Thinking outside the (financing) box.
Can you describe the development of peer-to-peer lending in MENA? Marketplace lending is still a relatively new phenomenon in the MENA region. A big part of what we do is to educate investors in the potential for diversifying their existing portfolios with a different type of investment. It offers them a wide-range of choice as investors are able to browse through campaigns and select the ones that match their criteria best.
Liwwa only lends to small and medium enterprises (SMEs), and we continue to scale up that lending activity. As our underwriting activity grew from $2.3 million in 2016 to $5.2 million in 2017, the level of funding from retail investors nearly doubled. Retail lenders want to see a credible company, a solid portfolio and a low default rate. As long as Liwwa continues to deliver on those three criteria, we can build trust in the platform and hopefully build an ongoing relationship with new and existing investors.
Over the last 18 months banks have significantly scaled back lending activity to the SME sector. How as this affected P2P lending activity in the region? IFRS 9, with its provisioning rules, is one of the main drivers of banks' reticence to lend to SMEs. The market demand for loans hasn't appreciably changed, and one could argue that market risk has stabilised in many MENA economies--so the accounting rule change is having an outsized impact. Alternative financing structures such as these are poised to fill a need because much of the debt is treated on an off-balance sheet basis. Retail lenders and non-bank institutions can contribute to filling the SME lending gap given a difference in risk appetites and a more generous perspective on solvency ratios.
In your opinion, in what ways can banks work with P2P lending platforms? As a lending institution, the value of marketplace lending becomes apparent when you consider the challenge that banks face when it comes to managing solvency ratios and provisioning for non-performing debt. The marketplace allows other lenders-- both individuals and institutions--to share in the risk, thereby decreasing the balance sheet expense for everyone. Today, a well-diversified lender through a P2P lending platform earns an appropriate return with none of the implied solvency expense (for institutions).
We believe that the way forward is to work in partnership with the banking sector, not in competition with it. We are currently working with a number of banking institutions including Bank Al Etihad, Arab Bank, Capital Bank and Ahli Bank, and we are seeing a steady amount of interest and support from them. They participate alongside retail lenders to fund our live campaigns. That is a win-win collaboration because they can still lend to SMEs, while not needing to allocate the same amount of resources to the process. They can instead outsource the credit assessment and administrative work required.
What kind of challenges do you face in the P2P business? A key challenge is building awareness and educating our customers. Both with respect to our borrowers and to our investors. We want them to fully understand why they should work with us, the benefits for them, and also the risks. For investors, they stand to make high returns, but their investments are unsecured and diversification among campaigns is critical to minimise any potential loss in the event of a default.
How do you view the future of P2P lending in the region? With demand for SME funding at $240 billion, there is a significant opportunity to address the need for capital via marketplace lending. But it's only one part of a larger capital markets evolution that's got to occur in MENA. Lenders, marketplace or bank, must be able to distribute risk in a way that supports more lending.
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