Friday, March 8, 2013

Peer to Peer Banking

Did you ever wonder where you can get a loan at amazingly cheap interest rates of only 3%? Did you ever wonder where to put your savings, so that you get more than the meager 0 to 0.25% that your bank may be offering for deposits? P2P banking may be the answer for you, because it channels people's savings directly into loans for other people, and takes only a slim overhead to cover risk of default, and contract administration.

(read full Wikipedia article)

There are quite a number of successful P2P banks and lending facilities around, you can read about this industry's news on this website:

Keeping Your Spreads Low

Let's assume your investing peers are receiving an average 2% interest per year, and your loan clients are paying an average interest of 4%, that would leave you 2% of the turnover to maneuver, which needs to cover the defaults, as well as your administrative costs.
Ok, that might be the optimistic scenario in developed countries, but probably you will need to charge higher interest rates, because your customers have a higher default risk, which is determined mostly by 
  • The customer's ability to pay his debt
  • The customer's willingness to pay his debt
  • Your knowledge about your customers. Only 8.1% of Palestinian individuals and firms are in the public credit registry (according to World Bank Doing Business Study). The most reliable payment practices data is probably available through electricity distributing companies, as well as telcos. Another way to improve data is to include location data, and family tree data in your creditworthiness algorithm. Family reputation might be a good leverage to increase debt collection rates.
Besides lowering the risk of default, you need to optimize the transaction cost for debt collection, possibly you can learn from, or even partner with electricity companies (who have the leverage of being able to switch off lights if bills remain unpaid).

P2P-Funded Photovoltaic Roofs

Installing a couple of Kilowatts of solar cells on domestic roofs costs in the range of 5.000$ to 20.000$. The produced electricity can be sold to your local electricity distributor, according to the feed-in legislation passed in September 2012. You can ask solar companies like Ayava (website) or ISS (website) to perform the rooftop installation. It is a very safe investment into assets that generate regular income for pay-back of the loan. This would be an ideal investment to be funded through a P2P scheme, as those people with some savings are not always the same people that have empty space on their rooftop or their garden.
For solar energy investment, it actually makes a lot of sense to partner with the electricity distribution companies for the purpose of collection, that way you can ensure a close to 100% debt collection rate, and your spreads will get amazingly low. Imagine you can finance solar cells at only 3% p.a., that would make them amazingly profitable for house owners.

Engaging Donor Subsidies

Several international donors are attempting to encourage lending by providing credit guarantees of up to 70% of the risk. Engaging with these schemes will significantly lower your spreads.

Paving the Regulatory Framework in Palestine

The Palestinian Monetary Authority (PMA) is the regulatory body for such business models. Probably you will not be able to avoid registering as a bank, but possibly you can register as a Microfinance NGO. Beware that if you register as a bank, the PMA might have high capital requirements for you, and they might require you to lend money to the Palestinian Authority at interest rates that are far from the market's judgement of the PA's creditworthiness.
In addition of the legal status question, a supportive regulatory framework would be a government that assists you in your debt collection, as available in many industrialized countries. That would further lower your spreads.

Going Halal

In the Middle East, everything sells better with an Islamic label on it. Even political parties. But that's another topic. So if you are aiming for a broad customer base, consider using the green color of Mohammed's Qureshi tribe in your logo, include a tawhid calligraphy somewhere, and of course follow some of the Islamic banking principles. I am not a great expert in Islamic finance, but I understand you need to exclude beer and pork from your investment portfolio, and you need to re-name the ugly word of "interest" into something that sounds more appealing, like "profit sharing", or "management fee". Also, you can utilize two purchase transactions, to simulate an interest rate.

As far as I know, there is no Islamic P2P-banking website existing worldwide, so you would explore an entirely new market here.


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