A new lending threshold under the National Credit Act could stunt the ability of start-ups to obtain funding via online lending platforms in SA, just as such loans are growing.
A new lending threshold under the act of zero rand, gazetted by trade & industry minister Rob Davies (pictured above) in May, will mean that investors who use peer-to-peer lending platforms and who lend to any business with an annual turnover of below R1m ($70,000) will have to register as a credit provider with the National Credit Regulator (NCR).
The new threshold is expected to come into effect on November 11. Under existing rules, lenders need only register as a credit provider if they intend lending more than R500,000 to such firms.
Peer-to-peer lending (also known as marketplace lending) allows borrowers such as small businesses to source loans on online platforms from individuals and companies.
'Will hit start-ups'
For local lending platform RainFin, which was launched in 2012 and in which Barclays Africa has a 49% stake, the new threshold will greatly reduce investors’ ability to fund start-ups at a time when lending to small businesses via the platform, which RainFin initiated in 2014, is taking off.
The platform currently has 280 active investors who can each lend any amount from R50 to R750,000. As lenders can pool contributions, each RainFin deal involves on average 13 lenders.
RainFin CE Sean Emery says the new threshold will limit the ability of those firms with an annual turnover below R1m to get finance via crowdfunding. He says "99%" of the platform’s borrowers would be affected by the new NCR threshold.
Emery says most individuals looking to use the platform to lend to small businesses will be put off by having to register as a credit provider (which the NCR says takes about a month to complete once applicants secure a police clearance certificate).
Instead, funding for such firms with an annual turnover of below R1m is likely to come mostly from organisations, he says.
'Makes little sense'
As a platform RainFin, which administers loan agreements on behalf of lenders, is already registered as a credit provider. Emery believes it therefore makes little sense for lenders to have to register with the NCR as well.
He believes the minister is concerned chiefly in reining in loan sharks, and has unwisely chosen to include crowdfunding sites in doing so. The minister’s spokesman, Sidwell Medupe, did not respond to requests for comment before going to press.
Since August last year, by which time Emery says the platform was able to address most of the regulatory hurdles, lending has grown from two loans disbursed valued at R750,000, to 65 totalling R32m in April. By the end of April this year the platform had facilitated a total of 307 loans valued at R140m.
This is over three times (R37m) what donations-based crowdfunding sites — with two of the biggest platforms being Thundafund and BackaBuddy — have given out between them over the past nine years to about 1,400 causes and projects. This is according to Thundafund founder Patrick Schofield and statistics on BackaBuddy’s website.
Emery says complex financial regulations, not crafted with crowdfunding in mind — which in addition to the National Credit Act also include the Banks Act and the Collective Investment Schemes Control Act — are making it harder for peer-to-peer platforms to operate.
Platforms face red tape
Though the Financial Services Board (FSB), credit regulator and Reserve Bank have not stopped the platform from operating, the regulations, he says, have in at least three instances led to international crowdfunding platforms pulling the plug on local lending operations.
One local platform, Sun Systems, even deploys co-operatives to circumvent the need to register with the NCR or comply with the Banking Act.
Emery says if SA is to grow and nurture online lending platforms it should follow the example of the UK, which in 2014 introduced specific peer-to-peer and equity-based crowdfunding rules.
He believes that rather than creating totally new laws, local authorities, together with industry members, need to create a peer-to-peer annexure in existing legislation.
Equity crowdfunding probed
Meanwhile, the FSB has set up a working group to look at whether to regulate platforms that offer equity finance via the Internet.
Equity crowdfunding — which is legal in several countries — was worth about US$1.1bn globally in 2014, according to Massolution. In the US, a Securities & Exchange Commission’s provision came into effect in May, which will allow entrepreneurs to raise up to $1m annually from ordinary investors through regulated online platforms.
Kevin Allen, chief of staff of property crowd investing platform Wealth Migrate and a member of the African Crowdfunding Association, says the association has been engaging with the FSB on crowdfunding since November last year.
"The FSB sent a working multidisciplinary committee to both Wealth Migrate and Thundafund in March to do an audit on the companies and their due diligence processes," he says.
He says though the FSB had acknowledged that crowdfunding falls "outside their regulatory net", the regulator must still ascertain what legislation may be applicable and whether new legislation or regulations need to be put in place.
'Partner with VC funds'
Schofield has proposed to the FSB that it allow the crowdfunding site to set up a separate platform for investors to take equity in selected deals.
He says the idea is that these deals would first have to gain the approval of venture capital (VC) funds before they could be placed on the platform for other investors to consider.
A VC or angel investor would then agree to provide a sizeable portion of the required equity that an investee company is searching for.
Schofield says this would go some way to providing more certainty for investors and help to mitigate the risk of fraud by providing due diligence and management oversight.
He has based some of his model on the UK experience, where VC funds have looked to equity crowdfunding platforms to leverage their own contribution to seek out further funding.
FSB spokesman Lesego Mashigo says the FSB is engaging with the African Crowdfunding Association to determine which of its activities fall within the regulated activities and how best these can be accommodated in the current regulatory regime.
"The research work will ultimately come up with an appropriate framework for these new ventures and platforms," he says.
'Pricey, but worth it'
With bank finance barely growing since the 2008 recession and with government’s Small Enterprise Finance Agency planning to scale back on loans to small businesses, online lending platforms could step in and help — as Lukas Pieterse can attest to.
Pieterse, who runs Green Africa Lawn, a lawn delivery company in Hartbeespoort, was able to get a R300,000 loan from RainFin in December to fund a bakkie and to cover costs for a new depot he’s set up.
But it came at a price. The interest rate on the loan is over 20% a month — more than double what he would’ve paid at banks and above RainFin’s average interest rate of 15.7%.
However, Pieterse, whose business’s annual turnover is above the NCR’s R1m threshold, says he’d use the site again if he had the chance, as it means having to avoid the heap of paperwork one needs to apply for a bank loan. RainFin asked for just his financials and the money was in his account a week after his loan bid was posted on the platform.
Crowdfunding platforms, therefore, offer small businesses another source of funding, but only if the authorities make it easy for such platforms to do so.
This story originally appeared in The Financial Mail (go here for the original version). Follow Small Business Insight on Twitter at @Smallbinsight.
Stephen Timm is a