Over the last two years, Pakistan’s nano lending industry grew from scratch to a user base of millions, with over a hundred billion rupees in disbursed loans.

But the story of their rise was not really something to celebrate, as stories of exploitation and harassment were plenty. The lenders, both licensed and unlicensed, were notorious for charging annual percentage rates in high three or even four digits.

For a while, all complaints fell on deaf ears. Initially, the regulators tried to hide away their complacency or inaction in technical loopholes. The Securities and Exchange Commission of Pakistan (SECP) argued that the problem lay with the unregistered players, often operating from abroad, who were tarnishing the image of the licensed entities.

Meanwhile, the State Bank took refuge in the fact that non-banking finance companies (NBFC) were not its mandate. Google and the Pakistan Telecommunication Authority (PTA) were just bystanders for the most part.

However, by the end of the last year, some big changes became noticeable. In its landmark Circular 15 from December 2022, the SECP issued new guidelines for digital NBFCs, which outlawed upfront deductions from the loan amount in the name of service and processing charges.

Similarly, the practice of “license outsourcing” was finally put to an end. The SBP also tightened the noose in late June, instructing its regulatees to only authorise payments for licensed lenders, albeit with weak enforcement early on.

The new measures should help protect borrowers from predatory lending practices if implemented

Yet, most of the measures proved far from enough as the industry continued to grow unabated and without checks for the most part. They were still charging extortive interest rates and the stories of harassment were no less frequent. Unfortunately, it took the suicide of a victim of loan apps to shake everyone and the incident finally triggered the response, which should have been taken a long time back.

Since then, the speed of regulatory progress has been quite visible, and finally, the SECP had support from other organisations like the PTA. Within a couple of weeks, they together took down over a 100 lending apps from the Play Store in a reactive measure.

But within a couple of weeks, the SECP also started taking proactive measures. In its circular dated Aug 7, the regulator imposed exposure limits on digital lenders, capping a single loan at Rs25,000, and Rs75,000 was the maximum an individual could borrow across creditors.

Moreover, it instructed that compounding of markup or late payment charges would not be allowed. This was an important detail because the industry’s modus operandi has been to keep accruing fees under various heads to extort money from the customers.

The biggest change came in September when the SECP finally prescribed caps on pricing, marking a major shift from its long-standing policy that market forces should determine the cost of the loan.

“An NBFC shall charge an Annual Percentage Rate (APR) not exceeding ten times the Policy Rate issued by the State Bank of Pakistan. The APR agreed between lender and borrower at the time of loan grant shall not be affected by any subsequent change in the Policy Rate.”

While this is still pretty damn in the current interest rate environment, in more normal times — whenever that happens — the APR shouldn’t be more than 100 per cent. For context, the various charges on credit cards often end up in high double digits. In instant lending, the level of risk is comparatively much higher, which needs to be compensated to an extent. In fact, even microfinance banks, through their digital wallets, were charging upwards of 250pc nano loans at the time the policy rate was under 8pc.

Furthermore, it explicitly states that the lender shall not recover from a borrower an aggregate amount exceeding the principal of the loan. This includes all possible costs under any name, be it processing fees, late charges and so on. Essentially, the practice of costs ballooning to a million for loans of thousands will not be possible anymore.

But the issue in Pakistan, as we all are aware, is that the enforcement is usually very weak even if there is no shortage of circulars. Monitoring is a big challenge whenever it comes to online products, as a recent warning from the regulator shows. Apparently, a number of nano lenders have started bypassing the Play Store altogether and are now distributing their apps through Android Package Kits (APK) files on websites or social media.

Traditionally, this route has often been taken by players to save on the commission they pay to Google or Apple. But at times, companies in sanctioned countries have also taken this recourse. Iran’s super-app Snapp is a great case in point. This is a truly global problem in tech, where regulators are always playing catch-up.

The writer is the co-founder of Data Darbar

Published in Dawn, The Business and Finance Weekly, October 9th, 2023