The evolution of peer-to-peer lending platforms has given small businesses another way to access financing despite renewed lending scrutiny.
Speaking in Parliament recently Trade and Industry Minister Rob Davies complained that “developmental credit”, the kind used to start or sustain a small business, for example, “hardly features” in South Africa.
Instead, in the wake of African Bank’s collapse, the focus has been on the evils of unsecured credit, extended solely for short-term consumption, keeping low and middle-income earners trapped in a cycle of debt.
Many financial institutions are wary of lending money to start small businesses, or expand existing ones. But with the evolution of online platforms that facilitate peer-to-peer lending, or P2P, there may soon be a new way for entrepreneurs to borrow the money they need.
RainFin is a locally grown peer-to-peer marketplace that connects lenders directly with borrowers. RainFin, in partnership with a company called M2North, is making it possible for small businesses to access funding via its peer-to-peer platform.
The offering is being introduced in a phased approach, but according to RainFin chief executive Sean Emery, it will be “the first peer-to-peer lending platform to small businesses” in South Africa. Alternative lending through peer-to-peer and crowd-funding platforms has grown rapidly in the developed world, generating billions of rands worth of loans, at rates that are cheaper than those of traditional banks.
Individuals who invest on the platforms as lenders also typically get returns that are better than those offered by banks. Proponents see these platforms as the emerging online competitors to banks, but this has not stopped large financial institutions from investing in them, including in South Africa.
US investment banks have taken to lending through major peer-to-peer sites, and in March this year Barclays Africa, via its South African unit Absa, bought 49% of RainFin.
‘Big, big cost in serving SMEs’?
For large financial institutions, there is “a big, big cost in serving SMEs [small and medium enterprises]”, said Emery, particularly when it comes to assessing the business in order to offer financing. In addition, the regulatory burden on businesses is high and the SME sector in South Africa is notoriously volatile. Through its partnership with M2North, and the data it can provide, Emery says RainFin can make assessing small enterprises and their loan origination highly competitive.
According to Emery, M2North enables SMEs and large industrial companies to exchange procurement documents and acts as an electronic intermediary between large companies and their supplier base. Small businesses registered with M2North can now register with RainFin and opt in to share their existing data with the peer-to-peer platform.
Using this information, RainFin is able to assess the credit-worthiness of a business, much like performing credit checks, and provides a risk rating on the individual borrowers using its site. Investors or lenders signed up to RainFin will then be able to lend to small businesses as they would to individuals.
The data provided will enable RainFin to calculate things like a business’s estimated cash-flows, and since many SMEs using M2North have supplied large corporates, it can also access things like a firm’s black economic empowerment status and VAT registration.
The loans will initially be small, up to a maximum of R250 000 over a duration of six months. Emery is aware that this offering is breaking new ground. “No one’s done it like we want to do it,” he said. There is not a 50-year history of credit scores and models for small firms in the same way there is for consumers he noted.
“Anybody who lends on the RainFin platform to these SMEs is going to be establishing a new lending paradigm,” he said. Developing credit models? Barclay’s Africa, through Absa, is set to market RainFin’s services to borrowers and lenders across the country, according to Stephen van Coller, chief executive of the investment bank.
‘Change the industry massively’
Barclays Africa can do both lending and borrowing with known or unknown counterparts through RainFin’s website. “This can change the industry massively,” said Van Coller. The bank is also expected to invest in the SME offering, alongside other individual lenders, as this newer leg of the RainFin marketplace launches.
In future, RainFin hopes to publish the loan data and history, enabling other players to use it to develop their own credit models, and potentially provide better insight into the performance of the SME sector. The lending platform is not a bank, but adheres to the requirements of the National Credit Act.
It vets the borrowers on its site through credit checks to declare earnings, monthly expenses and requires that they give permission to validate their credit standing via the credit bureaus. According to RainFin, an average of 350 customers per day, representing an average R7 500 000 in loan value, register with the site. After detailed screening, however, less than 10% qualify, resulting in around 18 new loans, valued at around R400 000, being listed on the site each day.
RainFin has also introduced its own risk grading system. It indicates both the borrower’s historical default rate and RainFin’s internal grade assigned after moderation of the specific loan by the user. This grade provides a guide to the average interest rate lenders have offered to borrowers according to these scores.
Concern about the spike of unsecured lending in South Africa has resulted in calls for heightened regulation. Under the recently amended National Credit Act, the department of trade and industry has proposed new regulations. These include prescribed affordability assessments. Emery said he welcomed the affordability assessments, as they would protect borrowers who could not afford to take on additional debt.