Online marketplace for loans is an idea that can challenge the banking industry
A mark place is where buyers and sellers meet to trade. An online market place is where buyers and sellers meet to trade online. An online market place that we are all familiar with is OLX. There are two main versions of online market places, those that allow for trade in everything of which OLX is an example, and those that are specialized in particular business lines like BrighterMonday.co.ke for jobs and Cheki.co.ke for cars. Apparently, there isn’t an online market place that allow for borrowing and lending.
The loan industry is a lucrative industry for the sector players all the way from commercial banks, micro-finance institutions, SACCOs and even Chamas. According to Central Bank of Kenya:
In the third quarter of 2012/2013 financial year, the banking sector’s “gross loans and advances increased from Ksh. 1.36 trillion in December 2012 to Ksh. 1.40 trillion in March 2013, which translated to a growth of 3.0 percent. The growth, which stood at Ksh. 40.0 billion, was in 7 sectors registering a marginal decline occasioned by faster loan repayment rate compared with the rate at which new loans were being made in those sectors during the period.”
In the year ended December 31st 2013, Equity Bank alone grossed shs. 24.8 million from interest on loans alone of the total shs. 12.64 billions in profits.
Even though the industry is mincing billions in profits by giving out trillions in loans each year, there are very few Kenyans who opt for the loans. The prohibitive interest rates, impossible requirements and bureaucracy have all worked together to lock out Kenyans from accessing the much needed finances, and neither parliament, central bank and the government at large have helped leverage these hurdles.
To help themselves, there are Kenyans who have come up to offer loans in seconds. These businesses commonly known as “Shylock” or “Cash on Goods” are so popular in Nairobi, Mombasa and Nakuru and many Kenyans who are in need of quick cash have turned to them. The problem with these cash on goods businesses is that they still charge very high interest rates mostly between 20 and 40 percent per week. If one were to pay in a month, then interest alone shall have climbed to at least 80 percent.
The desire for Kenyans to access faster loans also explains the popularity of M-Shwari, a service by CBK for Safaricom’s M-PESA customers. Since M-Shwari does not require any security other than M-Shwari, M-PESA and Safaricom’s Airtime usage history, the amount one can access as loans is always limited to some few thousands – the interest rate (they call it loan processing fee) of 7.5 percent per month is still high compared to Bank interest rates of 1 to 2 percent per month.
As a solution to these hurdles that make millions of Kenyans run away from loans (those who have solved loan requirements and bureaucracy have penalized loanees on interest rates) someone can borrow the idea being fronted by Charles Moldow, a general partner at Foundation Capital, US, who posted an article in TechCrunch titled How A Trillion-Dollar Market Remains Hidden In Plain Sight. The gist of Charle’s article is how banks can be bypassed in order for interested investors to offer affordable loans to borrowers with viable projects.
In the article, Charles also mentioned how people tried to bypass banks to offer peer to peer (P2P) loans akin to Kenya’s loans on goods but the difference is that loans were being offered for particular items. He wrote:
The first efforts in this space were called peer-to-peer (P2P) lending, and rightly so. It was literally individuals posting descriptions of things they needed loans for (a new deck, cosmetic surgery) and other individuals offering to loan them the money for those things, at various rates. With no banks involved, it was truly disintermediated lending. There was no underwriting rigor – because there was no underwriting, period. It was the Wild West, and about half of those loans failed.
As this approach failed (most probably they didn’t require security like in the Kenyan case that loan on items such as smartphones, laptops and other valuable items), the new approach was to use a marketplace like structure. Charles explains:
Today, more sophisticated, more professional operations have grown up, and these lenders are not truly peer-to-peer, because the money used to fund their loans comes from a diversified set of investors, not just individuals. They’re not truly disintermediated either because the best platforms provide some form of intermediation (like scoring borrower quality). That’s why I’ve taken to calling them “marketplace lenders.” These new platforms are able to create a marketplace where lenders and borrowers can find one another and agree to terms, all without the involvement of retail banks or credit card companies.
The new approach was found to benefit both investors and borrowers alike. He continued:
Why does this matter? Because by removing traditional banks as the middleman, marketplace lenders can use their spread advantage to offer lower rates to borrowers and better returns to lenders. Borrowers on marketplace platforms pay closer to 10% interest, a third less than the average of what is paid to banks or credit card companies. And instead of receiving 1% interest for keeping their money in a CD, active lenders on marketplace platforms receive, on average, an 8% return on their investments.
The above paragraphs got me thinking; what if the marketplace for investors was something operated like Brightermonday.co.ke or Cheki.co.ke with a cut of eBay in there? Such a platform, I believe, would allow for lenders to meet borrowers. Those seeking to offer loans plus their terms and conditions would be listed; then the borrowers would browse through and choose the most competitive loans on offer.
The extent to which lending and borrowing would be allowed in such a platform would be left for the online marketplace for loans to decide. In the article by Charles, it is mentioned that such marketplaces have allowed for loans to be offered for as low as 10% interest rate against the standard 30% by banks and other credit companies in US. The online marketplace approach would help solve the problem identified by Charles that says:
Creating those marketplaces won’t be easy, but there are several companies that are already well on their way. Finding them, too, hardly takes a scavenger hunt – unlike your bank’s loan officer, they’re just a click away.
As an investor, you would most likely prefer to find a way to generate that extra income by giving someone quick or long term funds for a greater ROI compared to what you would get in stashing your money in some bank that would only give you 1 to 5 percent on your saving per year. As a borrower, you would also benefit by being able to access credit (and I mean good credit in hundreds of thousands to millions) at a third the cost of the standard industry charges – and so everyone wins and the banks are forced to toy with what the new demand/supply curve dictates.