FeaturedNationalVOLUME 18 ISSUE # 36

Cracking down on predatory loan apps

The Federal Investigation Agency, the Securities and Exchange Commission of Pakistan, and the Pakistan Telecommunications Authority have united in a decisive move against loan apps involved in extorting money through threats and blackmail. This crackdown comes amidst a troubling economic landscape in Pakistan, marked by soaring inflation rates, a balance of payment crisis, and the risk of a sovereign default. The rise of mobile-based lenders has created fertile ground for scams and fraud, leaving vulnerable individuals at the mercy of unscrupulous loan sharks. Tragically, one recent suicide has brought this issue to the forefront, shedding light on the desperate circumstances that push people into the clutches of predatory lending.

The spotlight on loan apps in Pakistan intensified after the tragic suicide of a 40-year-old man from Rawalpindi. He was unable to repay the funds he had borrowed from mobile apps, and loan officers from these apps had been incessantly threatening him, leading him to take his own life. This incident occurred amidst a challenging economic situation in Pakistan, with annual inflation reaching a national record of 37.97 percent in May. The country was grappling with a balance of payment crisis and the risk of a sovereign default, and the removal of subsidies and currency devaluation had driven up living costs for its 220 million citizens.

Google also announced a new policy to protect consumers in Pakistan from fake and unregistered loan apps. The new requirements, effective from May 31, 2023, allow the NBFC lender to publish only a single Digital Lending App (DLA). Those who attempt to publish more than one DLA will be terminated from their developer account and any other associated accounts.

Developers with personal loan apps targeting users in Pakistan must complete the Personal Loan App Declaration form and submit the necessary documentation before publishing their app. They must submit proof of approval from the SECP to offer or facilitate digital lending services in Pakistan. Google Play will also request additional information or documents related to loan app compliance with the applicable regulatory and licensing requirements.

Personal loan apps operating in Pakistan without proper declaration and licensed attribution will be removed from the Play Store. Developers must immediately remove the app from the Google Play Store if the submitted licence, registration, or declaration is no longer valid under the applicable laws. Farhan S. Qureshi, Google’s Director for Pakistan, said, “Google is taking preventive measures by setting stringent requirements for DLA to reduce financial risk and ensure data privacy.”

Google stated that the new requirements imposed on developers of personal loan apps will provide an extra layer of protection for users. Under the new set of rules, a DLA is prohibited from accessing sensitive data, such as external storage, media images, contacts, and fine location. Apps offering short-term personal loans, requiring repayment in full within 60 days from the loan issue date, are not allowed. Pakistan is one of a small group of countries where Google has implemented additional requirements for DLAs. The new policy update is a significant step towards safeguarding consumers from harmful financial practices and ensuring data privacy.

To cope with these difficulties, more people turned to mobile-based lenders, creating fertile ground for scams and fraud. Digital rights and consumer defense groups voiced concerns about the abuse of customer data and aggressive recovery tactics, such as threats and blackmail, employed by illegal lenders.

While the government’s crackdown on illegal internet loan apps is a step in the right direction, it may not be enough to completely address the issue. The root cause lies in the financial desperation that drives people into the hands of predatory loan sharks, particularly the unbanked population that lacks access to formal borrowing channels. These vulnerable individuals often find themselves trapped in a vicious cycle of debt, leading to tragic outcomes like the aforementioned suicide. The state faces a challenging dilemma as it tries to combat this issue. Shutting down websites and platforms may provide temporary relief, but desperate individuals will still seek ways to borrow money for their immediate needs. Simply warning people to avoid such lenders is not effective, as desperation often overrides rational decision-making. Providing stipends is not a viable long-term solution either, given the scale of the problem.

Addressing the root causes requires tackling social issues like population growth and education, as well as formalizing the unbanked sector by establishing official credit structures. This way, borrowing and lending can be brought under official oversight, ensuring a sensible debt and interest system. However, these solutions will take time to implement and yield results.

The government must extend its efforts beyond the online sphere and confront real-world challenges related to population growth, education, and economic crises. It should work on strategies to formalize the unbanked sector, ensuring access to credit at the grassroots level. It is crucial not to ignore the issue once it fades from the headlines, as politicians may exploit the situation for their own gains.

Tackling the problem of predatory loan apps requires a multi-faceted approach that addresses both immediate concerns and underlying social and economic issues. It is essential to take proactive steps to prevent this cycle from repeating in the future.

While the government’s crackdown on illegal internet loan apps is a positive step, it is essential to recognize that digital safeguards alone will not suffice in combating predatory loan practices. Addressing the root causes of financial desperation, such as population growth and lack of financial inclusion, requires a long-term and multifaceted approach. By formalizing the unbanked sector and establishing official credit structures, Pakistan can offer sensible debt solutions and protect its citizens from falling victim to loan sharks. It is crucial for the government not to brush this issue aside after its immediate impact diminishes, but instead, continue to work towards sustainable solutions to uplift its population and prevent this cycle from repeating.