How Peer-to-Peer Lending Supports Financial Inclusion
Financial inclusion is increasingly becoming a buzzword in the finance arena. While crucial in setting a strong foundation for development, the Southeast Asian (SEA) region and the world still has a lot of room for improvement. This is where Peer-to-Peer (P2P) lending can step in to steer the money lending economy in the right direction.
Why is financial inclusion important?
Financial inclusion refers to people and businesses having access to affordable and useful financial products and services, delivered in a sustainable manner. This can include access to transactions, payments, credit, savings, and insurance, just to name a few.
A crucial foundation
Financial inclusion is important as it contributes directly to the ability of communities to develop and grow. It equips people with the tools to manage their wealth by having savings and enabling the allocation of resources to various aspects of their lives such as health, education, and business. According to the American Economic Review, financial inclusion can aid in the reduction of poverty through an increase of one’s income potential and asset-building capabilities. Financial inclusion also acts as a safety net to let companies survive financial emergencies through business loans.
The state of financial inclusion in SEA
Despite the importance of financial inclusion, many individuals and businesses still lack access to quality financial services. Global Findex Database found that 1.7 billion people worldwide do not have access to basic financial services, like a bank account. Deloitte reported that less than 60% of Small Medium Enterprises (SMEs) in Indonesia, Malaysia, Philippines, Singapore and Thailand have access to bank loans as a means of financing. Shockingly, the region around us continues to use personal funds as a dominant source, particularly in Indonesia.
The reality is that SMEs’ financial requirements are more often than not too large for microfinance, yet too small to be effectively served by corporate banking models. As such, there are many underserved companies with poor access to mainstream financial services and need to rely heavily on alternative financial services.
How does P2P lending support financial inclusion?
The presence of financial exclusion reveals a potential market for lenders. In particular, P2P lending can help address the issue of accessibility while providing an alternative form of investment.
P2P lending brings lenders and borrowers in direct contact through a common platform. By skipping traditional financial institutions through a convenient digital platform, the P2P lender is able to enhance access to much-needed working capital. Lenders and borrowers are not bogged down with the same degree of bureaucracy and regulation imposed by traditional credit providers, and other measures of assessing creditworthiness are in place. Instead of waiting for a week to process loan applications, a more immediate relief can be provided through P2P lending for business emergencies in the form of SME loans, bridge loans, invoice financing, and more.
Viable investment opportunity
On top of the improved access to funds, P2P lending also adds more options to the pool of investment types available. As opposed to a large starting capital of $10,000, P2P lending allows easy entry with affordable options starting from $20. New and seasoned investors alike can look forward to diversifying their portfolio through this form of alternative investment.
In this digital age, there are lesser excuses for financial inclusion to remain problematic. Banks and Fintech businesses need to ensure that the underserved community is not left behind. P2P lending has the potential to reinvent the funding sphere.