What is ‘Peer-To-Peer Lending (P2P)?
Peer-to-peer lending (P2P) is a method of debt financing that enables individuals to borrow and lend money – without the use of an official financial institution as an intermediary. Peer-to-peer lending removes the middleman from the process, but it also involves more time, effort and risk than the general brick-and-mortar lending scenarios.
Since the global financial crisis, trust has been low in the conventional banking system and its belief in entrepreneurs isn’t that high either. In this climate, entrepreneurs are disrupting the system by filling what The Economist called a “bank-shaped hole” with a project finance model that appeals to the Occupy generation. And Wall Street is paying attention. The new model, peer-to-peer lending, brings borrowers and investors meet on an online platform where borrowers pay less interest than a conventional bank loan while investors get higher returns. The advantage to the lenders is that the loans generate income in the form of interest, which can often exceed the amount interest that can be earned by traditional means (such as from saving accounts and CDs). Plus, P2P loans give borrowers access to financing that they may not have otherwise gotten approval for by standard financial intermediaries.
The popularity of P2P is growing quickly across the globe. Below are examples of the P2P platforms in some countries:
UAE: Headquartered in Dubai, Beehive (www.beehive.ae) successfully launched the UAE’s first online marketplace for P2P financing. Beehive has worked with prominent Islamic legal advisors and Islamic finance industry experts to develop a Murabaha structure that complies with the principles of Sharia. Beehive investors are currently earning 12% average APR* with reinvested returns.
USA: Lending Club and Prosper Marketplace have 1.6 million members and more than $2 billion in funded loans.
UK: Funding Circle, Rate Setter and Zopa, the oldest UK P2P lender – have created the UK’s first industry body called the P2P Finance Association.
China: In China’s command economy, online lending is also booming. According to Bloomberg, there is a $2.4-trillion unregulated “shadow-banking system”. There are now more than 2,000 websites set up since 2007, with Ppdai.com one of the largest such entities.
The P2P method is not without disadvantages as the lender has very little assurance that the borrower, whom traditional financial intermediaries may have rejected due to a high likelihood of defaults, will repay their loan. Furthermore, depending on the lending system employed, in order to compensate lenders for the risk that they are taking, the amount of interest charged for peer to peer loans are much higher than traditional loans.