Peer to Peer, or P2P lending, is becoming increasingly popular in Vietnam with the establishment of several online lending companies, but consumers are advised to be wary of the model’s imminent risks.

P2P lending is the practice of lending money to individuals or businesses through online services that match lenders with borrowers.

Since peer-to-peer lending companies offering these services generally operate online, they can run with lower overhead and provide the services more cheaply than the general brick-and-mortar financial institutions.

As a result, lenders can earn higher returns compared to savings and investment products offered by banks, while borrowers can borrow money at lower interest rates, even after the P2P lending company has taken a fee for providing the match-making platform and credit checking the borrower.

P2P lending has grown rapidly over the last year and is a new source of fixed income for investors in Vietnam.

For example, Hanoi-based P2P lending platform Tima received more than 3.19 million applications on its system and its loans totaled more than VND43.95 trillion (US$1.89 billion), according to its website.

Besides Tima, Vietnamese people can also borrow money from online lending companies such as Vaymuon.vn, Mofin, Lenbiz – the leading players offering the new method of debt financing in the Southeast Asian country.

A big advantage of the P2P model is that the door is open for all borrowers, even those who do not qualify for bank loans, to get access to the source of money.

For individual customers, they can borrow VND1-30 million ($43-1,290), with simple procedures.

A personal loan will be approved within 15 to 30 minutes after the borrower fills in an online application form available on the platform, and takes a photo of some relevant documents.

Also known as crowd-lending, some of the largest amounts of peer-to-peer loans are lent to businesses, like what Lenbiz does.

Unlike other P2P lending platforms which focus on consumer loans, Lenbiz targets small and medium-sized enterprises (SMEs) in Vietnam.

On Lendbiz, businesses can demand up to VND1 billion ($43,000) in a loan with terms from three to 12 months and no collateral required.

Applications are approved within 24 working hours and repayment before maturity is accepted if the capital has been used over two-thirds of the term.

A screenshot of the Tima P2P trading floor shows its transactions worth a total of VND43,959 billion (around $1.89 billion).

Still not officially legal

However, the activities of P2P companies are also raising concerns about the risk to all parties, resulting from the lack of a clear legal framework.

In Vietnam, as P2P is still not officially legal, the companies in the field usually register as investment consultancy firms.

A source from the State Bank of Vietnam confirmed to news website VnExpress that it has licensed no P2P platform in Vietnam.

The activities of this online finance trading form have therefore become difficult for the government to manage.

In many cases, borrowers swallowed a bitter pill as the P2P floor where they turned to for the loans turned out to be fraudulent places charging shockingly unreasonable interest rates and fees.

The interest rates quoted by these companies were around ten percent per annum, but the real interest was 40 percent.

What is worse is that interest rates applied by some online lending institutions are up to 60-108 percent per month, hundreds of times higher than current bank loans, according to VnExpress.

There have been many complaints about dishonest lending marketplaces that cause lenders to pay fees but they are still unable to connect with borrowers.

On the other hand, the risks of this lending form include the possibility that P2P trading firms disappear with the investors’ money as there is currently no provision on blockade of unallocated funds.

Insufficient risk management

In addition to a lack of legal frameworks, Vietnamese P2P platforms still do not prepare a full risk management plan while their financial capacity is modest.

Take Tima as an example. The Hanoi-based P2P lending platform holds a charter capital just over VND6.6 billion ($283,800) while the minimum figure required for a commercial bank is VND3 trillion ($129 million).

In other developed countries, some peer lending companies gain the trust of investors by setting up a loan provision fund for repayment if bad debts arise, and other companies offer insurance coverage for loans.

But these two common hedges are nowhere to be seen in the introduction of P2P lending companies in Vietnam.

Economists are cautious about P2P, especially after China’s recent statement on eliminating 157 online lending companies and keeping only one state-owned company.

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