As a relative newcomer to fintech and with limited experience working with peer-to-peer (P2P) lending, I thought the size of such lending would be similar to that of crowdfunding. Individuals could visit a P2P lending website, apply for a loan, and be matched with individual lenders. I didn’t realize that the concept of P2P lending is much broader than just crowdfunding.
According to Wikipedia, in addition to crowdfunding, P2P lending also includes student loans, commercial and real estate loans, payday loans and secured business loans, leasing and factoring. This makes sense when understanding P2P lending is the process of lending outside the jurisdiction of a credit institution. This would define “peers” as any entity or individual that is not a bank or other registered credit institution (and other than governments).
One of the most prominent models we’ve seen for P2P lending in Vietnam is the partnership between a source of capital and a pawn shop to provide loans to customers. Pawn shops are governed by certain laws, but ultimately the Civil Code, and their right to loan customers is limited to short-term expenses. Foreign investors looking to lend at interest without obtaining a credit institution license must find ways to provide their capital to customers and often work with existing pawnbrokers who already have a pawn license to provide short-term loans to customers.
The relationship between the foreign investor and the pawnbroker would be contractually regulated without necessarily forming a new unit. The pawnbroker would act on behalf of the foreign investor in identifying customers, making loans and servicing those loans, and would share in the interest collected.
A major issue with this and most of the other P2P lending models in Vietnam is the collection of interest on the loan and what exactly is called interest.
The recent cases on the news here in Vietnam have sparked authorities’ concern about inflated interest rates. As already mentioned, pawnbroker loans are considered civil law contracts and are subject to the maximum annual interest rate according to the German Civil Code, which is twenty percent. Any interest charged above this limit will be 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 measures.
It should be easy to distinguish the stated interest rate on a short term loan. However, there are traps that the police and other authorities have set for pawnbrokers and thus P2P lenders. In particular, the police have begun to treat certain fees charged for servicing a pawnbroker loan as interest.
Usually, a service fee, an agency fee and, depending on the type of introduction, an advisory fee or other costs may be charged to the borrower at the time of lending. These fees are technically not against the law. But the police have shown that they are willing to view these fees, especially if they are excessive, as actual interest and as an attempt by the lender to bypass the interest rate caps. From this point of view, they then take action against the lender. While the lender can ultimately win in court, the negative publicity and the temporary cessation of activities are major obstacles to the smooth running of the business.
For this reason, we recommend keeping all service charges reasonable to minimize the possibility that the police will de facto view them as an interest charge. We also suggest that the local staff develop a relationship with the local police force to promote public outreach and education to the authorities. It is easier to understand that charges are for a specific purpose and should not be viewed as interest than to argue that charges are not interest after an arrest or seizure of computers and accounts.
This is a unique problem with P2P lending because properly licensed lending institutions are allowed a different rate cap and fees of this type are covered as part of the lending process. Therefore, before getting into the P2P lending business, it is important to plan the appropriate fee charges and ensure that these are not only distinguished from the interest, but that the purpose of the fees is based on certain activities regardless of the profit made by the lender.