When I described peer-to-peer lending to some of my friends, one of the more cynical responses was “Isn’t that tontine?”
Huh? What is tontine?
In a nutshell, it basically involves a group of people pooling funds together and lending money to a borrower who pays the highest interest via a bidding process.
In fact, the history of tontines in Singapore can be traced to the colonial times in the early 1900s. Then, there were no financial institutions and banks to help those in need of money, people turned to tontine groups as an alternative avenue to get loans to pay off debts. Due to the lack of proper documentation and regulation, fraud and cheating were rampant. This prompted a civic-minded individual (by the initial S.S.G) to write to the editor of The Singapore Free Press and Mercantile Advertiser (16 Sept 1912), telling him to urge the Government to take action against illegal tontines.
So, is P2P lending a modern-day version of tontine?
As S.S.G rightly pointed out a hundred years ago in his letter to the editor, a tontine scheme based on honesty and trust can be beneficial both to society and businesses. Similarly, for P2P lending to be successful and sustainable, it has to be based on trust and mutual gains to borrowers and lenders.
But P2P lending is NOT tontine! Here’s why…
Below is a summary of the salient characteristics of Peer-to-Peer lending setups around the world:
- They provide a technologically advanced platform to match the needs of unrelated borrowers and lenders.
- They operate within the ambit of the respective legal frameworks.
- They have robust standard operating procedures on documentation, credit review, funds segregation, customers protection.
- They provide proper recourse avenues.
- They leverage on social media to address information asymmetry by promoting transparency and punishing undesirable behaviours.