Despite risks, online lending ready to revamp China's financial sector

THERE are two phenomena in China's financial market today: the lack of investment options and funding channels.

Investors are between a rock and a hard place. The Shanghai Composite Index has dropped by as much as 20 percent during the past year, banks' annual deposit rate is less than 1 percent, and property market is still expensive despite the government's effort in cooling down this sector.

As borrowers, banks are reluctant to lend money to persons with little creditworthiness, or to small- and medium-sized enterprises (as well as microenterprises) with no collateral. The export market continues to slow down, but borrowing demand does not. So what are the alternatives?

A new business model was introduced to the world in 2006 by Zopa, a British pioneer in online lending, or commonly known as peer-to-peer (P2P) lending. Simply put, through P2P, loans are arranged between borrowers and lenders without the middleman, which makes them cheaper to the borrower and more lucrative to the investor.

With today's technology, all of the transactions can be executed online, through internet. That is, borrowers and investors don't even need to meet face to face and have their business completed. Ever since Zopa made its debut, this new growth engine is widely accepted and adopted elsewhere, including China.

The beauty of online lending (and investment) is its simplicity. There are no complicated procedures and long waiting time like borrowing from banks, or complex investment instruments that investors find difficult to understand. The key factors that need to be known to both borrowers and lenders are: the price - a mutually agreed interest rate; the risk - the creditworthiness of the borrower; and the tenure - the duration of loan. There is no official figure for the number of online lending operators in the country, but an estimate of active lenders are over 100, with the leading top five operators already making profits.

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