30 Nov. 2022
P2P Lending and legal issues
Peer-to-peer (P2P) lending or crowd -funding will soon become a hot topic in Vietnam when these P2P lending companies’default is looming high from one to another according to a recent article in Vietnam Investment Newspaper.
This risk of debt default and domino collapse has been talked about for more than two years in the face of the proliferation of foreign and domestic P2P Lending businesses booming in Vietnam during the time of P2P lending collapse around the region with tens of billions of dollars lost in China. It can be said that this is nothing new. In the current situation when market liquidity in Vietnam is tight, the stock market declines and thousands of billions of Vietnam stock market vaporized, issuers of corporate bonds are facing or have fallen into insolvency, it is no doubt that investors are fleeing away from these P2P Lending businesses and the risk of default is very present.
Many studies have shown that Vietnam currently lacks a legal framework for this activity and this is considered part of the reasons that the lack of control will lead to the risk of collapse. This is both true and false.
It is true and only partially true that Vietnam currently does not have any specialized legal documents that directly and specifically regulate peer-to-peer lending in Vietnam. However, it cannot be said that Vietnam currently does not have a legal framework governing peer-to-peer lending at all.
P2P lending from a technology perspective is purely a new and innovative financial technology platform that provides a direct connection between people with direct capital needs and people with idle capital who want to invest profitably. These platforms provide convenience, quick connection opportunities for both borrowers and lenders and are considered to be a more effective way for access to cheaper capital resources and meeting capital demands of people and businesses.
If a P2P Lending Enterprise merely provides technology systems/platforms/solutions as well as providing P2P lending technology system services for the connection of borrowers and lenders, there will be nothing to discuss in the legal corner of Vietnam because, in essence, these businesses operate and provide technology services according to the existing legal framework for these type of businesses.
If looking into what businesses and activities these P2P businesses in Vietnam are doing, and as clearly written in the news what the VO247 leaders were talking about what they have been doing with investors and borrowers and assuming other peer-to-peer lending businesses are doing the same things in Vietnam then it’s worth noting that the current Vietnamese law is quite complete governing these activities and thus these businesses are facing the following legal problems: (even though it is necessary to re-emphasize the clear spirit and provisions already in the Vietnamese Enterprise Law that Enterprises are allowed to what is not prohibited by law):
1. If we take a separate look at the capital mobilization from investors in the form of civil agreements between the enterprise and investors, these activities can clearly be carried out in accordance with the provisions of the Civil Code and if it may be borrowings from foreign investors, the Enterprise will be subject to additional regulations of the law on overseas borrowings of Vietnam. If the borrowings are separated from lending to other borrowers, in the spirit of the Enterprise Law as mentioned above, the law does not prohibit enterprises from lending money to others when they have idle capital and the provisions of the Law on Enterprises may apply to such activities. If lending is looked into as a permanent business, other than lending activities of credit institutions which are subject to the provisions of the Law on Credit Institutions of Vietnam, the only authorized lending activities under the currently law are pawn services. Obviously peer-to-peer lending is not a pawn service. If referring to the provisions of the Law on Credit Institutions of Vietnam, which is defining “routine lending” as a banking activity, then these routine lending activities are governed by this law and they require a license from the State Bank of Vietnam. Under this law there arises a question whether P2P Lending businesses of constantly mobilizing capital from investors and continuously lending loans to many people in need of loans in society is a routine lending business and thus in violation of the Law on Financial Credit Institutions that they are doing banking services without license.
2. If P2P Lending platforms have the connection of payment accounts of lenders and borrowers and with P2P Lending businesses themselves to perform lending-borrowing services, loan money transfer, debt repayment, debt collection…, these activities are currently governed by the Government’s Decree on non-cash payments, specifically regulations on payment intermediaries and they are professional activities required to be licensed by the State Bank of Vietnam. It is now the question whether these businesses have these licenses in hands or not? Pretty sure the answer here is no.
3. In current P2P lending activities, businesses and lenders are applying high interest rates similar to consumer finance businesses, ie with very high interest rates inclusive premium of risks, small ticket size but large portfolio of unsecured loans, so there is a possibility that businesses and lenders may violate the provisions of the civil law on the interest rates and overdue rate ceilings despite the fact these provisions could have been circumvented by converting the interests into other forms of fees?
4. Current Vietnamese law prohibits debt collection services, so if a P2P Lending Enterprise says that they do not provide unauthorized banking services, that is, they do not loan others, then they have no legal basis to collect debts of themselves not mentioning collect debts for the investors because all these activities may fall into the category of prohibition.
5. It’s also worth to mention that Vietnam has a very complete legal system on anti-money laundering, terrorist financing that requires financial services, payment, money transfer businesses to strictly comply with KYC on its customers, payees and the money sources etc. If the relevant organizations and individuals do not comply with this law, they may suffer severe sanctions.
6. Finally, Vietnam also has very strict and special legal systems on foreign exchange control and additional regulations on non-cash payment. These systems will pose a huge risk of criminal penalties against illegally cross border money transporting, money laundering to P2P Lending businesses invested in disguise by foreign investors operating in Vietnam.
Therefore, not only the credit, market risks or losses looming over P2Plending activities which are normally small ticket size, unsecured but very large portfolio of loans in Vietnam now or the collapse in large scale in China the last few year back has shown, investors and businesses of peer-to-peer lending in Vietnam today are also facing very high legal risks as well.
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