P2P Start-ups: Finding an Opportunity in the Midst of a Lingering Recession

The global recession or what has come to be known as the ‘great recession’ –in direct reference to the 1930s era Great Depression-has been with us unbelievably for the last 3 and a half years. It doesn’t seem like it does it? Many had predicted that it would turn out to be a ‘W’ or maybe a ‘U shaped or even a ‘double dip’ recovery by now, with most commentators assuming that we would most likely have seen its tail end with a year or two. Most- if not all of them- have been proved embarrassingly wrong! Countries such as the UK, US, Spain, Ireland, Hungary, Portugal –the list goes one and on and on and on- are still counting the cost of the recession in terms of lost jobs, productivity and in some cases, sovereign default! Recovery it seems, whatever alphabet sounds sexy, W or U shaped –is still yet to be seen in many cases.

Looking at the effects of the recession from the microfinance industry perspective however is what makes very interesting reading. Microfinance as such, is an industry that is curiously not correlated directly to the mainstream financial markets. What this means is that whilst the main stock indices around the world have fallen during this downturn (ignoring the couple of months when there was a half hearted Bull Run that eventually ran out of steam), the overall size of the microfinance industry has been growing in leaps and bounds within the same period. Focussing on the P2P start-up platforms for example, the US P2P platform Kiva has seen its online lenders increase to 146 million US$ over the last 5 years which covered the period when the recession began, specifically with the fall of Lehman Brothers, which triggered a load of other unfortunate events in the US and the world. The value of loans that have been on lent to borrowers in Africa, Asia and other emerging economies has seen 378,000 entrepreneurs funded all at a low default rate of 98% as at today. This is a fantastic achievement when compared to the number of banks that have failed, companies that have been declared bankrupt, the number of personal bankruptcies that have occurred and factories that have been shut down due to low consumer spending.

It is indeed this development that proves beyond a shadow of a doubt that the social investor-who is ideally the main target customer of all P2P platforms, is clearly not directly influenced by the negative developments in the world markets when it comes to making his /her investment decisions. In fact if anything, one could say that the worse the lower their trust in mainstream banking, the higher the probability that the social investor will choose a ‘social avenue’ for their investment dollars.

This is a very powerful trend and one that more and more P2P micro lending start-up entrepreneurs are starting to sit up and pay attention to. This is proven by the fact that in the last 12 months we have seen a flurry of activity in the European P2P start-up space. The French market micro-lending platform Babyloan is now actively in business, while MyAzimia which is UK focused, is aiming to launch in the latter part of the year. The myAzimia business model is aiming at differentiating itself from existing platforms by building a best in class platform as well as focusing on micro loans in specific industry niches. US based P2P micro lending platform energy in common has also launched in the last 3 months with also with a niche focus on micro loans related to energy. Planet Rating, a well known French Microfinance rating agency has also made the decision to launch a P2P platform and they have invested significant amounts of capital in an initiative that is expected to launch later this year. There are also 3 or 4 other smaller platforms that have also launched in the p2p market place although both their strategy and their platforms are not very clear in terms of quality and sustainability in the long run.

These developments goes to show that P2P micro lending platforms are jumping onto the bandwagon that Kiva started by targeting potential social investors who believe in the concept of the double bottom line where an investor can make a financial return and at the same time make an significant difference in the lives of micro-loan recipients.

What these launched and soon-to-launch platforms have in common is that they have created opportunity from the huge threat that is the ongoing global recession.  The existence of these platforms has also greatly helped emerging economy MFIs (microfinance institutions) to leverage new sources of capital and diversify their existing capital base. It is estimated that MFIs who access capital through P2P platforms have the potential to increase their capital base by anything from 20 to 50% .

The hope is that at some point the Great Recession truly does come to an end, but in the mean time, success and luck (one needs both!) to all those budding P2P entrepreneurs who are seeking opportunity amidst the doom and gloom.

Guest post contributed by Kanini Mutooni

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3 thoughts on “P2P Start-ups: Finding an Opportunity in the Midst of a Lingering Recession

  1. It’s actually quite common that innovations start during recessions. Many companies are in bad shape and they might be desperate enough to try something totally new. Often they fail, but sometimes result is truly game-changing.

    I’m bit worried if there is room for all these new microfinance institutions. But from users’ perspective, competition and multiple options are a good thing.

  2. some Updates on startups live in service from UK
    yes-secure.com now 2 months old and doing reasonably well as startup, similar to zopa with facebook like user engagement model
    fundingcircle.com also open for lenders

  3. Quite optimistic post. You should say that prosper is in a bad situation as the most part of lenders are loosing their money. Some other companies are lending their own money because of a lack of lenders.
    How a peer to peer lending company can claim to save people from the credit crunch and insolvency when they allow APRs higher than 15% on their website? This is not sustainable.

    My opinion is that peer to peer lending sector can’t compete with banks and investment funds in the long run if they offer the same benefits than the banks: ROI. That’s why all the websites based on community reputation and philantropic motivations are stronger and less vulnerable to the market fluctuations than ROI-based p2p websites.

    PS: The most part of peer-to-peer lending website are not profitable.

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