Social lending could put pressure on traditional lending institutions but the internet model might not last, financial analysts said on Friday.
Following the launch of social lending company RainFin last week, South Africans are warming to the new platform.
Using a person-to-person model of lending, RainFin will issue loans through an online platform that will directly link people and groups who have cash to invest with people and small businesses that want to borrow money.
RainFin was governed by the Protection of Personal Information Act, National Credit Act, National Credit Regulator, Financial Intelligence Centre Act, Money Laundering and Terrorism Act and the relevant Income Tax Act, RainFin co-founder and chief executive Sean Emery said last week.
He said the service had been launched as consumers were beginning to look at alternatives to the traditional loans provided by banks.
Consumers would be able to lend and borrow money at more competitive interest rates than they could get from the banks and without the excessive bank fees.
A report by TechCrunch, a global company that reviews new internet products, said peer-to-peer loans in the US had reached more than $1 billion (R8.3bn) since 2006. In the past 30 days, the two biggest lending marketplaces in the US issued 5 600 new loans totalling nearly $64 million, with a borrower average interest rate of 15.81 percent.
Dimitri Mitropapas, an analyst and stockbroker at PSG Konsult, said such lending platforms could have a place and they could put some pressure on the traditional lending market.
“If they are going to base it on the stokvel type of system they might do a better job in attracting the unbanked,” Mitropapas said.
He said stokvels were fairly liquid and if online social lenders operated in a similar way, they had great potential.
But Jean Pierre Verster, an analyst at 36One Asset Management, said similar lending platforms had been tried in South Africa before, but they had not been successful because people who used social lending were usually in lower-income groups and lent to people they personally knew rather than via the internet.
The traditional method of social lending in South Africa, the stokvel, had been serving this market for a long time and was well established. Verster said high- to middle-income groups had internet access to use such platforms but the people who traditionally made use of social lending often were not connected.
“Even though such platforms might offer lower interest rates for borrowers than banks do, it is a higher risk form of lending because their risk management is not as sophisticated as that of banks,” Verster said.
He said because banks were sophisticated intermediaries with access to proprietary data on historical client behaviour and were linked to the credit bureaus, they were in a much better position to assess risk.
“What may happen is that people who have bad credit records and who can’t get a loan from the bank would choose a social lending network as an alternative. So they may end up exposed to very high risk credit profiles.”
In contrast, Mitropapas said cellphone penetration was highest in sub-Saharan Africa and more people were accessing the internet from mobile devices.
“You look at the popularity of Facebook in South Africa and as 3G and 4G is rolled out to more people, there’s definitely a space for this.”
Social lending, in the form of stokvels, operates under an exemption to the Banks Act.
“We don’t have to be registered with the National Credit Regulator but we felt it was necessary,” Emery said.
When individuals applied for credit with RainFin, the company did a full credit check similar to banks and the information was made available to lenders without giving out the person’s name, he said. The agreement was legally enforceable and RainFin would refer debtors who did not pay to the credit bureaux.