Cf Series 6: Not Disrupting, Building – Crowdfunding and P2P Lending Will be an Integral Part of new Financial Systems in Developing Economies
Alternative finance is often seen as the disruptor of traditional financial models, such as bank lending and investment in startups. However, just as many developing economies have skipped investing in older forms of infrastructure such as landline phones and gone straight to using mobile, alternative finance models could do the same for the financial system. These new financial intermediaries could become the building blocks of a financial system providing personal loans and business finance in developing economies, where demand for finance is increasing but traditional financial infrastructure is underdeveloped.
Following in the footsteps of M-Pesa
Access to appropriate and sufficient finance is vital for startups and SME’s and as developing economies grow, the provision of this finance will be vital to develop a strong and productive population of businesses. Large groups of the2.5 billion people globally who are unbanked with few opportunities to access banks or the opportunity to borrow money at a reasonable rate, will look for new ways of getting finance or investing, saving or lending money. One study by the world bank estimates that there is an opportunity for up to 344 million people in developing economies to participate in crowdfunding.
In emerging economies, where alternative finance providers will, in many cases, be entering or trying to build the financial infrastructure at the same time as more traditional providers such as banks, their low cost digital platforms are more likely to become the original building blocks of a new financial services market, rather than being the disruptors of an existing market.
The rapid growth in mobile technology and access to the internet (key components in online alternative finance models) in developing economies,such as in Africa, is further indication of this potential. One early and related forerunner is the mobile money transfer service, M-Pesa, which has grown rapidly in countries such as Kenya (where it has got almost 20 million users). M-Pesa’s success is underpinned by its ability to provide a low cost alternative for those working in urban areas struggling to get bank accounts and need to send money. That same trend has the potential to drive rapid growth in crowdfunding and P2P lending in developing economies, at the expense of more traditional financial institutions like banks. One early example of this is how the M-Changa platform in Kenya and Tanzania (built on many of the same technologies behind M-Pesa), allows people to use their mobile money to crowdfund projects.
The rapid growth of particularly the P2P lending market in more developed, but still developing economies such as China has also been impressive. The market grew from $30m in 2009, to $940m in 2012 and is estimated to reach $7.8bn by 2015, is again indicative of how a lack of an effective banking systemcan lead to mass adoption of alternatives.
The growth of of P2P lending and crowdfunding in developing economies will be facilitated by a combination of local or regional crowdfunding platforms focusing specifically on supporting SMEs in these countries and by some of established European or U.S. platforms expanding their reach to help launch in developing new markets. China-based Demohour, which provides a reward-based platform for Chinese businesses, and SeedAsia, which operates a pan-Asian equity crowdfunding platform for Chinese & and Southeast Asian tech startups are two examples of the former. Examples of African platforms include South African rewards platform Startme and P2P lenders Lendico andZidisha.
Facilitating more and new types of investment from developed to developing economies
In addition to facilitating investment, lending and donation within different developing economies, alternative finance models also have the opportunity to create new ways of distributing finance between people and organisations in developed economies and those seeking finance in developing economies.
The potential in this has so far been primarily demonstrated by platformsdriven by social motives. Kiva, which has helped facilitate more than 1 million zero interest loans from lenders in developed economies to low-income entrepreneurs in developing countries and donation based platforms such asGlobalGiving are two examples of this.
However there is a growing trend of platforms facilitating investments from developed to developing economies, seeking a return for investors, either through receiving a product, equity or interest on repaid loans. Established International platforms already operating in the US or Europe will play a big role in this. This is probably best exemplified by how rewards based platforms like Kickstarter and Indiegogo enables projects in developing countries to attract support from a global community of backers. US-based Indiegogo claims it has helped entrepreneurs launch reward-based campaigns in more than 200 countries.
Building on this a number of platforms have been setup with the specific purpose of facilitating investment rather than just donations from developed to developing economies. One such platform is EmergingCrowd, a London-based equity crowdfunding platform which aims to give retail investors in the UK the opportunity to directly buy shares and bonds in companies based in emerging markets, predominantly in Africa. In similar style the Sunfunderplatform has experimented with offering investors an opportunity to invest in a diversified portfolio of off-grid solar projects in developing economies and earn a financial return. This, amongst others led to a $10,000 investment from 86 investors in a solar light project in the Chadiza district in Zambia. Other examples include Homestrings, which provides investment opportunities for international investments in real estate, financial services, telecoms and small to medium sized enterprises in 13 african countries.
Finally, platforms traditionally focusing on the opportunities in facilitating investment into companies operating in developed economies are beginning to explore the opportunities in emerging markets. One recent example of this is how UK-based equity crowdfunding platform Crowdcube helped facilitate a £122,000 investment in to the african business Shamba Technologies(registered in the UK but operating in Sub Saharan Africa).
While there is great opportunity and much of the platform technology is already in place the growth of alternative finance will also depend on the existence of skills and capacity amongst entrepreneurs and businesses in developing economies to use the models to raise finance. One attempt at addressing this is how the World Bank has set up the Kenya Climate Innovation Centre (KCIC) which is a crowdfunding mentorship programme for entrepreneurs in East Africa. Growth will also depend on the existence of financial services such as companies that can do due diligence for investments, credit scoring for P2P loans etc.
Building on this some potential future evolutions could be:
- As economies grow P2P lenders will take large parts of the market for personal and business lending in developing economies.
- Business angels and venture capitalist looking for investment opportunities in developing economies will use equity based crowdfunding platforms as the primary source for new investment opportunities.
- Crowdfunding platforms will drive the growth in the social impact investment market. International development agencies investing in projects such as renewable energy will see it as key way of identifying social ventures and mixing institutional funding with crowd-investment.