Crowdlending to enhance social and financial inclusion amid COVID-19
20 Oct 2020
Fundkiss celebrates a recent report by the International Monetary Fund (IMF) under its special series for COVID-19 which notes that the pandemic and the need for social distancing have put a spotlight on digital financial services, including crowdlending, bringing to the fore their ability to facilitate firms and households’ access to finance
Lauding the move towards digital financial services, including Peer-to-Peer (P2P) lending platforms, as a welcome change from traditional financial institutions, the in-depth research paper explores the opportunities associated with an expansion of FinTech platforms, and comments on how these platforms have the potential to decease existing divides, especially through the provision of loans to employment-intensive SMEs with an impactful community footprint.
The IMF special report also emphasises that the top three reasons for the heightened importance of crowdlending services, among other FinTech platforms, during the pandemic are that they facilitate social distancing; they allow governments to disburse funds to those in need quickly and effectively; and they enable many households and firms to rapidly access online payments and financing.
Creating a more inclusive market
Interestingly, the report notes that new P2P lenders often provide better service than established financial institutions due to recent advances in lending technology and the ability to extend fully automated lending processes.
P2P financing platforms can facilitate access to credit, as highlighted for instance by emerging P2P lending platforms in China and payment to businesses (P2B) crowdfunding platforms that have taken off in several countries. In crisis times such as the pandemic, when bank financing may be harder to obtain, such platforms could provide an alternative potential source of credit for some households as well as Small and Medium Enterprises (SMEs), which would otherwise likely be credit rationed due to their small size and potential lack of documentation as well as collateral.
Moreover, P2P lending platforms can offset SME cost constraints in times of crisis as they operate with lower overheads and provide their services more cheaply than traditional financial institutions, with mainly small to midsize lenders participating in such platforms. Lending software providers create solutions to process loans faster, and lenders try to tap into new markets and demographics.
Digital, contactless credit provision to firms and households can also help implement social distancing during the COVID-19 crisis, by reducing the need for entrepreneurs and household members to physically go to the bank to interact with or deliver documentation to loan officers. In addition, recent research suggests that FinTech applications can significantly reduce the operational volatility and improve the survival rate of SMEs, particularly after natural disasters.
Therefore, the report recommends that in the context of the current epidemic, the global economy should leverage FinTech platforms – such as crowdlending platforms – to provide loans, besides the wider ecosystem support, to SMEs.
All sustainable development paths converge on FinTech
Interestingly, various aspects of FinTech help digital platforms to pursue the path of sustainability and social inclusion in diverse ways, but towards the same objective.
On the lenders’ side, crowdlending encourages savings as it provides a viable and profitable channel for investments, with the average annual rate of return being in the early double digits for Fundkiss investments, in a muted macro-economic environment where falling interest rates have brought the cost of money close to zero with a persistent excess of liquidity. Looking at Mauritius, where the gross savings rate stood at a lowly 10% in March, compared to an average of 13.7% over the last 2 decades, it is clear that retail savers are not being incentivised to put their money aside in anticipation of viable investment channels. It is in this context that crowdlending provides retail savers with an attractive alternative asset class, giving them access to investments in businesses that were previously aimed only at institutional investors.
Finally, when it comes to borrowers, crowdlending provides a clear avenue for financial inclusion for smaller companies that have credit needs largely unsatisfied by the traditional credit system. These companies are marginalised because they are considered unattractive by banking operators and must meet collateral requirements that impose a drain of their resources to be eligible for traditional finance, a condition that Fundkiss does not subject its borrowers to.
Technology fuelling a borrower’s market
In economies such as Mauritius which are heavily reliant on banks for SME financing, the digital revolution is needed more than ever because of its sheer potential to shift the balance of power in the financial services system towards the borrower – be it an entrepreneur or an individual.
By reducing the information divide through increasing the quality of available information and its ease of use, technology has the power to generate greater awareness among users of financial services.
Also, by leveraging the power of the crowd, crowdlending acts as an influential aggregation of individuals, with a supportive digital platform, enabling the ecosystem to make collective decisions and achieve greater autonomy in the financial sector. This democratisation of access to the financial system is essential to stimulate responsible and sustainable development in turn.
Lighting a digital path to sustainable development
With the recent publication of P2P lending rules by the Financial Services Commission (FSC) of Mauritius, innovative firms shall be able to operate within an appropriate regulatory framework that protects the interests of all stakeholders.
Ultimately, by allowing fundraising through the online sharing of business projects, crowdlending is poised to reshape the way individuals, jurisdictions and businesses interact, enabling multiple subjects to collaborate directly for economic development and promoting financial inclusion in the process.