Online or Offline?: The Rise of “Peer-to-Peer” Lending in Microfinance
Journal of Electronic Commerce in Organizations
Abstract
Over the past five years, “peer-to-peer†lending websites have become a new approach to mobilizing funds for on-lending to impoverished people in developing countries (microfinance) and domestic markets. In this paper, the authors review these developments and use the analytical lens of asymmetric information and transactions costs to explain the characteristics of the different models in operation. The authors find that “peer-to-peer†lending is more of an aspiration than a reality. Although web 2.0 technologies have offered new means of mobilizing funds, the borrowing mechanisms at work follow mainstream conventional approaches to the management of lending.
... However, there are certain limitations inherent in investigating the creditworthiness of the borrowers for P2P lending platforms. Since traditional scoring models treat credit risk prediction as binary classification problems, P2P lending platforms suffer from inaccurate scoring mechanism [17]. In addition, understaffing of investigation departments to evaluate debt capacity of borrowers remains another fundamental limitation [18]. ...
... Since traditional scoring models treat credit risk prediction as binary classification problems, P2P lending platforms suffer from inaccurate scoring mechanism (Ashta et al., 2010). In addition, understaffing of investigation departments to evaluate debt capacity of borrowers remains another fundamental limitation (Chen et al., 2018). ...
... To address the aforementioned issues, by adopting stakeholder approach, the conflicts of interest among regulatory authorities, P2P lending platforms, and borrowers are analysed in this paper. Besides, due to the asymmetric information available, short-sightedness, and self-interest [24,25], P2P lending participants may show bounded rationality in multistage games. An EGM is developed, and the asymptotic of the equilibrium and evolutionary stability strategies of the EGM are analysed. ...
In China, most of peer-to-peer (P2P) lending platforms do not possess operational sustainability due to excessive defaults. To address this problem, the conflict of interests among P2P lending participants is discussed using a stakeholder approach. An evolutionary game model (EGM) of three players is developed to analyse the interactions among regulatory authorities, P2P lending platforms, and borrowers. Then, the asymptotic of the equilibrium and evolutionary stability strategies of the EGM are analysed. Results indicate that either the P2P lending platforms or borrowers will choose “noncompliant operation” or “default” strategies from a short-term perspective, and the strict supervision of the P2P lending platform in the short term is necessary for the sustainable operation of the platform. When supervision is intensified in the early stage and regulatory pressure becomes a normal state, P2P lending platforms and borrowers will actively select “compliant operation” and “repayment” strategies even if there is a lack of regulation in the future. Meanwhile, the behavioural strategies of P2P lending participants can be changed to conform to the sustainability of P2P lending by reducing the costs of strict supervision and increasing the damage caused by general supervision, reward and punishment coefficient for P2P lending platforms, repayment incentives of borrowers, and defaulting opportunity costs. Finally, suggestions for regulating the behaviours of P2P lending participants and promoting sustainability of P2P lending industry are discussed.
... The only hope for the future seems to be based on the recent development of crowdfunding which has been examined in the literature (Assadi & Ashta 2009, Johnson et al. 2010, Assadi & Ashta 2012, Assadi & Ashta 2014, Attuel-Mendes 2014, Ley & Weaven 2011, Mollick 2014. Crowdfunding is developing not only in the developed world (Ashta & Assadi 2010a), but also in the developing world (Ashta & Assadi 2010b). ...
Microentrepreneurs need financial capital as well as human and social capital. Banks prefer refinancing microfinance institutions and capacity building organizations rather than dealing with microentrepreneurs directly. In this chapter, we examine if the advent of crowdfunding could disturb such relations. Our research question is “what is the perception of people working in support networks on the changing of the relations between banks, support networks and crowdfunding platforms?” In this chapter, we first provide a background on entrepreneurship and coaching in France, emphasizing the role of the entrepreneurial support networks. Thereafter, we present our research methodology based on semi-structured interviews with managers in these support networks. The findings from these interviews are presented in the third section. We find that while the support networks are aware of crowdfunding initiatives, they do not think it will make a major change to the existing relations. This finding is original because most other research seems flabbergasted by the dramatic speed of development of crowdfunding sites. In the fourth section, we analyze the discourse using Nvivo software. The recommendations that emerge from this analysis point to using crowdfunding more as a tool of image building and communication.
... While some of the above findings on Kiva's intermediarybased model are important to our considerations, we argue that the interest-rate free P2P lending setting is very different. As Johnson et al. (2010) point out, most so-called P2P microlending models actually do not facilitate the direct interaction of borrowers and investors and thus can not be seen as real P2P lending. This fundamental difference between the intermediary-based model and real P2P model would probably lead to different investor behavior. ...
Based on a unique data set on US direct microloans, we study the funding determinants of interest-free peer-to-peer crowdlending aimed at borrowers in the US. By performing logistic regressions on funding success and Tobit regressions on the reversed funding time, the existence of a social underwriting by a third-party trustee and information in the description texts fostering the investors’ trust are shown to be the main predictors of successful funding. Regarding social impact, the possibility to empower women and groups of borrowers appeals to the investors, whereas empowerment of the family or community beyond the borrowers themselves appears to remain unappreciated. When examining the vulnerability of the borrowers as a predictor, the results manifest differences amongst the attitudes of the investors towards social impact. In the subsample of non-endorsed loans, the investors appear to prefer to support borrowers with an immigration background. In contrast, this is not the case with endorsed loans.
