P2P lending activities under the draft decree on the controlled trial mechanism for financial technology activities in the banking sector

With the advancement of science and technology, particularly in the financial technology (Fintech) sector, peer-to-peer lending (P2P Lending) first emerged globally in 2005 and entered the Vietnamese market in 2015. By its nature, P2P lending can be understood as a lending model conducted via online platforms, such as applications or websites, connecting borrowers directly with lenders without the intermediation of traditional financial institutions, such as banks. This method offers advantages such as simplified lending procedures and reduced time consumption. However, due to the absence of an intermediary financial institution to coordinate the lending activities, P2P lending may involve certain risks, thereby necessitating a legal framework to regulate issues such as conditions and procedures for conducting P2P lending activities. 

From a legal perspective, Vietnam currently lacks a formal legal document regulating the Fintech sector in general and P2P lending activities in particular. As of now, the Fintech sector, including P2P lending, is expected to be allowed under a controlled trial framework as stipulated in the Draft Decree on the Sandbox Mechanism in the banking sector (the “Draft Decree“). This article addresses several provisions of the Draft Decree related to P2P lending, aiming to introduce Vietnam’s initial legal approach to this credit operation method. 

1. Definition and Characteristics of P2P Lending Under the Draft Decree 

Article 3.5 of the Draft Decree defines “P2P lending solutions as solutions for lending in Vietnamese Dong on digital platforms designed and implemented based on financial technology applications provided by companies participating in the Sandbox Mechanism, to connect borrowers with lenders.” From this definition, the following characteristics of P2P lending can be identified: 

• The currency of P2P lending activities must be Vietnamese Dong; 

• P2P lending activities are conducted on digital platforms, such as applications and websites, developed through the application of financial technology; 

• According to Article 3.10 of the Draft Decree, participants in P2P lending activities include: 

1. • Fintech companies: Non-credit institutions legally established or registered in Vietnam that independently provide P2P lending solutions or cooperate with credit institutions or foreign bank branches to offer these solutions; 

• • Lenders: Organizations (including credit institutions and foreign bank branches) established under Vietnamese law and Vietnamese citizens; and 

• • Borrowers: Organizations (excluding credit institutions and foreign bank branches) established under Vietnamese law and Vietnamese citizens. 

2. Criteria and Conditions for Participation in the Sandbox Mechanism 

Organizations registering to participate in the Sandbox Mechanism for P2P lending activities must obtain a Certificate of Participation. The criteria and conditions that these entities must meet are as follows: 

2.1 Criteria for P2P Lending Activities 

a. General criteria for all Fintech Solution under the Sandbox: 

• The solution addresses technical and operational aspects not yet specifically regulated under current legal provisions; 

• The solution demonstrates innovation, offering benefits and added value to service users in Vietnam, especially solutions that support and promote financial inclusion; 

• The solution has been designed with a risk management framework to mitigate negative impacts on the banking and financial systems and includes reasonable measures for addressing risks during the trial; 

• The solution has undergone thorough review and evaluation by the applicant regarding its functionality, utility, and operational aspects; 

• The solution is feasible for market implementation upon completion of the trial. 

b. Specific criteria for P2P lending activities:  

• Measures must be in place to identify and manage the maximum loan balance for a single borrower within a specific P2P lending solution and across all P2P lending solutions within the Sandbox Mechanism, as determined by the Governor of the State Bank of Vietnam;

• Loan disbursement and repayment transactions must be conducted through payment accounts at credit institutions, foreign bank branches, or e-wallets provided by intermediary payment service providers. 

2.2 Conditions for an Organization registering for the Sandbox Mechanism for P2P Lending Activities 

• The applicant must be a legally established and operational enterprise within the territory of Vietnam. The Organization must not be a foreign-invested enterprise and must not be undergoing division, separation, merger, consolidation, transformation, dissolution, or bankruptcy as prescribed by law. Furthermore, the Organization must not engage in pawnshop services; 

• The legal representative and General Director (or Director) of the applicant company must have no criminal record, must not have been administratively penalized in the fields of finance, banking, or cybersecurity, and must not concurrently be the owner or manager of businesses involved in financial services, credit, pawnshops, multi-level marketing, or informal credit networks Additionally, they must not serve as members of Boards of Directors, Members of members’ councils, Supervisory Boards, or hold equivalent managerial positions in credit institutions, branches of foreign banks, or intermediary payment service providers;

• The legal representative and General Director (or Director) must hold at least a university degree in economics, business administration, law, or information technology and possess a minimum of two years of managerial or executive experience in financial or banking organizations. They must also not fall under any legally prohibited categories;

• The applicant must meet technical, human resource, and infrastructural standards necessary for implementing the technological platform for P2P lending solutions. 

3. Trial Duration and Scope 

a. Trial Duration: The maximum trial duration for P2P lending activities is two years, depending on the specific solution and sector, calculated from the date the Certificate of Participation in the Sandbox Mechanism is issued by the State Bank of Vietnam. The validity period of the Certificate of Participation must not exceed the validity period (if applicable) of the Organization’s establishment license or business registration certificate. 

b. Geographical Scope: The implementation of Fintech solutions under the Sandbox Mechanism is restricted to the territory of Vietnam and may not involve cross-border trials; 

c. Operational Scope: P2P lending companies may only offer P2P lending solutions that connect borrowers with lenders. They must not engage in the following activities:  

• Providing direct guarantees or collateral for borrowers’ loans; 

• Engaging in activities beyond the scope specified in the Certificate of Participation, such as acting as borrowers, issuing promissory notes, introducing borrowers or lenders, disseminating misleading advertisements or false information, or charging fees for filing complaints from borrowers or lenders; 

• Directly or indirectly collecting and pooling lenders’ funds. Splitting loan terms arbitrarily. Engaging in unauthorized financial product sales for capital mobilization. Exaggerating profit margins. Acting as brokers for loans involving high-risk activities; 

• Misusing funds from lenders (in cases where lenders disburse loans through Fintech companies) or borrowers (in cases where borrowers repay loans through Fintech companies) for investments or business purposes; 

• Disclosing borrowers’ or lenders’ information to unauthorized individuals or entities that have no legal rights or obligations concerning the transactions; 

• Offering P2P lending solutions to pawnshop operators; 

• Unilaterally or indirectly suggesting that borrowers or lenders consent to granting access to contact lists, photo libraries, friend lists, or social media account permissions; 

• Engaging in other prohibited acts as specified by relevant laws. 

In conclusion, P2P lending activities in Vietnam are currently permitted only under the Sandbox Mechanism provided by the Draft Decree on the Sandbox Mechanism in the banking sector. The Draft Decree has preliminarily outlined key provisions such as definitions, criteria, conditions, trial duration, and scope for the management and supervision of these activities. Generally, the provisions of the Draft Decree remain generalized and require further refinement. Nonetheless, the Draft Decree reflects Vietnam’s initial approach and policy direction toward managing P2P lending activities while paving the way for innovation in the Fintech sector to develop safely and in alignment with the domestic financial market context.

See more:

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2/ Foreign borrowing costs of enterprises without Government guarantee

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