Islamic Finance In Indonesia: Implementation Of Sharia-Based Peer-to-Peer Lending

In recent years, Indonesia’s Fintech sector has grown rapidly and made considerable impacts on the country’s financial services. This includes the emergence of peer-to-peer lending (“P2P Lending”), whose particular market is Small and Medium-Sized Enterprises (“SMEs”).

As Indonesia is the most populous Muslim-majority country in the world, people have growing interest in Sharia-based financial services. With the emergence of fintech and tech-based financial services, it is interesting to see the digitalization of Islamic finance, including Islamic Finance/Sharia-based P2P Lending (“Sharia P2P Lending”).

In this article, we will provide you with an overview of the regulatory framework of Sharia P2P Lending in Indonesia.

General Regulatory Framework

Similar to the conventional P2P Lending, the main legal basis of Sharia P2P Lending in Indonesia is Financial Services Authority Regulation No. 77/POJK.01/2016 on Information Technology-Based Lending and Borrowing Services (Peraturan Otoritas Jasa Keuangan No. 77/POJK.01/2016 tentang Layanan Pinjam Meminjam Uang Berbasis Teknologi Informasi or “POJK 77/2016”).

In addition to POJK 77/2016, the implementation of Sharia P2P Lending should comply with Fatwa of the National Sharia Council of the Indonesian Ulema Council (Majelis Ulama Indonesia) No. 117/DSN-MUI/II/2018 on Information Technology-Based Financing Services Based on Sharia Principles (Fatwa Dewan Syariah Nasional Majelis Ulama Indonesia No. 117/DSN-MUI/II/2018 tentang Layanan Pembiayaan Berbasis Teknologi Informasi Berdasarkan Prinsip Syariah or “Fatwa”).

General Principles

Sharia P2P Lending is generally required to comply with Sharia principles; therefore, it must not contain elements of:

  1. Riba: increasing or exceeding the amount of return of loans or trade;
  2. Gharar: uncertainty in an akad (contract), in both quality or quantity of the akad‘s object or the handover of the object;
  3. Maysir: any contract conducted with no clear objective and based on speculative considerations;
  4. Tadlis: the act of hiding the defect of the contract’s object by the seller to deceive the buyer as if the object is not defective;
  5. Dharar: act that can cause harm or loss to another party;
  6. Zhulm: act that harms, takes, or hinders the rights of others;
  7. Haram: strictly prohibited activities.

Notwithstanding the prohibited elements, Sharia P2P Lending providers are allowed to charge its customers for their services. In this regard, the fees are chargeable on the basis of ijarah principle.

Types of Akad in Sharia P2P Lending

Similar to its conventional counterparts, Sharia P2P Lending providers provide loans to their borrowers based on agreements or contracts. In Sharia finance, a contract is generally called akad.

The types of akad that are relevant in the implementation of Sharia P2P Lending are as follows:

  1. Al-Bai’: sale-and-purchase.
  2. Ijarah: transfer of rights to use certain items or services for a certain period of time in return of certain fees.
  3. Mudharabah: a collaboration agreement between two or more parties in a specific business, in which each party contribute fund in such business, and the gained profit will be divided proportionately or in any other way agreed to, while the loss is borne proportionately.
  4. Musyarakah: a collaboration contract between funder and manager of a business, in which the gained profit will be divided in a way agreed to, while the loss is borne by the funder.
  5. Wakalah bi al ujrah: this akad is basically the same as paid power of attorneys authorizing the authorized to act on behalf of the authorizer for certain legal matters. In return, the authorizer pays the authorized for their services.
  6. Qardh: a loan contract stipulating that the borrower must return the loan fund in accordance with the agreed time and manner.

Service Models of Sharia P2P Lending

The types of services usually provided by Sharia P2P Lending providers include:

  1. Factoring: financing in terms of a business that sells its account receivables (based on invoices) to a third party, with or without a bailout.
  2. Financing of goods procurement ordered by third parties (purchase order): financing given to sellers who have received purchase or work orders from third parties.
  3. Financing of procurement of goods for online sellers: this type of financing is divided into (a) financing granted to online sellers that use their own distribution channels and utilise the online payment gateway that collaborate with related Sharia P2P Lending providers, and (b) financing granted to online sellers on e-commerce platforms that cooperate with Sharia P2P Lending providers.
  4. Employee financing: financing granted to employees using the payroll deduction scheme.
  5. Community-based financing: financing granted to community members, whose leaders organize the financing scheme.

With regard to the service models, the types of services provided by Sharia P2P Lending operators are generally similar to those provided by their conventional counterparts. The main difference is, the types of businesses involving Sharia P2P Lending should be halal businesses (i.e., not sellers of alcoholic beverages or other non-halal industries).

Types of Akad in Sharia P2P Lending Services

To provide a better understanding on different types of akad and how they are implemented in different services of Shariah P2P Lending, please refer to the following table for your further references:

1. Between provider and beneficiary: wakalah bi al-ujrahFactoringBetween provider and funder: wakalah bi alujrah
2. Between provider and beneficiary: sell-andpurchase, musyarakah, or mudharabahFinancing of goods procurement ordered by third partiesBetween provider and funder: wakalah bi alujrah
3. Between provider and beneficiary: sell-andpurchase, musyarakah, or mudharabahFinancing of goods procurement for online sellersBetween provider and funder: wakalah bi alujrah
4. Between provider and beneficiary: sell-andpurchase or ijarahEmployee financingBetween provider and funder: wakalah bi alujrah
5. Between provider and beneficiary: sell-andpurchase, ijarah, musyarakah, mudharabah, or other akads in accordance with shariah principlesCommunity-based financingBetween provider and funder: wakalah bi alujrah

The article above was prepared by Marshall S. Situmorang (Partner) and Audria Putri (Senior Associate).Disclaimer: The information herein is of general nature and should not be treated as legal advice, nor shall it be relied upon by any party for any circumstance. Specific legal advice should be sought by interested parties to address their particular circumstances. For more information, please contact us at [email protected].