Decision-making behavior can be capricious and may vary from individual to individual. This paper provides a straightforward method for the empirical identification of the narrative style affecting financial decisions under time pressure. Punctuation, Chinese characters and sentence length constitute different narrative styles. Using data from Renrendai, we find that as the number and type of punctuation marks in narratives increase, the loan funding and repayment performance increase. Also, as the number of characters and long sentences in narratives increases, loan funding increases, whereas loan performance suffers. These conclusions remain valid after robustness checks.
This chapter explains the overview of microfinance; the efficiency of microfinance institutions (MFIs) and sustainability; microfinance and interest rates; microfinance and information technology (IT); microfinance, social capital, trust, and repayment rates; microfinance and health care; informal microfinance institutions (IMFIs) and tourism entrepreneurship; and the importance of microfinance in emerging nations. Financial services provide a method for people and businesses to obtain credit and manage available assets on a continuous basis. Microfinance has a significant role in bridging the gap between formal financial institutions and rural poor households. MFIs can access financial resources from banks and other financial institutions and provide financial services to poor households. The chapter argues that promoting microfinance has the potential to enhance financial performance and reach economic goals in emerging nations.
This chapter addresses the reactions from communities of early supporters of companies turning from participative forms of financing to classical venture capital and/or buyouts by blue chip firms. Through the study of two recent cases of major crowdfunding successes, namely Oculus VR, a Californian company which obtained nearly 2 Billion, and Mojang, a Swedish company formed to manage the unprecedented success of a video game, Minecraft, sold to supporters from its unfinished versions, the firm being later purchased by Microsoft for $2.5 Billion. Both of these companies had to manage the changes in the nature of their relationships with their early supporters. This chapter proposes typologies of potentially harmful changes induced by attempts to transform bonding social capital into bridging social capital, as well as countermeasures available to entrepreneur to control the effects of such situations.
Peer‐to‐peer (P2P) lending has emerged as a network form of crowdfunding that facilitates the loan originations outside the traditional banking model. In China, the combination of imperfect financial development and Internet technology has led to the widespread growth of a P2P network lending market. Using the theoretical lens of information asymmetry, we identify the key sources of risks facing contemporary Chinese P2P companies. Results from our two regression models reveal several factors that can be used as predictors for risk and financial management, including marriage, income, and house property. Our findings also show that collective inference by non‐expert lenders can accurately draw an inference from soft/nonstandard information. The construction of such a predictive system is important for ensuring the good operation of P2P network lending platforms in emerging economies.
This paper explores whether microcredit borrowers are charged unreasonably high interest rates. It draws on data from Microfinance Information Exchange and the MicroBanking Bulletin. The paper does not find evidence suggesting any widespread pattern of borrower exploitation by MFIs charging high interest rates. Findings include: MFI interest rates have been declining by 2.3 percentage points since 2003, much faster than bank rates; MFI rates are significantly lower than consumer and credit card rates as well as rates charged by informal money lenders in most countries; MFIs have to pay more than banks when they leverage their equity with liabilities; Administrative costs are the single highest contributor to interest rates, but they have been declining since 2003; Interest rates, profits and administrative costs have shown a downward trend in recent years. Finally, there is strong empirical support for the proposition that operating costs for microloans are much higher than that for normal bank loans. Therefore, sustainable interest rates for microloans have to be significantly higher than normal bank interest rates.
