South Korea is on the verge of becoming the first country in the world to create laws dedicated to newly emerging alternative financing methods -- peer-to-peer loans and other forms of “marketplace lending.”
Speakers at a parliamentary debate on Sept. 23 discussed ways for a soft-landing of the new bill, which is expected to replace the guidelines -- a temporary legal basis for Korean marketplace lending platforms, mostly startups -- created in 2017.
Courtesy of Yonhap
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Hosted by Rep. Min Byung-doo of the ruling Democratic Party of Korea in Seoul, the debate revolved around the need to remove legal vagueness by creating a law to keep pace with the growth of the marketplace-lending market here -- designed to offer midrange loans sourced from either retail or institutional investors.
The market grew over 10 times in 2 1/2 years to 6.4 trillion won ($5.4 billion) of accumulated loans as of end-July.
Korea took a bold step in terms of legalizing P2P lending and marketplace financing as the National Policy Committee of the National Assembly passed the bill in August this year.
A standalone bill, loosely translated as “Act on Online Investment-Linked Financing,” will allow P2P lending platforms to act on a clearer legal base.
Such a move distinguishes Korea from other marketplace financing powerhouses like China, the United Kingdom and the United States, a speaker said.
“Other countries (like China and the UK) have chosen to revise the existing laws, while the US has different rules by states,” said Kim Sung-joon, who heads P2P lending platform Lendit. “No country has yet to create a legal framework that works nationwide in a uniform fashion, like what Korea is trying to achieve.”
The law will also become the first in 17 years to legally define a certain financial industry sector since a set of legal terms was created for private loan companies in 2002, according to Kim.
Alternative to loan sharks
Marketplace financing methods -- which come normally at between 10 and 15 percent interest rates from a borrower’s perspective -- can be a way to achieve national financial inclusion, and at the same time, offer alternatives to high-interest loans -- as high as 24 percent -- or state-led midrange loan products, another speaker said.
“The lawmakers’ recent actions indicate that marketplace loans may contribute to a social and economic impact in a positive way,” said Koo Ja-hyun, a researcher at Korea Development Institute. “Those suffering lack of financial information like small enterprise owners can take advantage of the new financing channels.”
Korean small enterprise owners or loan borrowers had few choices but to loan sharks if their credit scores on a scale of 1 to 10 are poorer than 3. Korea recognizes those with scores between 4 and 7 as midrange borrowers, and those between 8 and 10 as bad borrowers.
“Over half of adults in Korea are prone to high-interest loans,” said Kim of Lendit.
He added 56 percent of adults in Korea in 2018 fell into the category of either midrange or bad borrowers, and regardless of the scores, those poorer than the credit score 3 are effectively denied access to commercial bank loans.
Speakers at a parliamentary debate on Sept. 23 discuss ways for a soft-landing of a bill dedicated to marketplace financing at the headquarters of Korea Chamber of Commerce & Industry in Seoul. From left: KDI researcher Koo Ja-hyun, Lendit CEO Kim Sung-joon, Shin & Kim Attorney at Law Hwang Hyun-il, FSC Director Song Hyun-do, PeopleFund CEO Joey Kim, Funda CEO Sean Park and Yellowdog CEO & Representative Director Je Hyun-joo.
Despite efforts, there are still uncertainties as to how to curb the side effects of legalizing marketplace lenders by inviting more channels for risk-prone investment instruments.
In November 2018, roughly 1 in 10 marketplace lenders turned out to have been fraudulent -- displaying fake assets for investment and embezzling investors’ money, among others -- according to the Financial Supervisory Service. Kim said he would come up with finalized penalties for those who fail to abide by the rules.
Koo of the KDI urged marketplace lenders to come up with digital capabilities and financial technologies to properly evaluate borrowers’ credit scores.
“Marketplace financing platforms should make efforts to enhance their digital capacity and protect financial consumers,” Koo said.
However, a representative of the financial authorities raised doubts about whether marketplace lenders have managed to differentiate themselves from private credit companies -- under which current P2P lending platforms are legally recognized.
“In fact, the use of the term ‘big data’ among marketplace lenders still appears elusive,” said Song Hyun-do, director of the Financial Innovation Bureau at the Financial Services Commission, Korea’s top regulator.
In addition, speakers at the debate expressed concerns about the possibility of the nation consolidating the two different advocacy groups into one, as stated in the forthcoming law. Song urged the players to promptly create a new association.
Song expects the law to be passed by parliament by the end of the year and to go into effect by the second half of 2020.
By Son Ji-hyoung (firstname.lastname@example.org)