Peer-to-Peer Lending Platforms: Revolutionizing Passive Investments | Investera | Investment Management Platform

Peer-to-Peer Lending Platforms: Revolutionizing Passive Investments

27June, 2022

The idea of passive investments stems from the belief that people should invest in assets that can generate returns with little or no effort. Passive investments are generally considered to be a long-term strategy, as opposed to an active investment, where you can expect higher short-term gains. The term “passive” comes from the fact that in order to see returns on your investment, investors have to wait for them (as opposed to “active” investment where investors actively trade or work on creating opportunities).

The most popular types of passive investments are dividend-paying stocks, bonds, and index funds. Passive investments appeal to millennials because they don’t want the stress of managing their own portfolio and instead prefer a low-risk strategy.

However investing in stocks, bonds, and index funds is considered to be risky as the market is volatile and investors might lose all their investments at one time. This is where Peer to Peer lending platforms come into place. This technology has revolutionized passive investment strategies for individuals and allows individuals to invest in various types of loans (secured and unsecured) with interest rates reaching up to 14% annually.

The process of Peer-to-Peer lending

The traditional process of obtaining loans from banks requires time including the required compliance work. Whereas Peer-to-Peer lending platforms allow individuals to acquire loans directly from other individuals resulting in bypassing the middle man involved. Occasionally some of the Peer-to-Peer lending platforms offer a fixed rate amortizing personal loans, indicating their interest rates stay the same throughout the loan term and the balance is paid off in equal, scheduled installments. 

The market for Peer-to-Peer

The market of Peer-to-Peer lending globally was worth $83.79 billion in 2021 and is expected to reach $705.81 billion by 2031. The increase is expected due to the growth in the digitization that is happening in the banking sector along with the emergence of SMEs, especially in developing countries.

Apart from the mentioned factors increasing the Peer-to-Peer lending platforms also eliminate the cost of establishing physical branches, staffing, and maintenance, thereby gaining preference among the masses. -Technological advancements such as the development of blockchain and smart contracts are acting as a growing factor offering transparent and reliable lending and borrowing facilities that safeguard the welfare of all parties involved.

Types of Peer to Peer lending platforms

As a result of their growing popularity, the number of peer-to-peer platforms and the categories of loans they offer is also growing. 

Qualified borrowers on peer-to-peer platforms can obtain loans at rates lower than those offered by banks, while investors can earn returns not available elsewhere.

Most peer-to-peer lending sites now provide loans that were previously only available through banks and loan sharks. The following are some of the most common types of peer-to-peer loans offered by popular peer-to-peer platforms.

Here are some top MENA and International Peer-to-Peer lending platforms.

In MENA, Saudi Arabia takes the lead with 4+ companies being established in the Peer-to-Peer ecosystem, clubbed with the government support and initiatives the country is providing an easy and direct way for lenders and borrowers to connect. Companies such as Raqamyah use innovative technology to directly connect small businesses seeking fast, affordable finance with financers who can help fund their growth, and Forus that connects borrowers and investors, enabling investors to invest in a marketplace of alternative loans targeted toward small and medium enterprises are permitted and supported by the Saudi Arabian Monetary Authority (SAMA). Other Peer-to-Peer lending platforms include Beehive which is considered to be MENA’s first P2P lending platform, Liwwa, Lendo, Solfeh, Funding Souq, and Manafa.

Internationally, Peer-to-Peer lending platforms have gained traction prior to the industry entering the MENA market. Companies such as LendingClub, and Funding Circle are the top-rated companies in the industry for their speed of approval, annual percentage rate, fees, etc. Other companies in the international Peer-to-Peer lending industry include Peerberry, Lendwise, Alami, and Financepeer.

Pros and cons of Peer-to-Peer lending platforms

Peer-to-peer lending platforms offer both lenders and borrowers several advantages over more conventional forms of finance, but the potential downside persists. There are advantages/pros and disadvantages/cons that both the borrower and the lender have to consider when engaging in Peer-to-Peer lending. Below listed are a few of the points:

In conclusion, Peer-to-peer lending can be an attractive alternative to traditional financing and investing. Individuals in need of funds may be able to save money and get approved faster for a personal loan from a Peer-to-Peer lending platform. Similarly, investors could generate additional fixed income by funding loans. 

Peer-to-Peer lending is an exciting investment proposition for those who want to combine the benefits of several different asset classes. Peer-to-Peer lending has a comparably short time horizon, offers the potential for high returns every investor seeks, requires little capital to get started, and can generate predictable, passive income. Though the many benefits of Peer-to-Peer lending are surely intriguing for lenders, it is essential to remember that these loans can be somewhat riskier than other investments and often less liquid. 

Peer-to-Peer lending experienced exponential growth globally due to the size of the funding gap. However, in order for it to scale up, proper digital infrastructure and regulation are required. Even in markets where Peer-to-Peer has operated successfully for a time, pivots away from pure Peer-to-Peer lending, driven by regulation or market shocks, are proven necessary. In the face of persisting funding gap and growing disposable income, Peer-to-Peer lending in MENA continues to have a large addressable market. However, startups are also being forced to pivot due to the lack of infrastructure that allows for fully digital onboarding and credit assessment.

Researcher

Birani Obaidullah