The growing issue of inflation failed fiscal policies, and limited opportunities in the present-day global landscape have crippled the lives of many in developing countries such as Pakistan. Consequently, many people are drawn to, heavily social media-advertised, peer-to-peer (P2P) lending apps that promise quick, “one-click” loans, despite their limited knowledge of consumer credit. This leaves them badly exposed to exploitation. Unfortunately, these ‘easy’ loans can quickly turn into a nightmare, trapping borrowers in a cycle of debt with devastating consequences.” Digital lending apps seem to be the easiest bet for meeting people’s immediate economic needs. But like many things that seem too good to be true, there’s a darker side to these services that aren’t always readily apparent. A comparison of the digital lending space in Pakistan with same-day loans in America shows stark contrasts and illuminates the regulatory and risk gaps emerging markets face. The Securities and Exchange Commission of Pakistan (SECP) regulates financial services including digital lending in Pakistan. A recent notification by SECP imposing a cap on the Annual Percentage Rate (APR) at 74% for digital loans is undoubtedly a good step towards regulating predatory lending. However, many of you might think that it is still quite steep. Well!..it is not if we look at the interest rates on short-term loans globally. But in a developing country like Pakistan where the working-class population is already cash-strapped with limited sources of income, these rates are a recipe for disaster. But that raises a big question: does this cap can protect the borrowers or is it an open invitation to economic abuse? To put that into perspective, let’s compare this to same-day loans in the US, also known as payday loans. While these loans are notorious for high interest rates, the regulatory environment in the US is equally stringent. It varies by state, with some states limiting payday loan APRs at 36% or banning payday loans altogether. The federal government through agencies like the Consumer Financial Protection Bureau (CFPB) regulates the lending, ensuring transparency and providing a platform to seek recourse if they are exploited. On the other hand, the regulatory framework in Pakistan is at a very nascent stage. Notwithstanding SECP’s efforts, several digital lending apps are running in a grey area, and even illegality exists in some situations. SECP’s whitelist of lending applications, such as the one in November 2024, is a first step towards a better lending environment. Yet the challenge lies in enforcement. How do you guarantee compliance and protect consumers when unauthorized apps can appear on third-party applications or by direct download? An important challenge in Pakistan is how these unauthorized apps abuse user information. Borrowers willingly or involuntarily provide apps access to their personal data list, while in the loan application process (and in some cases, even without their awareness). This information is subsequently used to bully not only the debtor but also the debtor’s other family members. Now assume that your relatives receive calls from debt collectors about the loan you took. This is not just an issue of privacy; this is social pressure that cannot happen within properly regulated markets like in the US. The California Consumer Privacy Act (CCPA), for instance, provides a framework for how consumer data should be treated and offers some layer of protection against misuse. These gaps leave consumers open to unethical practices that can drive their financial distress to extreme limits, even as far as committing suicide, a tragic scenario which has been witnessed in many developing countries like Pakistan and India. The terms of the loan also tell a tale of inequality. In the U.S., payday loans are short-term, where borrowers must pay them back at the next payday; the terms can range from two weeks to a month. Loan amounts are not so big, but penalties for not repaying them are sometimes extremely high and have created a debt trap. For this reason, several states have set up restrictions on rollovers and placed a cap on how many times a loan may be rolled over. Furthermore, consumers have access to financial advising and can legally contest predatory borrowing. Pakistan, similarly, provides similar short-term loans via P2P lending apps but with a twist. The payback time might be less strict, and since there isn’t much legislation on this point, hidden costs and penalties push the effective APR beyond the nominal cap of 74%. Additionally, the financial background of the country further complicates the situation. Borrowers with limited access to mainstream credit due to informal employment status or lack of credit history turn to these loan apps as they seem like their only options. What to do now? Strengthening the regulatory framework is an obvious first step to protect the innocent public from illegal lenders and safeguard their personal data from exploitation. The second most important thing is educating the borrowers in developing countries on the complexities of consumer credit so they can better understand the loan conditions, consequences of non-repayment, and protections they have against lenders. Public awareness and basic financial education initiatives could do wonders in this aspect. Digital lending in Pakistan is still in the infancy stage. However, it is apparent from the U.S. experience that regulation, consumer protection, and financial education are prerequisites to guard public against the exploitation. The challenge before regulators like the SECP is to balance innovation and consumer protection. Will they be successful? Let’s wait and see. The writer is an economist, currently serving as a White-Collar / Financial Crimes Investigator with the Federal Government. X @ umair_fci Contact: +923008680300