As a relative newcomer to fintech, and with limited experience working with peer-to-peer lending (P2P Lending), I thought that the scope of such lending was similar to crowdfunding. Individuals could go to a P2P Lending website, lodge a request for loans, and be matched with individual lenders. I didn’t realize that the concept of P2P Lending is considerably broader than simply crowdfunding.
According to Wikipedia, in addition to crowdfunding, P2P Lending includes student loans, commercial and real estate loans, payday loans, as well as secured business loans, leasing, and factoring. This makes sense when you consider P2P Lending to be the process of lending outside the purview of a credit institution. This would establish “peers” as any entity or individual that is not a bank or other registered credit institution (and excluding governments).
One of the significant models we have seen for P2P lending in Vietnam is the partnership between a capital source and a pawn shop for the purposes of extending loans to customers. Pawn shops are governed by specific laws but ultimately by the Civil Code and their right to lend to customers is limited to short term issues. Foreign investors who wish to provide loans at interest without obtaining a license to be a credit institution must find ways to provide their capital to customers and often they partner with existing pawn brokers who already have a pawn license to provide short term loans to customers.
The relationship between the foreign investor and the pawn broker would be governed by contract without necessarily forming a new entity. The pawn brokerage firm would act for the foreign investor in identifying customers, extending loans, and servicing those loans and would share in the interest collected.
A major issue facing this, and most other P2P lending models in Vietnam is the collection of interest on the loan, and what, exactly is considered interest.
Recent cases in the news here in Vietnam have given rise to the authorities’ concern over excessive interest rates. As I mentioned, pawn broker loans are considered civil contracts and subject to the maximum annual interest rate under the Civil Code, which is twenty percent. Any interest charged beyond that cap is considered a violation of the law and, in addition to forfeiting the amount in question, the broker who charges such interest may be subject to additional disciplinary actions.
It should be a simple matter to distinguish the stated interest rate charged on a short term loan. However, there are traps which the police and other authorities have laid for pawn brokers and, thus, P2P lenders. Specifically, the police have begun to view certain fees charged on the servicing of a pawn broker’s loan as interest.
Normally, when granting a loan, there may be a service fee, an origination fee and depending on the nature of the introduction a consultancy fee or other costs levied on the borrower. These fees are not technically against the law. But the police have proven they are willing to view these fees, especially if they are excessive, as de facto interest and an attempt by the lender to circumvent the interest rate caps. Taking this view, they then institute action against the lender. While the lender may eventually win in court, the negative publicity and temporary cessation of activities present major obstacles to the smooth operation of business.
As such, we have begun recommending that all service fees remain reasonable, to minimize the possibility that the police will view them as de facto interest charges. We also suggest that local staff develop a relationship with the local police to help foster outreach and education of the authorities. It is easier to help them understand that fees are for specific purposes and should not be seen as interest before the fact than it is to argue that fees are not interest after an arrest or seizure of computers and accounts.
This is a problem unique to P2P lending as properly licensed credit institutions are allowed a different interest rate cap and fees of this nature are assumed as part of the loan process. Before getting into the business of P2P lending, then, it is important to plan for the proper fees charges and to make sure that they are not only distinguished from interest but that the purpose of the fees is traceable to specific activities separate from the profit of the lenders.