Alternative lending, namely P2P, began to gain steam after the 2008 economic crisis, where traditional lenders tightened their lending practices. P2P became a burgeoning multi-billion-dollar sector, connecting borrowers and lenders through technology platforms that allow both parties to meet their financial needs. Focused on individuals or SMEs, P2P lending platforms are a lending marketplace generating small fee for each repayment collected. As of 2020, China and the US made up around 95% of the P2P lending market[1]. In its prime, there were over 6,500 P2P lending firms in China alone, similar explosive growth was seen in the US and the UK.
Despite the hype, thin margins, regulatory crackdowns, and operational complexity resulted in pivots. In 2020, the US-based LendingClub exited the retail P2P lending business as it prepared to become a bank holding company following its $185M acquisition of Radius Bank[2]. Similarly, Zopa announced that it attained a full UK banking license[3]. In China, following regulatory crackdowns, Ping An-backed Lufax ditched its core business of P2P lending in mid-2019, and pivoted to consumer finance: providing online credit facilitation and wealth management [4].
Another nail in the coffin, Covid posed a selection event where platforms faced liquidity crunches, unable to meet the demands of hordes of investors looking to liquidate. Platforms such as Indonesia’s KoinWorks resorted to multiple debt restructurings and reduction of interest rates, all of which hurt the investors trust[5]. Suffering similar woes in the UK, Ratesetter was eventually bought by Metro Bank[6]. The UK-based Zopa stopped lending to its high-risk category and Funding Circle stopped taking on new retail investors and disabled the secondary sale option of a loan portfolio.
The P2P lending wave in MENA began in 2013, with Jordan-based liwwa and UAE-based Beehive setting out to address the multi-billion-dollar SME lending gap, estimated by the IFC at more than $300bn in 2018.
MENA P2P platforms had a unique set of challenges that curbed their ability to scale regionally and resulted in pivots in their models. Lack of tried and tested regulation for digital KYC and e-signature hindered at-scale customer on-boarding. The lack of well-maintained credit scores for SMEs & individuals required P2P players to build their own scoring models. The lack of API integrations with banks required increasing the number of boots on the ground. Finally, the lack of unified P2P regulations across the region impeded the ability of P2P platforms to grow a retail investor base and to expand beyond their home markets.
Nonetheless, players came up with innovative ways to overcome these challenges. Beehive began partnering with banks where an SME lending white-label solution is implemented. Beehive also grew its base of institutional lenders, signing a partnership with Emirates Development Bank in June 2021 with the goal of boosting funding for SMEs in UAE by providing loans through a 30M AED (~$8.6M) fund[7]. Similarly, liwwa focused on institutional investors such as local banks and global debt institutions. liwwa also began to offer its credit analysis engine and techniques, credit-as-a-service, to banks in November 2020[8].
Recently, KSA appears to be the P2P lending capital of the region – with a spate of new platform launches, coupled with a noticeable growth in the FinTech market as part of the Vision 2030 strategy. By 2020, KSA had 60+ active FinTechs, including 12 P2P lenders such as Forus, Lendo, Raqamyah, among others[9].
Although not without its challenges, conditions in KSA for P2P lending are more favorable. Key challenges faced by platforms located elsewhere in the MENA appear to be readily resolved in KSA. The presence of a Credit Bureau, an E-KYC, digital banking infrastructure, completely functional digital signature framework, digital promissory note processing in direct connection with the courts, coupled with the size of the gap in SME lending in KSA, create favorable conditions. Furthermore, KSA boasts one of the highest GNI per capita in the world, with available disposable income that allows a large number of retail investors and family office to finance through P2P lending platforms. This is evident in the speed with which these P2P lending opportunities are financed by retail investors, where Lendo, one of the most prominent platforms, takes less than 5 minutes to fulfill a campaign for a loan amount ranging from $80K to $500k.
The role of the regulator in this boom in KSA is not to be overlooked. As part of developing the FinTech industry, multiple experimental FinTech licenses were approved. Saudi Arabia’s 2030 Vision strongly supports entrepreneurship and the enhancement of FinTech services. SAMA – KSA’s sandbox unit, along with CMA, have issued experimental permits for P2P lending within their sandbox programs. Furthermore, SAMA has begun its open banking initiatives which is expected to be fully rolled out by 2023[10]. It is important to note that P2P lending platforms in the KSA have material capital requirement which one can argue creates a barrier to entry and hinders the growth. Nonetheless, a clear regulatory framework bolsters the trust of both investors and borrowers in these platforms. P2P Lending platforms in KSA are demonstrating impressive growth with relatively low default rates.
Conclusion
The P2P lending experienced exponential growth globally due to the size of the funding gap. However, in order for it to reach scale, proper digital infrastructure and regulation is required. Even in markets where P2P has operated successfully for a time, pivots away from pure P2P lending, driven by regulation or market shocks, are proven necessary. In the face of persisting funding gap and growing disposable income, P2P 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 a fully digital on-boarding and credit assessment.
On this, Osama Alraee, Cofounder of Lendo comments: “Evolution in the crowdfunding business model is natural and will happen in every market as startups scale. Whether crowdfunding platforms shift from retail investor to intuitional investor, or whitelabel to banks. In KSA, every startup that has reached over $100M in valuation is eager to find ways to offer embedded finance, either in payments or lending. This opens an opportunity for crowdfunding startups to offer credit-as-a-services at an unfathomable scale. The truth is, transforming a model is not necessarily an indication of some market failure, but instead a natural byproduct of growth”.
We at AB Accelerator strive to help FinTech startups reach a level of understanding of the whole process and how to avoid the pitfalls that other FinTech startups fall into. We provide them with the mentorship they need as well as an opportunity to test solutions through a proof-of-concept which could potentially lead to a pilot agreement with Arab Bank. AB Accelerator invests in FinTech startups that have a product in the market with demonstrated customer traction. If you are a Fintech startup looking to accelerate your solution within the MENA region Sign up now to Ab Accelerator.
[1] https://www.finextra.com/blogposting/18485/p2p-lending-market-outlook-2020
[2] https://www.bankingdive.com/news/lendingclub-peer-to-peer-loans/586841/
[3] https://techcrunch.com/2020/06/23/zopa-granted-full-uk-bank-licence/
[4] https://www.businessinsider.com/chinese-fintech-giant-lufax-seeks-24-billion-dollar-us-ipo-2020-10
[5] https://the-ken.com/sea/story/inside-indonesias-post-covid-p2p-loan-restructuring-purgatory/
[6] https://www.ratesetter.com/blog/ratesetter-announces-that-metro-bank-is-purchasing-the-loan-portfolio
[7] https://www.thenationalnews.com/business/banking/emirates-development-bank-signs-deal-with-dubai-s-beehive-to-boost-sme-financing-1.1245283
[8] https://www.capitalbank.jo/en/news/capital-bank-and-liwwa-team-up-to-finance-smes
[9] https://www.p2pfinancenews.co.uk/2021/07/20/is-saudi-arabia-set-to-become-the-next-p2p-hub/
