Information Society Watch

March 2007, Diego Rumiany, ICT4D development gateway

This paper explores the emerging business models for Internet-based social lending, focusing in particular on two websites that adopt a Peer-to-Peer (p2p), unknown-to-unknown, for-profit model. The research examines social lending models, discusses the challenges they face in comparison to the traditional (institution-to-unknown) microfinance model, and offers suggestions for future research into how such models can be adopted into microfinance for developing countries. Looking at one US and one UK-based website, the author suggests that Internet-based p2p lending may solve traditional microfinance problems of adverse selection and moral hazard, as well as being more affordable because they cut out expensive middlemen in banks. However, this kind of banking may not be sustainable for those who need it most, such as high risk borrowers excluded from mainstream banking. The model is also vulnerable to problems specific to the developing world: poor regulatory environments, inadequate ICT infrastructure; and lack of developed credit markets, payment processing and identity systems. Nevertheless, the author concludes that Internet-based social lending has the potential to be realized in the credit marketplace if the experiences of traditional microfinance are applied to further develop theoretical models.

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