• CFRED CUHK Law

Access to Finance between the (Broken) Promises of P2P Lending and the (Hopeful) Tradition of Susu

Vincenzo Bavoso – University of Manchester


-- This post is concerned with questions of access to finance and financial inclusion, which have resurfaced with some urgency in the post-2008 years. In particular, this analysis looks at systems of access to finance that are alternative to banks, namely at FinTech-based peer-to-peer (P2P) lending platforms and traditional Susu schemes.


Access to finance and financial inclusion have become increasingly pressing issues because of the ‘crisis of banking’ that exploded in the post-2008 years, which affected, among other things, the capacity of banks to extend credit to the real economy (some of the motives underscoring this phenomenon are explored in a volume of collected essays, Capital Failure, OUP, 2014). As an illustration of this trend, data clearly shows that the percentage of unsuccessful loans has increased, particularly for small and medium-sized enterprises (SMEs), across the EU (Eurostat 2011). In the more specific context of the UK, bank lending to the real economy also went down drastically between 2008 and 2012 (UK Finance 2018).


The role of banks as providers of credit needs to be understood in the wider context of financial development literature. While the role of financial deepening in the economy is still a matter of contention (especially insofar as the literature points to different desirable patterns of development, Beck et al 2007), it is definitely easier to agree on the importance that financial inclusion plays in allowing individuals and firms to develop business opportunities (Demirguc-Kunt and Levine 2009). In this sense, it has been recognised that access to external sources of finance is one of the major obstacle for SMEs’ success, and that banks remain the major providers of finance for SMEs (Beck and Demirguc-Kunt 2006, who also emphasise that SMEs are essential engines of entrepreneurship and economic development). It is also straightforward to see that SMEs prosper in jurisdictions characterised by a large number of local, co-operative banks (Bank of Finland 2014).

Problems of access to finance in the post-2008 years were partly countered by the expansion of non-bank intermediation, particularly by FinTech-based lending platforms. This trend was epitomised by the growth of the FinTech industry in the UK, where around 60% of borrowers on P2P platforms had been denied a loan from a bank, or would have been very likely to be denied one (Carney 2017).


In a nutshell, P2P lending revolves around online FinTech-based platforms that link prospective borrowers with prospective lenders. In essence, these platforms perform an intermediation function, bypassing the role traditionally performed by banks, without however operating like banks or being regulated accordingly. In the process, due to their lower operating costs, they are able to offer borrowers more favourable access to finance, and higher rates of returns to lenders. Over the past fifteen years the P2P industry has grown enormously at the global level, particularly in China, the UK and the US (while this expansion was a global phenomenon, its underscoring motives differ across different economic models).


The expansion of this channel of non-bank intermediation did not come without risks and pitfalls. The first one is represented by credit risk. Problems of credit risk are intrinsic in FinTech lending because of a) the operational structure of the platforms (credit risk is passed on to lenders, who rely on the credit risk assessment provided by the algorithm employed by the platform), and b) the way in which platforms are regulated, and particularly the absence of any public backstop in the shape of deposit insurance protection and lender of last resort (Bavoso 2019).


The second problem associated with P2P lending is its contribution towards systemic risk creation. This is due to the high level of interaction of P2P platforms with institutional investors and wholesale channels of finance, chiefly through the securitisation of P2P loans (by both lenders and platforms). Notwithstanding the relatively limited size of the P2P industry, its interconnectedness with large financial institutions through wholesale channels risks creating regulatory problems similar to those experienced in September 2008 (Bavoso 2019).


The third problem with P2P lending is that it elicits the creation of layers of private debt. This is due to the progressive morphing of P2P finance into a model whereby borrowers are needed as a source of revenue – the commoditisation of debt which is the result of lenders and platforms securitising the underlying loans. Warning signs related to alarming levels of private debt have been raised over the past five years, and they lead to more pressing concerns of financial stability and the intensity of the leverage cycle (Turner 2015; IMF 2019).


The shortcomings associated with FinTech-based lending lead to an intractable friction between policy priorities. On the one hand, there is access to finance and financial inclusion, which are key indicators of economic development because they facilitate entrepreneurship and real economic activities. Given what was said in the previous two paragraphs, it is unlikely that P2P lending can serve as a viable technique of access to finance. On the other hand, systemic stability is equally a policy and regulatory priority, particularly in light of the red flags raised by the IMF about the levels of private debt creation at the global level, and also given that the focus of these concerns is on non-bank financial intermediaries.


The above friction prompts some rethinking about contemporary alternative channels of finance. This post focuses accordingly on the Susu, a traditional micro-finance scheme, originally from Ghana, but employed widely in African societies, as well as in the Caribbean and parts of Asia. Susu represents a form of informal saving and credit arrangement, involving relatively small groups of people – traditionally at the tribal or community level.


In its most common structure, this scheme involves standard periodic contributions made by each member of the Susu; at the end of a pre-determined period, the total contributions are disbursed to one member of the Susu; this disbursement works according to a pre-determined rotation, so each member of the Susu will receive the distribution at some point. While the economic essence of Susu reflects saving and lending, no interest rates are charged as there is no borrowing as such (Stoesz et al 2016). It is essentially a system of saving with very low transaction costs, reflected by the absence of legal and contractual formalities and standardisations (Osei-Assibey 2014).


Key in the Susu arrangement is the role of the collector/operator, who deals with individual members and is therefore in a critical position due to his/her trustworthiness. This element of trust, coupled with the tribal/community connotation traditionally associated with Susu, have so far represented the limitation to its wider adoption as a means to access to finance. It is interesting to observe in this sense that the M-Pesa revolution in Africa has not assimilated Susu, and as an illustration, only a small percentage of users have stated they would be comfortable with mobile payments, whereas most users trust Susu collectors more than electronic devices (Osei-Assibey 2014).


If Susu is to achieve a wider adoption (the sort of network effect that boosted P2P lending), and thus address questions of access to finance, a balance needs to be found between a higher degree of legal certainty and enforceability, and the low transaction costs that are typical of informal arrangements. Moreover, a larger scale of application should not deprive Susu of its personal, trust-based character, because that may result in information failures (Aryeteey 2008). The central question of this post is whether a combination of technology and regulation could address this balance.


This post specifically speculates on the possible contribution of centralised digital ledger technology to the practice of Susu. In particular, without digitalising the whole process, collectors could be equipped with a dedicated app, and record payments on a centralised digital ledger (using effectively decentralised finance, DeFi blockchain technology). This could achieve two functions: namely a degree of certainty and enforceability among members, as well as a tool for supervisors to oversee the Susu market. The use of technology could be complemented by a high-level legal/regulatory definition of Susu, aimed at preserving its personal character: a) no transferability of Susu positions from the original members, and b) no corporate form for members and collectors.


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