Investigating peer-to-peer lending as a solution to unsecured lending in an unbalanced credit market

Abstract

The unsecured lending market in South Africa is characterised by a high consumer debt-to-income ratio, significant legislative amendments, government-instituted credit amnesties, abnormal lender profits, the bailout of African Bank Investments Limited and stagnating growth. A credit amnesty is a short-term reprieve for consumers with adverse credit information from past debts. There have been two amnesties in South Africa: in 2007 and 2014. Both amnesties were essentially information amnesties, which resulted in the removal of negative information from borrowers' credit profiles. The 2007 credit amnesty aligned the credit market with the National Credit Act (Act No. 34 of 2005) by the removal of specific borrower information that was in misalignment with the National Credit Act (NCA). The 2014 amnesty was a straightforward credit-information-removal exercise. A credit amnesty is a superficial remedy and a short-term fix of a deeper underlying problem of credit usage and profit maximisation. But an amnesty does not result in borrowers changing their behaviour. The credit amnesty in 2007 affected 8 million customer records, but research by the National Credit Regulator (NCR) shows that about 40% of customers who received amnesty (3.2 million people) defaulted on new loans within two years. Credit amnesties are a symptom of a graver underlying problem within the unsecured credit market in South Africa, which is considered unsustainable based on the notion that government intervention artificially regenerates consumer access to credit without regard to lender risks. Unsecured lending is growing, and the existing model appears to be increasingly unsustainable. Peer-to-peer (P2P) lending might address some shortcomings and develop as an alternative model. As there has been insufficient research into P2P lending, the focus of this study is on the sustainability of P2P lending as an alternative to traditional unsecured lending in South Africa. The study could reveal P2P lending to be an alternative model of unsecured lending and a more equitable and sustainable lending model for poverty alleviation, economic growth and wealth inequality in South Africa. The approach of the study is to understand the unsecured lending market, its practices and norms in South Africa through a sustainability framework view and, by doing so, describe the shortcomings of market practices. Peer-to-peer lending, both formal and informal, is investigated to understand the nuances and variations in lending. There is a significant informal P2P lending market that has existed for decades, and a formal P2P market that was established less than three years ago. The theoretical investigation into P2P lending highlighted four themes: behavioural underwriting, peer pressure, disintermediation and degrees of separation. These were used as the basis for the qualitative research conducted. The research conducted probed aspects that revealed the readiness and willingness of South Africans to utilise P2P lending as an alternative to traditional unsecured lending. Information was collected through four means: an online investigation of 1 121 people's preferences into savings and credit; two focus groups of 51 people in total; a sustainability review from unsecured lending practitioners; and a narrative study. The autoethnographic approach described and systematically analysed the personal experiences of the researcher to understand and make sense of real-world experiences. Having travelled to nine and worked in six African countries as a micro financier, the researcher relays personal experiences and attempts to understand the interrelatedness of unsecured lending through personal narratives. The conclusions of the study point to an intriguing future for P2P lending in South Africa. There seems to be validity in the statement that P2P lending could be a viable alternative to unsecured lending in South Africa. Peer-to-peer lending could be used as a tool to protect vulnerable borrowers from exorbitant credit costs and manage balance sheets more efficiently for individual lenders. A decentralisation of the lending function, with a specific set of investments that address the outcomes of this research, may begin to distribute wealth more proportionately than the traditional unsecured lending market. Barriers to P2P lending in South Africa could include legislative or regulatory acts, specifically within the NCA, and scaling difficulties of P2P platforms. Peer-to-peer lending needs further exploration to understand the far-reaching consequences in related fields such as secured lending, asset insurance, health insurance, remittances, small business lending and P2P financial education.