We’ve all been there: You need a loan because you don’t have any money. But if you had the money you wouldn’t need the loan.
This dilemma is often described as a vicious circle. Credit flows to those who need it least because they—or maybe their great-grandparents—demonstrated an ability to pay back a loan. This crowds out those who urgently need funding to start or grow a business.
But it might be time to end this rigged game. Since the dawn of the digital era, it has become increasingly easy to access information that can be viewed favorably about potential borrowers—information about their reputation and dependability that includes but is not limited to their financial history. And now, with the advent of blockchain technology, the day has arrived when lenders can act on this information actually extend credit.
This puts Colendi in a position to help its clients turn this vicious circle into a virtuous one.
Why are borrowers and lenders flocking to Colendi?
There are roughly 7 billion people in the world, so perhaps 700 billion things people need money for.
But as many good reasons as there are to borrow peer-to-peer (P2P), there’s one ultimate, overarching reason to lend P2P, and few in the banking world want to discuss it:
If you have a bank account, you’re already a lender.
More than 60% of the world’s adults have at least a few dollars or dinars or lire deposited in an institution. They’re mainly motivated by the prospect of keeping their money safe while receiving interest or—for the shariah-compliant—an expected profit rate. The appeal is undeniable.
But the money you deposit doesn’t go into a vault to remain untouched until you ask for it back. Rather, it’s redeployed as capital and lent out to those the bank deems more worthy of it. What they pay you in for the privilege of letting them take your money is a pittance compared to the interest rates they charge to people looking to expand a business or buy a home or pay for studies. The whole reason banks take deposits in the first place is so that they have a supply of other people’s money to make loans from.
The bank isn’t safeguarding your money. It’s renting it. You’re already making loans. You’re just trusting the bank and its credit scoring algorithms to decide who is most deserving of your money.
Viewed through that lens, it’s no wonder that an ever-growing number of individuals are choosing P2P lending. They get to pick their own borrowers, ensuring that they never do business with people who don’t rise to their own standards of honesty and integrity. This human connection ensures that the businesses and individuals funded are likely to make the world a better place as they pursue their personal interests. And it also means that this new class of lender can use non-financial as well as financial metrics to determine the likelihood of getting paid back in full and on time. Whatever interest rate the borrower and lender agree on is bound to be a) less than the borrower would’ve gotten at the bank and b) more than the lender would’ve been paid in interest on their deposits.
The death of demographics?
Despite the surprisingly high number of people with bank accounts, there are still more than 2 billion people without them and, thus, without access to credit markets. It’s no stretch to estimate that there are indeed 2 billion people in the world who can’t be counted on to pay back the money they owe, but it’s doubtful these are the same 2 billion people.
The unbanked’s route to credit markets is fraught with difficulty, but even those with some money on deposit face many of the same obstacles.
Let’s take the example of the United States. On average, Americans are wealthy. But then again, on average, flipped coins come up neither heads nor tails. As in most the world, there is a chasm between the haves and have-nots. And which side of that gulf you’re on might have little to do with how much good could be done by lending you money, or even your likelihood of scrupulously paying down your note.
So who gets access to credit in the U.S.?
One study indicates that barely half of African-Americans had access to credit cards, compared with 80% of white Americans. The U.S. population is keenly aware of this, according to a Federal Reserve report that suggests African- and Hispanic Americans are far less confident that they’ll be approved for non-mortgage credit.
There is without a doubt a stark contrast in credit access when it comes to educational attainment. An American with a college degree has a 62% chance of getting a credit card, compared to 23% for a high school graduate.
But the real source of credit inequality throughout the world is almost certainly gender. Banks simply don’t treat women the same as men, and this is a global issue. A woman might be just as likely to get a business loan as a man, but she will probably have to put up more collateral and pay higher interest.
“Female entrepreneurs report either difficulties or higher costs in accessing bank credit. These problems can be either the result of supply-side discrimination, or differences in profitability between female- and male-owned firms,” according to an Italian study. “Gender does not affect the likelihood of obtaining a bank loan. However … the probability of having to pledge collateral is higher than for male-owned firms. … Differences in credit access are the result of discrimination and structural differences between male- and female-owned firms.”
Other studies have demonstrated that men tend to take on more debt yet also tend to have higher credit scores. This discrepancy is magnified with age, as 65-year-old men are considered far more deserving of debt financing than 65-year-old women as judged by traditional credit ratings. This could be explained at least in part by men’s tendency to make more money than women, but that just underscores the structural inequality.
This might be the way it is, but it’s not the way it has to be. When you go the P2P route, there are more inclusive measures of how good a credit risk you might be.
Your age doesn’t matter. Your gender doesn’t matter. You matter.