According to basic economics, if demand exceeds supply, prices will rise, thus decreasing demand or increasing supply until demand and supply are in equilibrium; thus if prices do their job, rationing will not exist. However, credit rationing does exist. This paper demonstrates that even in equilibrium, credit rationing will exist in a loan market. Credit rationing is defined as occurring either (a) among loan applicants who appear identical, and some do and do not receive loans, even though the rejected applicants would pay higher interest rates; or (b) there are groups who, with a given credit supply, cannot obtain loans at any rate, even though with larger credit supply they would. A model is developed to provide the first theoretical justification for true credit rationing. The amount of the loan and the amount of collateral demanded affect the behavior and distribution of borrowers. Consequently, faced with increased credit demand, it may not be profitable to raise interest rates or collateral; instead banks deny loans to borrowers who are observationally indistinguishable from those receiving loans. It is not argued that credit rationing always occurs, but that it occurs under plausible assumptions about lender and borrower behavior. In the model, interest rates serve as screening devices for evaluating risk. Interest rates change the behavior (serve as incentive mechanism) for the borrower, increasing the relative attractiveness of riskier projects; banks ration credit, rather than increase rates when there is excess demand. Banks are shown not to increase collateral as a means of allocating credit; although collateral may have incentivizing effects, it may have adverse selection effects. Equity, nonlinear payment schedules, and contingency contracts may be introduced and yet there still may be rationing. The law of supply and demand is thus a result generated by specific assumptions and is model specific; credit rationing does exist. (TNM)
Examines the role that institutions, defined as the humanly devised constraints that shape human interaction, play in economic performance and how those institutions change and how a model of dynamic institutions explains the differential performance of economies through time. Institutions are separate from organizations, which are assemblages of people directed to strategically operating within institutional constraints. Institutions affect the economy by influencing, together with technology, transaction and production costs. They do this by reducing uncertainty in human interaction, albeit not always efficiently. Entrepreneurs accomplish incremental changes in institutions by perceiving opportunities to do better through altering the institutional framework of political and economic organizations. Importantly, the ability to perceive these opportunities depends on both the completeness of information and the mental constructs used to process that information. Thus, institutions and entrepreneurs stand in a symbiotic relationship where each gives feedback to the other. Neoclassical economics suggests that inefficient institutions ought to be rapidly replaced. This symbiotic relationship helps explain why this theoretical consequence is often not observed: while this relationship allows growth, it also allows inefficient institutions to persist. The author identifies changes in relative prices and prevailing ideas as the source of institutional alterations. Transaction costs, however, may keep relative price changes from being fully exploited. Transaction costs are influenced by institutions and institutional development is accordingly path-dependent. (CAR)
Examines the role that institutions, defined as the humanly devised constraints that shape human interaction, play in economic performance and how those institutions change and how a model of dynamic institutions explains the differential performance of economies through time. Institutions are separate from organizations, which are assemblages of people directed to strategically operating within institutional constraints. Institutions affect the economy by influencing, together with technology, transaction and production costs. They do this by reducing uncertainty in human interaction, albeit not always efficiently. Entrepreneurs accomplish incremental changes in institutions by perceiving opportunities to do better through altering the institutional framework of political and economic organizations. Importantly, the ability to perceive these opportunities depends on both the completeness of information and the mental constructs used to process that information. Thus, institutions and entrepreneurs stand in a symbiotic relationship where each gives feedback to the other. Neoclassical economics suggests that inefficient institutions ought to be rapidly replaced. This symbiotic relationship helps explain why this theoretical consequence is often not observed: while this relationship allows growth, it also allows inefficient institutions to persist. The author identifies changes in relative prices and prevailing ideas as the source of institutional alterations. Transaction costs, however, may keep relative price changes from being fully exploited. Transaction costs are influenced by institutions and institutional development is accordingly path-dependent. (CAR)
International capital flows are constrained by a lack of complementary human capital, information asymmetries and transaction costs for small loan sizes. Extant research has provided a myriad of economic and cultural explanations of how microcredit has overcome these. Based on these, the paper develops a simple economic framework that accounts for these behavioral and institutional factors: a discontinuous marginal revenue curve and a U-shaped supply curve of capital for the microcredit environment. It then uses these analytical tools to explain capital flows and interest rates charged by traditional moneylenders. Finally, it uses these tools to present the growth of microcredit and the increase in financial flows and to explain why microcredit interest rates are lower than those of moneylenders, but higher than those of commercial banks to wealthier borrowers.
I. Introduction, 488. — II. The model with automobiles as an example, 489. — III. Examples and applications, 492. — IV. Counteracting
institutions, 499. — V. Conclusion, 500.
The design credit and risk institutions in low-income countries provides one of the most exciting testing grounds for theories of contracting with imperfect information and limited enforcement. This paper reviews some of the recent literature, with a special focus on nonmarket institutions that cope with risk and provide credit. This literature attempts to bring together insights from economic theory, especially information economics, contract theory, and mechanism design theory. However, it is also applied, being motivated by the circumstance of the poor countries that their authors have visited and studied. Copyright 1995 by American Economic Association.
There is a new wave of business communication tools including blogs, wikis and group messaging software - which the author has dubbed, collectively, Enterprise 2.0 - that allow for more spontaneous, knowledge-based collaboration. These new tools, the author contends, may well supplant other communication and knowledge management systems with their superior ability to capture tacit knowledge, best practices and relevant experiences from throughout a company and make them readily available to more users. This article offers a paradigm that highlights the salient characteristics of these new technologies, which the author refers to as SLATES (search, links, authoring, tags, extensions, signals). The resulting organizational communication patterns can lead to highly productive and highly collaborative environments by making both the practices of knowledge work and its outputs more visible. Drawing on case studies and survey data, the article offers managers a set of ground rules for implementing the new technologies. First, it is necessary to create a receptive culture in order to prepare the way for new practices. Second, a common platform must be created to allow for a collaboration infrastructure. Third, an informal rollout of the technologies may be preferred to a more formal procedural change. And fourth, managerial support and leadership is crucial. Even when implanted and implemented well, these new technologies will certainly bring with them new challenges. These tools may well reduce management's ability to exert unilateral control and to express some level of negativity. Whether a company's leaders really want this to happen and will be able to resist the temptation to silence dissent is an open question. Leaders will have to play a delicate role if they want Enterprise 2.0 technologies to succeed.
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