforced, especially for platforms that exceed the 5% cap,” he said.
KoinWorks, a leading platform that pioneered OJK registration in 2017, currently reports a 9.89% nonperforming loan rate out of a total disbursement of IDR 8.7 trillion (USD 539.4 million) this year.
Recently, OJK revoked the registration and operational license of Investree, a prominent platform backed by major financial institutions, including state-owned bank Bank Rakyat Indonesia, after its bad credit rate reached 12.58%.
Farras cautioned that failure to address high nonperforming loan rates among digital lending platforms would affect the broader financial technology ecosystem. “This will lead to distrust towards the digital financial industry at large.”