Is P2P Lending another Dodgy Investment Scheme?
Alternative investments such as wine, gold and land banking were under scrutiny after another gold buyback scheme went wrong recently. Those affected investors could have avoided the loss if they had read Tan Kin Lian’s blog “Beware of Investment Scams”. (Mr. Tan K.L. was one of the four candidates who contested in the 2011 Singapore Presidential Election.)
The spotlight was also on the Monetary Authority of Singapore (MAS) role as the financial regulator and whether these “innovative’ investments should be regulated. Although MAS is currently reviewing the regulatory framework, MAS’ stand is clear: regulation cannot ensure the sustainability or viability of an investment scheme.
So, is P2P lending another of those dodgy investment schemes? (sense the scepticism?)
Not if you ask me!
P2P lending is based on transparency and accountability while many of those questionable schemes are opaque and secretive. This is not to say that P2P loans have no risks. In fact, the risks of a borrower defaulting are clearly and explicitly revealed upfront before the lenders make any decisions. Many of the P2P lending platforms have processes requiring borrowers to disclose both ‘hard’ and ‘soft’ attributes to mitigate the issues of asymmetric information and adverse selection (To be discussed in future posts)
Below are some of the best practices of established P2P lending players:
- Mandatory disclosure requirements by borrower
- Risk acknowledgement by lenders before investing
- Regular and timely updates on every loan status
- Customers’ funds are held in segregated accounts
- Standard operating procedures are published and strictly adhered to
- Legal recourse available to lenders
- ‘Hard’ attributes: credit rating, payment history, financial statistics
- ‘Soft’ attributes: third-party endorsement, social media reference checks
P2P lending is not a “sure-win” or “quick-win” scheme; it is an alternative asset class for serious investors. If you are still not convinced that P2P lending is for real, check out Funding Circle, Lending Club, Prosper or Zopa.