On August 8, 2023, Pakistan’s Federal Investigation Agency (FIA) and the Securities and Exchange Commission of Pakistan (SECP) resolved to collaborate on implementing a secure digital financial system in Pakistan in the backdrop of an increasing number of illegal lending apps and illegal deposit-taking. As Pakistan’s digital financial system flourishes, the vines of financial cybercrimes and frauds are entwining themselves with its growth.
Pakistan’s National Financial Inclusion Strategy was the first step to creating a digital financial set-up in 2015. Yet the transition of Pakistan’s traditional finance into digital finance expedited after 2020 with an increase of 50% in mobile banking transactions and 34.3% in mobile money transactions. Since then, as the population has increasingly turned to digital apps and other online platforms for their financial management, there has been a corresponding surge in the emergence of digital lending apps in the market. This development seems constructive, however, on the flip side; there has also been a rise in financial cyber frauds. In Pakistan, financial frauds are the most common type of cybercrime. According to a UK IT company AAG, financial fraud through social media and apps in Pakistan increased by 83% from 2018 to 2021.
Where cybercrimes and fraud threats to Pakistan’s digital financial system are concerned, Pakistan already has a strong policy framework in place to tackle this giant issue. Part VIII-A of Companies Ordinance 1984, and Non-Banking Finance Companies and Notified Entities Regulations, 2008, lays out a detailed structured process through which Non-Banking Finance Companies (NBFCs) can be granted a license by the SCEP to undertake lending money. Moreover, The Companies Act 2017 has already laid out the rules for deposit-taking by companies other than the banking sector. Section 84 and Section 474 establish strict regulations regarding accepting, renewing, and inviting deposits from public by such companies. The contravention of these regulations results in penalties for the company and potential legal consequences for its officers.
Yet there are a number of unregistered and unapproved companies and nano lending apps called loan sharks that are functioning without registration. The SECP APP Whitelist which was introduced in April 2023, enlist the names of companies which are authorised to lend money and only two of the apps appear in the list which are licensed. Others deposit money from the public and lend money to the public with over 25% interest rates for over a month without a license. These apps are functioning by retaining unethical practices such as unique loan recovery tactics and non-disclosure of terms and conditions to the users. Taking any legal action against them is impossible given that they operate outside the ambit of laws.An instance was documented wherein a man tragically took his own life due to his inability to repay loans acquired through these applications.In response, Pakistan Telecommunication Authority (PTA) took strict actions against such illegal apps and banned almost 120 illegal apps from Google Play Pakistan and kept several others under evaluation.
However, such loan sharks are not only limited to Pakistan alone; rather, this problem is widespread across the globe. A UK-based think tank, Centre for Social Justice (CSJ), has observed that around 1 million people in the UK could be availing loans from digital loan sharks. In the UK, loan lenders have to get authorised by Financial Conduct Authority (FCA). However, UK laws have ensured to hold illegal money lenders accountable and provide safety to the borrowers even if such illegal money lenders are not authorised by FCA.
The laws consider the lenders culprit and not the borrowers. Similarly, many states in the US also have a Loan Shark Prevention Act which limits the amount of interest rates to 15% and would not allow the payday lenders to grow. Moreover, the US has self-regulatory organisations such as the Online Lenders Alliance (OLA) and the Consumer Financial Services Association of America (CFSAA) which ensure that users are protected from fraud and abuse. These organisations do so by making the lenders information public, ensuring full disclosure of the loan terms, educating the borrowers, and suspending the lenders who go against the principles.However, in Pakistan, although there is a complete policy framework and laws which prohibit illegal money deposits and money lending in the form of apps and otherwise by any NBFCs, there is no mechanism to punish illegal lenders like in the UK and the US. The SECP can ban illegal money lending apps, but it cannot take any actions against them because they operate outside the ambit of the law. Such liberty gives these illegal NBFCs a competitive edge against the legal NBFCs, which are part of the formal regulatory system. Hence, the collaboration of SECP with the FIA Cybercrime Wing will prove constructive to that end as it will allow for a quick communication channel to keep in check the growth of such illegal NBFCs and their predatory practices.
—The writer is a researcher at Centre for Aerospace and Security Studies (CASS), Lahore. [email protected].