'The opportunity for peer-to-peer lending in emerging markets,' Peter Tavener, Chief Financial Officer, Beehive UAE
SMEs often comprise more than 80% of total businesses in emerging markets, yet their access to finance can often be restricted, leaving limited options to raise capital and fund future growth plans. So while the appetite to innovate and grow is often evident, the means of funding that growth can prove hard to secure.
With the advent of technology, however, the landscape is changing and opening up new and considerable prospects for emerging markets to accelerate growth and leapfrog other markets. One industry undergoing disruption is the field of Finance, where new technological models are challenging traditional structures and providing exciting new opportunities for economic development.
Alternative finance, such as peer-to-peer lending (P2P) platforms, a form of crowdfunding, is one such technology which has the ability to unlock and expedite growth in emerging markets.
As a concept, peer-to-peer lending refers to retail investors providing finance to businesses, or individuals, without the use of a conventional intermediary, such as a bank. Technology is a key enabler in P2P lending, which uses an online platform to connect businesses seeking finance with a crowd of hundreds or even thousands of potential investors. The benefits are multiple for both parties, drastically reducing cost and time to finance for SMEs and providing investors with attractive returns and the opportunity to diversify. Transactions are carried out online, directly between investor and borrower and the two parties never actually meet.
Tech-enabled alternative finance platforms can provide multiple advantages over traditional providers, not least a faster, more efficient and streamlined process. But the real advantage of an online peer to peer model, unlike conventional banking models, is that it can be adapted and rolled out across diverse markets with relative ease and speed. This is where young economies that successfully adopt these innovative online models can steal a march over their neighbours, using technology to ignite their growth.
The benefits of embracing P2P finance platforms are clearly tangible but, while the technology is agile enough to be modified to suit the distinct needs of different markets, it is not sufficient to adopt a ‘one size fits all’ strategy. Each market will have its own infrastructural limitations which need to be considered and incorporated into local operations in order to ensure successful implementation.
As has been seen in markets such as the UK, the successful operation of peer to peer platforms is not necessarily dependent on the creation of specific legislation. Regulatory infrastructure has only recently been established in the UK almost 10 years after the original inception of P2P, yet the fundamental principle is that it has been developed to complement the burgeoning industry, rather than seek to impinge its growth. This approach is an important learning for the introduction of peer to peer platforms in emerging markets. Where limited legislative or regulatory infrastructure exists, it is critical that governing parties work collaboratively with alternative finance providers to shape creative and flexible regulatory and legal guidelines that support the premise of peer to peer and encourage the positive contribution it can bring to an SME dominant economy. Suffice to say that rigid or obstructive infrastructure can negatively impact the speed of set up and adoption of new technologies, thereby negating the positive impact that could otherwise be gained.
An additional challenge facing the successful implementation of new financial models is the process by which risk is assessed and managed. Accounting practices can vary dramatically across regions, markets may have varying credit infrastructure such as limited SME credit history information, fragmented offline data sources and outdated or unreliable information. These variances can impact the speed and efficiency of risk evaluation of SMEs requesting finance and can also lengthen the overall adoption curve of new finance technologies within that market. What is clear is the need for emerging markets to implement some financial best practice such as efficient bookkeeping, ongoing tracking of business credit history and encouraging a general move to storing credit information online. These measures will help standardise credit information, improve information accessibility and reduce risk.
Peer to peer lending provides a huge opportunity for emerging markets to play on a world stage however, the technology can only ever be fully leveraged when the environment and infrastructure actively support and complement such innovations. Evidence from more developed markets demonstrates that collaboration between suppliers and governing bodies is a critical success factor. Markets such as the UAE and Malaysia are actively engaging with P2P platform providers, such as Beehive, to work collaboratively to create robust regulatory and credit infrastructure that will help guide the set up and ongoing operations of new market entrants.
Ultimately, the partnering of new technology providers with established local governments, agencies and institutions will act as the key enabler to unlock growth potential of SME driven emerging markets.