Peer-to-peer or P2P lending is a process whereby an individual lends money or gives a loan to another individual through an intermediary. Intermediaries generally comprise online digital lenders or platforms, whose main function is to find and match borrowers and lenders.

It is a simple business model in which a person with spare money (lender) invests the money by giving a loan to someone who needs it (borrower). The lender makes money through interest earned from the loan.

The interest rates tend to be above the market rates as the borrowers are generally those who cannot borrow cheaply through traditional banks and other lending companies. The intermediary or the platform will generally get a commission for lender-borrower matching services they provide.

The P2P lending model was established in 2005 with Zopa in the UK. Funding Circle in the UK and Lending Club in the US are the most popular companies operating under this model.

While the business model is simple, it comes with its own share of challenges. Firstly, the lender is not in a position to assess the risks associated with the borrower, including any misrepresentation of information.

Second, the intermediary has no skin in the game and takes no responsibility for outcomes. Third, the platform needs to attract both borrowers and lenders, therefore, doubling marketing activity.

The business model adoption in its worst form has been seen in China where several P2P platforms have committed serious fraud, losing billions for small investors.

In many instances, there were fake borrower profiles and a complete misrepresentation of information. P2P operators embezzled funds by not passing them on to the borrowers. Such practices have taken the sheen off what was an innovative way to invest and borrow money.

P2P lending can be made sustainable through effective regulation. The fact that it offers affordable loans online to borrowers makes it a viable option for many. Besides, the P2P model has proved to be an alternative investment vehicle for the populace. 

Credit goes to the Reserve Bank of India for an intervention in this segment in 2017 and for bringing in strict rules. The RBI is amongst the first regulators in the world to introduce supervision and regulation in the P2P segment.

While the Central Bank of Kenya (CBK) has made significant efforts to regulate digital lenders, there’s a lot to do when it comes to peer-to-peer lending. There’s a need for a clear framework from which Peer-to-peer lending platforms can operate.