On 25 March 2022, the Securities and Exchange Commission of Pakistan (SECP) published draft amendments (P2P Amendments) to the Non-Banking Finance Companies and Notified Entities Regulations, 2008 (NBFC Regulations, 2008) for the purpose of seeking comments from the public.
On the promulgation of the P2P Amendments, lending non-bank finance companies in Pakistan will be allowed to provide peer-to-peer lending services through an online platform, where lenders and borrowers are aggregated (P2P Services). This will be yet another significant development in country’s fast-evolving fintech regulatory landscape.
Eligibility to provide P2P Services
Under the P2P Amendments, lending non-banking finance companies (i.e., companies that hold a NBFC license issued by the SECP for lending business) interested in entering this business will be required to increase their equity by PKR 20 million (above the minimum equity requirements under their lending license) and make an application to the SECP to obtain permission to begin operations.
Scope of P2P Services
The P2P Amendments envisage that a service provider will coordinate the entire transaction of lending and borrowing. This will begin by carrying out a credit assessment and risk profile of its eligible participants, disclosing such assessments to lenders, determining the price of loans, and after participants agree to the terms of a loan, facilitating disbursements, collecting repayments, and in case of default, recovering the loans. An important aspect of the service providers role is to maintain up-to-date credit information about its borrowers in order that it can make effective risk assessments, and to enhance data protection, the P2P Amendments require all data to be stored and processed on hardware situated in Pakistan (unless otherwise permitted). In addition to this intermediary role, the service provider is also required to have ‘skin in the game’ by contributing at least 15% of each loan that is disbursed on its platform.
Eligible lenders, borrowers and prudential requirements
All loans will have short-term tenors (up to 12-months) and will be unsecured. These loans are ideal for the working capital needs of businesses, although there is no restriction on the purpose for which loans can be extended. Eligible lenders must have a net-worth of at least PKR 15 million, and eligible borrowers must have a business history of at least 1 year. Financial institutions, public listed companies and their subsidiaries, and investment funds are all excluded from borrowing on such platforms. The aggregate amount a borrower can borrow from all P2P Service Providers is PKR 1 million, a single lender’s exposure to the same borrower cannot exceed PKR 500,000, and the maximum limit that a single lender can advance is PKR 1 million in the case of an individual, provident/gratuity fund, charitable institution or Section 42 Company, and PKR 10 million in all other cases.
Proposed operational safeguards include the use of two escrow accounts: one for disbursements and the other for collections. Only banks with at least an ‘A’ credit rating can act as trustees of these accounts. Further, no withdrawals are permitted other than for P2P lending, and all participant funds must be clearly identifiable. The P2P service provider is also required to ensure that no international funds are received through its platform.
Win-Win for all
The P2P Amendments will be a win-win for all stakeholders. Existing lending NBFCs can explore the development of a new product (there are potential synergies between lending NBFCs and e-commerce market players), lenders can benefit from a new avenue of investment, and SMEs can tap into credit which may have been denied to them by traditional avenues of financing.
Note: This article is not intended to provide legal advice and no legal or business decision should be based on its content. It is intended to provide information of general interest about current legal issues.
