As a country, we like to ban things. From the most basic things like confectionery to more sophisticated things like cell phones. It’s more than just economic management, more like an obsession. Nothing drives this point home better than the TikTok case where the courts as well as the Pakistan Telecom Authority (PTA) played big brother and decided what people should do with their time. After all, the moral fabric of society must be protected, not to mention the fact that those who champion this cause have built their entire careers on their very lack of morality.
Given this obsession, one would like to think that the authorities will act quickly when large numbers of Pakistanis fall prey to digital loan sharks. Anyone who keeps tabs on the Play Store, or even watches something on YouTube, knows this. Dozens of apps are currently available to entice average people with instant credit, obviously with misleading terms.
According to research by Data Darbar, 27 of the apps featuring Google Play Pakistan’s top 100 finance apps were instant credit apps as of June 28. Of these, 19 offered loans in local rupees and the top eight alone had estimated downloads at 15.4. million since their launch. That may not seem like much, but by our historical trends, it is. Especially given the time window.
For context, the top eight banks by total assets saw downloads of around 4.4 million in the comparable period, according to Appfigures estimates. Sure, it’s a pretty lazy industry to contrast, but with money. But even compared to the big four digital ledger apps, which have had a particularly impressive install trajectory, instant credit platforms stand out. Only the carrier-backed wallets manage to beat them.
Instant credit apps charge exorbitant rates while luring customers with misleading terms, and are completely unregulated by authorities
To be clear, most uploads are contributed by one player: Barwaqt with 9.27m. Licensed by the Securities and Exchange Commission through SeedCred Financial and backed by Chinese money, the app was launched on June 9, 2021 and has had a remarkable growth trajectory since then.
There is only one licensed player operating in this space: Sarmaya Microfinance. Many are not even registered entities, to begin with, although the modus operandi of the two types is little different. Promising low interest rates, they trick users into borrowing, often even disbursing the amounts without their confirmation.
However, a significant portion of the amount is actually deducted at source, between 21-38% depending on the application, in the name of service and/or processing fees. By the way, this is for periods of 30 to 90 days, sometimes even less.
Yet annual percentage rates, which represent the total cost of borrowing in annual terms, would range between 11 and 39 percent. This is a gross distortion of the facts. To understand, let’s say you get a loan of Rs10,000 for a period of 30 days, with Rs2,950 deducted at source. In this case, the service and processing fees alone amount to 354 bp on an annualized basis. We haven’t even factored in the interest yet.
This is both exploitation and deception of the highest order, while our regulator is completely absent. In this case, it is the Securities and Exchange Commission of Pakistan, which is responsible for non-banking financial companies. But no one has heard of them. Not that they would have done anything other than issue a circular that only 500 people, including journalists and financial analysts, would have read.
Admittedly, there is a limit to what the commission can do given that many apps are not even legal entities of Pakistan. But what is stopping them from regulating, instead of essentially granting amnesty with no questions asked to those who are authorized? Or to accelerate changes to the regulation of non-bank financial companies and provide more specific checks and balances? The recently proposed changes are anything but.
We also have the PTA which has built half of its brand around creating internet no-go zones for internet users, blocking dating apps, games and even blogs. They can quite easily restrict access to unregistered and unlicensed platforms, but morality standard bearers have more immediate issues to deal with.
And of course, it deserves an honorary mention from the State Bank of Pakistan (SBP) which likes to do anything and everything except its core mandate. Calling no further, but the SBP has in the past ordered its regulated entities to block payments to Indian content platforms, meaning it has the toolkit.
While the lack of interest in the financial well-being of citizens is certainly one reason for the authorities’ indifference, another is the cross-regulatory nature of the subject matter, according to an expert who has worked at the intersection of technology and financial services. When that happens, everyone chickens out, they say. This only gives the sharks more freedom to prey on simple people.
The author is the co-founder of Data Darbar, a private market portal
Posted in Dawn, The Business and Finance Weekly, July 4, 2022