Vipul Rawal is just one of a number of entrepreneurs in emerging economies looking to benefit from the fast rise of peer-to-peer lending. But for the sector to grow sustainably authorities need to craft regulations that while curbing fraud, can spur lending.
Rawal, who lives in Delhi, designs web platforms that allow web-based companies to facilitate lending between lenders and borrowers in various countries.
A report by PWC last year said peer-to-peer lending platforms lent out about $5.5 billion in the US in 2014 and that the market could reach $150 billion in 2025.
Rawal can attest to this growth. In the last two years he’s designed eight peer-to-peer lending platforms, for fintech firms in the US, Singapore, India and Estonia. Six months ago he set up p2pforce.com. He claims he can get platforms go live in 20 days.
Yet peer-to-peer lending may be stymied in a number of emerging economies because of the absence of any regulatory framework.
For example because India has no specific regulation for crowdfunding, platforms don’t always have access to credit bureaus (in contrast South Africa's RainFin requires borrowers to give the platform permission to check their credit standing at credit bureaus).
Indian platforms use post-dated cheques to ensure lenders have some security when lending. If the cheque bounces a criminal case can be lodged. At least one platforms uses friends or relatives to vouch for them when looking for a loan.
Yet without loan performance being reported back to the bureau, some borrowers may not feel the pressure to re-pay their lenders. Added to this borrowers looking to build and improve their credit rating do not benefit, as their loan performance is not reported to the credit bureaus. It means platforms in India are prone to attract only higher risk borrowers.
No rules, more fraud
A lack of rules also does little to combat fraud. Last year it emerged that 95% of projects on one Chinese platform, Ezubao, were fake. Almost one million investors were scammed.
Authorities in China responded in December last year by issuing draft rules on peer-to-peer lending. These state that online lending platforms are to act as intermediaries for borrowers and lenders, and should not participate in the transaction in any other way.
A too heavy handed approach is not good either. In Brazil platforms need to act as a correspondent bank, helping to structure a loan that is being put together by the partner bank. This approach may fend off fraud, but likely stifles lending.
Some emerging economies are however moving towards regulating peer-to-peer lending. Malaysia’s Securities Commission indicated last year that it will introduce a framework for peer-to-peer lending this year. Last year Malaysia legalised equity crowdfunding.
Chile’s government is also taking action. A report by Chile’s Ministry of Economy in July last year said crowdfunding was still limited in Chile by the lack of an institutional framework which could provide more certainty for investors and companies running these platforms (despite this crowdfunding grew by 55% last year over 2014 to lend out $60 million in 2015).
While the government has been working on a legal framework for crowdfunding, an industry association on crowdfunding (Afico) was set up in February to disseminate, educate and offer industry self-regulation of crowdfunding.
Importantly, a framework could clear up legal issues. In 2012 authorities served peer-to-peer lending platform Cumplo with court papers accusing it of violating Chile’s banking law by accepting deposits (the platform says it merely connects borrowers and lenders).
Platforms like Cumplo have a key roll to play. Cumplo alone has over 1,800 investors and 40,000 users, and averages 13 investors per loan, accounts for 80% of the total lent out through crowdfunding in Chile last year. Since 2011 it has made over 1,400 transactions.
The platform's founder Nicolas Shea (pictured above) who also helped found Start-Up Chile, says more efficient flows of money will reduce the cost of capital for entrepreneurs and help Chile to develop at a higher rate.
And because peer‑to‑peer platforms don’t originate loans themselves as banks do, they can offer lower interest rates for borrowers and higher interest rate for lenders.
This makes it a “win-win chance” for both lender and borrower, says Rawal, who now has his sights set on helping firms to set up similar platforms in other emerging economies. The presence of good regulatory framework can only help further grow online lending.
Timm is a South African who writes on small business. Follow him on Twitter at @Smallbinsight.
Stephen Timm is a