As a response to the long-term failures of traditional banks to fairly measure the creditworthiness of potential borrowers, many organization and businesses in Fintech sector are increasingly harnessing machine learning and AI to better gauge the creditworthiness of individuals. Unlike traditional financial institutions, these organizations are capable of taking into account so much more than solely people’s credit history when evaluating their credibility before offering a loan. Diverse data sources like social media accounts, text messages, and even locations data can provide rather reliable and accurate information about the customers of lending firms all around the world. As the methodologies preferred by developing technology and innovation sector start to dominate, people are also increasingly getting access to mobile applications, which means that there will be more opportunity for them to be financially empowered in the digital age. Proffered by developing technology and innovation sector, newer methods like having a mobile phone and less internet connectivity are no longer precluding economically disadvantageous for people who need a loan.
In today’s world, some starts-up aim to offer micro-credits to these less fortunate people with the help of lending circles. Colendi project was designed to enhance and expand microcredit opportunities for the un/underbanked people by offering a P2P financing platform using Blockchain and smart contracts.
Peer to peer lending
As a new way of loan origination in the age of digitalization, peer to peer lending entered the credit markets with the P2P platform Zopa in 2005. Today, many businesses and organizations targeting the financial inclusion of larger masses enable people to get the loans directly from other individuals, cutting out the traditional financial institutions as the middleman.
In the previous years, this kind of lending model was only perceived as an innovative tool by small businesses to offer credit access to people who would be spurned by a traditional bank. In recent times, however, P2P lending mechanism has enabled more consumers and lenders to take place in transaction and investment activities with lower and flexible interest rates but with higher returns compared to the savings offered by traditional financial institutions.
P2P lending model that allows the loan decision process to be controlled by private lenders and borrowers, and lending platforms through their websites. In these platforms, while borrowers can request a loan by providing complementary information about their current financial situation, like income or open credit lines, lenders can offer a loan with an interest rate derived upon this information.
In distributed P2P applications, peers self-organize and cooperate to effectively complete certain tasks such as forwarding files, delivering messages, or uploading data. However, because of the concerns over energy and bandwidth consumption, users may refuse to cooperate. Therefore, it is necessary for each user to receive a satisfying reward to compensate for its resource consumption for cooperation. On the other hand, satisfying incentive mechanisms are still missing in the P2P lending model.
Microfinance solution on Blokchain
As an innovative solution to the lack of incentive mechanisms in P2P system, more rewards for actors in micro-finance ecosystem can be emerged by Blockchain technology through the smart contract mechanism rewarding participants in the wake of their respective contribution to the network. Another advantage of Blockchain is that anyone can act as a microfinance institution (MFI), a lender, or a borrower.
“…Borrowers register with a MFI, the MFI credit scores the borrower, and lenders give out loans to the MFI who are then scored by the lender. Hence in this system, we have a reputation mechanism for borrowers, MFIs, lenders. Once the system is up and enough loans are given out, these loans can be securitized and sold to investors…”
Colendi: Milestone in microfinance ecosystem
As Blockchain is increasingly perceived as an infrastructure enabling a solution to the problems that many microcredit institutions and platform face in the digital age, many projects have started to integrate Blockchain technology into their business strategies. As one of the most outstanding of these projects, Colendi emerged as a Blockchain-based decentralized credit scoring mechanism and micro-credit platform targeting to provide a secure and democratic service for everyone and consequently, disrupt the traditional definition of banking. With the promise of financial inclusion and shared economy, Colendi company was established in 2018 in Zug, Switzerland although the early phase of the organization and team-building dates back to February 2016.
Upon considering the 1.7 billion people in today’s world who have no access to any bank account and thus, credit history due to the inadequate credibility assessment systems; Colendi project is crafted as a master platform for many un/underbanked people all around the world. In Colendi ecosystem, users can create their Colendi ID and get Colendi Score and can join Colendi network to access microcredits, P2P financing and installment shopping by simply using Colendi app.
As Colendi network expands, in addition to institutional lending, P2P lending will also be introduced as a complementary method in our ecosystem. Potential borrowers will be able to finance their shopping list through Colendi mobile application, but this time from individual lenders. Token compensation for queries will be provided by the lending party. By contributing to this process, both sides will get certain benefits for building a more decentralized community and putting the underutilized savings into use. Colendi also aims to improve the P2P financing platform to such a point, where users can lend their excess credit they are entitled to deploy via third parties or directly via Colendi Network, as the ecosystem matures to being a viable instrument for microcredit markets.