The traditional banking system is currently facing a challenge in keeping up with changing customer demands feels Bahaa Abdul Hussein. Under such circumstances alternate financial models leveraging new technologies are growing rapidly. Peer-to-Peer (P2P) lending is a model that brings together lenders with a more comprehensive credit score and borrowers willing to fund them. This can contribute significantly to financial inclusion by addressing several key issues faced in traditional banking.
Access to Credit for Underserved Individuals and Businesses
Credit scores calculated by traditional financial institutions leave many borrowers with very few opportunities to get loans. Those individuals and businesses with low traditional credit ratings can benefit from P2P lending platforms as they offer an alternative source of funding. This is because they assess creditworthiness using non-traditional data and algorithms, enabling them to extend credit to a broader range of borrowers.
Lower Barriers to Entry
Those businesses and individuals who cannot meet the stringent eligibility criteria and documentation requirements need a more user-friendly alternative. P2P lending platforms can provide this as they have a more streamlined lending process requiring less paperwork and financial literacy.
Flexibility in Loan Sizes
Small loans are not cost-effective for traditional financial institutions. This leaves borrowers who seek small loans without options. But P2P lending platforms are much more flexible and can connect such borrowers with potential lenders looking to make small investments.
Diversification of Lenders
P2P lending offers investment opportunities to a variety of lenders from individuals to small and mid-sized enterprises. By investing in a large range of borrowers investors can diversify their portfolio and potentially gain higher returns.
Geographical Reach
Remote and underserved borrowers from areas which do not have access to physical banks are beginning to rely on P2P lending as an alternative. Since they operate online, P2P lending platforms can connect borrowers with lenders across vast geographical distances.
Credit Building Opportunities
Often those who have poor traditional credit scores, do not get the opportunity to improve them. By taking P2P loans and successfully repaying them, borrowers can build better traditional credit scores.
To Sum Up
Although P2P lending has certain associated risks like potential defaults and lack of regulatory protections, it has the potential to ensure financial inclusion. If P2P lending platforms implement robust risk assessment procedures and educate borrowers and lenders about the associated risks, they can certainly keep growing at a rapid pace. By complying with relevant financial regulations they can protect the interest of all stakeholders including those who are underserved by traditional banking.
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