(Article) Peer-to-Peer Lending

 Peer-to-Peer Lending

Peer-to-peer (P2P) lending is an innovative form of crowd- funding  with financial  returns. It involves  the  use  of an online platform to bring lenders and borrowers together and  help  in mobilising  unsecured finance.  The  borrower  can either be an individual  or  a business requiring a loan. The platform  enables a preliminary assessement of the borrower's creditworthiness and collection of loan repayments. Accordingly, a fee is paid to the platform by both borrowers and lenders. Interest rates range from a flat interest rate fixed by the platform to dynamic interest rates as agreed upon by borrowers and lenders using a cost-plus model (operational costs plus margin for  the platform and returns for lenders).

One of the main advantages of P2P lending for borrowers is that the rates are lower than those offered by money lenders/unorganised   sector,  while  the   lenders  benefit from higher returns than those obtained from a savings account or from any other investment.

Although   there   has   been significant   growth  in  online lending platfroms globally, there is no  uniformity in the regulatory  stance with  regard  to   this  sector  across countries. While P2P lending  platforms are banned in Japan and Israel, they are regulated as banks in France,

Germany and  Italy, and  are  exempt from any regulation in  China  and  South  Korea.  Differences  in  regulatory stance emanate ideologically. It is argued that regulation may stifle the growth of this nascent sector. On the other hand, proponents of regulation argue that the unregulated growth of this sector may breed unhealthy practices by market plyers and may, in the long run, have systemic concerns given the susceptibility of this sector to attract high risk borrowers and also weaken the monetary policy transmission mechanism.