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Peer to Peer lending: The emergence of a new asset class

August 27, 2012 Leave a comment

Peer to Peer lending is fast becoming the next asset class just as stocks, bonds and cash currently are considered to be standard asset class options for investors. Although Peer to Peer lending has been on the rise for the last 7 years, it still hasn’t become what people would call a part of mainstream finance. In my view, this is just a few short years away, there are already clear indications that Peer to Peer lending, which involves regular people lending to each other without the need for a bank in between- is catching on as a mainstream idea for people’s investment portfolios.
I read an intriguing piece on this very subject on the New York times (Peer to Peer lending: what the future holds: http://bucks.blogs.nytimes.com/2011/02/04/peer-to-peer-lending-what-the-future-holds/) The article mentioned that Peer to Peer lending volumes had already hit $25.6 million in June this year on just two Peer to Peer lending platforms compared to just $12.2 million a year ago: this is an astounding 110% increase in growth in just 12 months!
To add to this, Lending club, the largest Peer to Peer lending player in the US market has indicated that almost 30% of their lenders are institutional investors. This means that Peer to Peer lending is no longer applicable to just individuals but this phenomenon is now attracting companies who wish to get a bigger bang for their buck, rather than rely on banks with their miserly interest rates for deposits or the unpredictable stock markets. The current statistics for investor returns on US Peer to Peer lending sites is at 9.5% with record low defaults rates of 2%.
On the borrower side, they also stand to benefit with loans at an average of 8% compared to almost 29% that individuals are paying on credit cards. These statistics attest to the huge appeal that Peer to Peer lending has created among both investor class and the borrower class.
As an asset class for the investor or lender, the reason why Peer to Peer lending makes so much more sense is that investors are currently experiencing volatility spikes in their stock market investments. In addition, their diversification strategies don’t always seem to work as most investment classes are now moving in tandem with each other. On top of all this, there is a clear lack of confidence in being able to reach one’s financial goals using the normal methods we used before, i.e savings, buying bonds as an institutional investor or adding certificates of deposit to your investment portfolio. The point here is that it is actually possible to triple your returns without taking additional risk through being a lender on a P2P platform.
Although Lending club, https://www.lendingclub.com/ Zopa http://uk.zopa.com/ and Prosper http://www.prosper.com/are the better known P2P lending platforms, it would be a wise decision to try some new platforms that have done well by their own right and that each loaned more than $10 million within just 3 months of their establishment: https://www.fundingcircle.com/, http://www.ratesetter.com/ and UK payday loans lender https://www.wonga.com/
In a move that signals the importance of this growth industry, support sites have come up that help users determine which sites are the best to use and which ones have the best returns by providing research and algorithms to help. They are http://lendstats.com/, http://www.sociallending.net/ and for those who need to crunch numbers before they make any kind of lending or borrowing decision http://www.nickelsteamroller.com/ is your best bet. Another ancillary service that helps provide businesses with a technology platform to set up a peer to Peer lending website is MyAzimia, http://www.myazimia.org/ a niche technology company that focuses on providing tried and tested platforms to P2P lending companies in Europe and the US.
The Peer to Peer lending industry is set to continue to grow exponentially over the next 10 years; the UK government has already set aside 100million pounds to support these companies over the next 5 years. This is because it has recognized the importance of this industry in providing a viable alternative to the mainstream banking industry which we know is riddled with governance problems. This is an industry to watch and I believe other governments will follow suit and realize its importance in due time. In the meantime, it makes sense to look at P2P as a viable alternative asset class to boost your portfolio as a lender or to get a competitive no strings attached loan as a borrower.

lower crime rates and higher investment returns: what’s the connection?

May 20, 2011 Leave a comment

 Social Impact investing is the new buzzword in social enterprise circles in the UK today. Impact investing basically refers to the process of financing long-term social programs that tackle social problems, but that are supported by government and only on their success do investors make a financial return.  This is done through a social impact bond which is a financial instrument created by Social Finance (a London Private Equity Fund), this bond is sold to private investors and institutions and only pays out a return if the programs it has invested in (eg lower conviction rates for criminals, reducing homelessness and Teen pregnancies etc)  actually show improvement. In this way investors are actually able to get richer by doing good. 300million has already been poured into social investment in Britain and the social investment market is itself estimated to grow in  the next decade to over 500 billion dollars.  The idea is catching-on, Obama’s white house has put aside funds to fund trials of similar bonds for the next fiscal year.

This is very interesting space that combines the need for solving the world’s problems but with an underlying commercial incentive, in other words a totally win- win scenario, let’s watch what happens when the US catches on this very innovative idea……

Categories: consumer loans

microfinance for londoners takes off

May 11, 2011 Leave a comment

Micro finance is no longer just the preserve of developing countries such as India or Uganda; London is now one of the fastest growing markets for small loans for lower-income individuals. On May 9, 2011, Fair Finance, the first firm to offer micro finance to East Enders in London received 2 million pounds from two large UK banks to expand its lending  to reach even more lower-income Londoners. Faisal Rahman, the founder of Fair Finance says that although the interest rates charged on loans average about 53%, this is still much lower that what the payday loan sharks charged which could be anything from 1000% to 13000%.  ‘Fair Finance is a cheaper alternative to Loan sharks and payday loans as our clients do not have access to the conventional banking system’.

Fair finance’s mission is to help clients get away from loan sharks and predatory lending but ultimately to help these individuals find their way into the mainstream banking system. Its interesting however that the very same banks that say no to lending to these individuals are the same ones that are funding Fair Finance’s expansion? this is probably their way of offloading the lending risk to someone else and helps them look good in the process as they look like they are helping the local community…!!!

Categories: consumer loans

would you knowingly pay 4000% in interest for a loan?

March 23, 2011 1 comment

Most of you would probably answer the above question with a resounding ‘NO WAY!’ 4000% does sounds like quite a rip-off interest rate for a loan but you would be very surprised to learn that  over 100,000 people a month in the UK have been paying this level of interest when they sign-up for pay-day loans with new lending site, Wonga https://www.wonga.com/ .The site lends funds to people who do not have enough liquidity to tide them over until they receive their paychecks at the end of the month and require money for funding consumer needs. They say that they process over 100,000 loans a month since they were established. All borrowers need to do is sign-up, provide their details for a credit check , request for a maximum of 400 pounds and within 15 minutes they are able to receive the funds they need in their bank accounts. I am not sure if most borrowers are actually aware of the effective annual rate of interest that they are paying as something tells me that anyone seeing the 4000% interest rate tag would rather call up their mate or family member and borrow money from them instead!! 

Wonga  seems to be very successful and all its lending capital is provided by a venture capital firm that has been backing it since it was established. The CEO of the firm confirms that the reason for their success is that ‘people now realise that they no longer need the services of a retail bank’. Although the interest rates seem quite exploitative, I would say that most borrowers on the site would probably not qualify for loans from a retail bank due to their poor credit history which means that Wonga is probably the only choice they have left.  Watch this space there will definitely be competitors wishing to replicate Wonga’s success in this market sector!