ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) has granted approval for launch of a Peer-to-Peer (P2P) Lending Platform which connects borrowers with individual lenders to meet the borrowers’ loan requirements and provide small and medium enterprises and retail investors short term investment opportunities.
In this connection, the SECP Wednesday granted approval for launch of the P2P Lending Platform under the first cohort of Regulatory Sandbox to support and encourage Fintech revolution in the country.
P2P lending is an innovative alternative digital platform that connects borrowers with individual lenders, who come together to meet the borrowers’ loan requirements. The P2P lending helps the borrowers give out short-term loans that enable the SMEs to scale up their business, eventually qualifying them to take bigger bank loans. Therefore, the P2P sector has emerged as an alternate investment and lending platform.
This current approval for testing and experimentation of a P2P Lending Platform by SECP is also attributed towards development of an ecosystem for SME financing to achieve higher growth prospects and to create new employment and business opportunities.
According to the SECP’s data, currently only 4 percent of the micro, small and medium enterprises (MSMEs) have access to credit from formal financial institutions. The banks in the country are too risk averse to lend to MSMEs, rather they prefer investing in t-bills and prefer lending only to large corporations. Limited access of credit by these MSMEs hampers the overall productivity of the country as well. As the financial institutions are not willing to lend to these MSMEs the only option left for them is to get capital from ‘loan-sharks’ at predatory rates.
On the other hand there are less than 50,000 retail investors in Pakistan who actively invest, domestically.
Despite major change in dynamics there is no readily accessible platform for the average retail investor; those in the middle of the income opportunity pyramid, as there are no wealth management or investment products designed for them. These individuals have little understanding of stocks and mutual funds and even if they do, the barrier to entry is quite high with lengthy paperwork and archaic signup processes, SECP said.
This leaves a large segment of the society as an opportunity to create the right products with an optimal return. Development of an innovative digital solution that kick starts economic productivity through a ripple effect from the core of the value chain while introducing simple short term investment opportunities for the average retail investor and at the same time fulfilling the credit needs of MSMEs, SECP added.
During the testing/experimentation stage, the P2P lending platform shall operate within pre-defined parameters and is subject to certain terms and conditions. Furthermore, specific eligibility criteria shall also apply on selection of each lender/borrower on the platform. These terms and conditions have been imposed to address the inherent risks involved in the operation of such platforms in the absence of a regulatory framework. However, these terms and conditions shall be reconsidered parallel to the results of the experimentation stage of the subject P2P Lending Platform. This will help the SECP devise the much needed enabling regulatory framework.
The SECP regulatory sandbox is the framework to accommodate provision of financial services that leverage new technologies. It allows FinTech firms to test their services and facilitate adoption of new technology in a live environment within the limited, well-defined scope.
When contacted, sources said that with increasing proliferation of digital transactions, fintech innovations, and demand for affordable credit, the P2P sector has emerged as an alternate investment and lending platform. Peer-to-peer (P2P) lending, that matches borrowers and lenders directly and eliminates an intermediating bank, has gained traction in recent years across the globe. With P2P lending being a major success and a whole new arena in India we are confident Pakistan can scale this market at a fast pace and serve the underbanked segments of our society in a more equitable manner, they added.
According to the World Bank, it is estimated that the credit demand and supply gap in India is $380 billion.
The current size of Indian P2P market is around IN? 200 crore, and it is projected to be $4-5 billion by 2023.
Pakistan is a highly underserved market as compared to India when it comes to access to credit. In 2018 the P2P lending market was valued at $15 billion and is expected to grow at a CAGR of 19% surpassing $44 billion by 2024, making it a tried and tested digital solution bridging an existing market gap. There are many successful foundations that are working towards a more inclusive financial infrastructure; however, there is no P2P lending platform in Pakistan, as prevailing in the global market.
Copyright Business Recorder, 2020