Many of my recent posts have focused on alternative lending, specifically the online peer-to-peer lending of Prosper and Kiva. In general, alternative lending refers to systems structured outside the traditional banking and credit industry. Such lending has been practiced since there has been trade. Many systems have evolved over time but their personal, individual and often informal characteristics remain. It is this flexibility that provides a successful structure for alternative lending.
For instance, the sytem of hawala remittance network was originated in the 11th century in South Asia and is practiced still today. The primarily Islamic network began as a way to transfer money across distances while avoiding the payment of bribes and fees to corrupt government regimes. People use hawala to send money to their family, pay down debts and make loans through the connections of tradesmen in different areas. The system works today as a popular avenue for migrant workers in America to send money back to India. It is a simple system built on informal traditions that offers transaction fees that are lower than those of formal banking institutions. Tradesmen transfer money by collecting and dispersing funds among one another and keeping track of the imbalances which they settle on a regular basis. This system encourages trustworthy behavior through reputation and continued interaction. More information on hawala can be found here and here.
A more modern form of alternative lending is online peer-to-peer lending. Companies and organizations, like Propser, Lending Club and Kiva, engage in this form of lending. Borrowers create online profiles describing their lending needs and their means and ability of repayment. Then potential lenders browse individual profiles or groups of loans for which to participate in. Different organizations have varying structures, such as Kiva, as covered in a previous post, which does not pay interest to lenders. Some, for instance, Prosper, have faced regulatory setbacks and bad management decisions which have led to legal claims and reduced business by lenders. Yet, business has continued as well as grown over the past year and interest rates for borrowers are often competitive to other providers of unsecured loans.
While the fate of online peer-to-peer lending may not be sealed, alternative lending, in general, is and has been sustainable and successful. For most people, traditional loans and credit are feasible and appropriate ways to lend and borrow. Yet, others may not fit into this traditional model. For such people, alternative forms of lending offer individualized and often personal avenues for receiving and distributing funds.
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