Cutting out the bank as middleman

2014-11-12 00:00

PEER-TO-PEER social lending is a growing global phenomenon which links borrowers and lenders directly, by-passing banks and their fees.

It is a similar concept to crowd­sourcing except that instead of a business proposal, a borrower lists needs for a personal loan and investors decide if they want to commit funds based on a specific return rate.

RainFin, which was the first peer-to-peer online lending platform in South Africa, announced recently that after being in the market for two years they are now listing around 18 new loans at a total loan value of around R400 000 for investors to bid on every day.

Lendico South Africa, an online peer-to-peer banking service, was launched in South Africa earlier this year.

While the model is aimed at lowering borrowing costs and providing better returns to investors, it is not to be seen as a solution for people with poor credit records to get easy credit.

RainFin says less than 10% of applications pass screening after undergoing a detailed moderation, scoring and affordability assessment.

Lendico country head Laurens Pohl says the company also applies very strict credit criteria. “We have a similar underwriting process to the banks but have stricter criteria. If a borrower doesn’t pay and an investor experiences a loss they won’t return, so it is very important to us that we do not become a place for blacklisted individuals to get a loan. We are an alternative for credit-worthy people looking for lower interest rates or to consolidate their debt in order to decrease their interest rate,” says Pohl.

Is it an attractive offering for investors?

Peer-to-peer lending models are certainly a cost effective way for borrowers with good credit records to access finance, but are they paying sufficiently high enough returns for individuals to take the risk in investing in these loans?

RainFin says that they have created the business to allow investors to receive returns comparative or better than RSA retail bonds.

Sean Emery, CEO of online lender RainFin says that given their excellent management of impairments (non-paying loans) the worst case scenario for investors with significant impairment will bring their returns back to levels compared to that of retail bonds.

Although RainFin encourages investors to spread their investment across many loans (the maximum allowed is 100) to limit losses, when investing in a bank account or a RSA retail bond the risks are still lower. One would therefore need to earn a higher rate from peer-to-peer lending to justify the risk.

It is important to understand the nature of the loan repayment, which is monthly — therefore an investor receives a monthly income which includes a portion of the capital invested as well as interest earned. As the interest is charged on a reducing balance one cannot make a direct comparison to a normal fixed deposit — the actual interest rate received is not a per annum rate.

Using RainFin as an example, if you invested R10 000 into a Grade A loan with a 10% return over two years you would receive R461 per month or R11 110,4 total return of capital and interest — that is a return of 11% over two years. These are not particularly high returns and one would need to take increased risk to receive returns above what the market currently offers.

There is however the aspect of social sharing — research and experience has shown that people prefer to borrow and lend to their community directly rather than using the bank which is often seen as an unfavourable “middleman” who limits access to funds and charges excessive fees.

For investors who have an appetite for risk and can afford to experience some loss or reduction in return, the higher risk loans could be an interesting option. This is also an option for an investor who would like a similar return to a fixed deposit but prefers the concept of social sharing and supporting the growth of peer-to-peer lending as an alternative to banks dominating the lending and borrowing space.

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