With bank lending to small businesses stuck at less than 4 per cent and a lack of traction to fill the void between financial institutions and government, peer-to-peer lending has emerged as a viable funding alternative in the UAE.
“We’re not going to solve the funding gap problem [but we] are a piece of the jigsaw,” said Rick Pudner, chairman of the peer-to-peer lending platform Beehive and until last year the chief executive of Emirates NBD. “We are a lender of first resort, however, and not a lender of last resort.”
A survey of SMEs by the personal finance website souqalmal.com this month found that just 28 per cent of respondents had taken out business loans and financing from a bank.
Of those that had managed to get bank loans and financing facilities, more than half described the process as “not easy”.
The survey found that 31 per cent of SMEs are self-funded, the most popular option.
Local banks are ramping up their efforts to service SME customers in line with government policies to support the sector even as international banks including Standard Chartered and HSBC retreat from the market.
In April, Sheikh Khalifa, President of the UAE, approved a federal law that included a requirement for federal authorities and ministries to contract at least 10 per cent of their procurement budget for purchasing, servicing and consulting to SMEs.
Peer-to-peer lending is a good model for the SME sector said Juan Jose De La Torre, the founder of the digital start-up incubator Afkar.me, and a former vice president at Etisalat.
“The beauty of doing this online is that you can really scrutinise and predict the different risk levels,” he said. “This is good for investors, who can gather a lot of information, and for the company, who can know who is investing.”
However, regulation will be a challenge in this region, he added.
Beehive is relying on the systems and controls of both its bank and fund administrator – both of which are regulated in the UAE – to protect investors and companies, Mr Pudner said.
In the US and UK in particular peer-to-peer lending has emerged over the past decade in an environment of reduced bank lending and historically low interest rates. Almost £1.8 billion (Dh10.35bn) is forecast to be lent this year via British platforms such as Funding Circle, Zopa and RateSetter, double the amount last year, according to a report co-authored by PwC.
However, the sector has matured from a pure peer-to-peer industry led by crowdfunding platforms such as kick-starter, where investors typically get a share of a business, to one dominated by institutions that apply more rigorous return models for investors who lend money at interest. The institutions also charge higher fees.
Beehive matches investors to companies seeking to raise between Dh100,000 and Dh500,000 in return for a fixed transaction fee applied to both parties. Interest rates are set according to demand and the maximum tenure is three years. The minimum amount an investor can lend is Dh100.
In the UAE, with the official launch of the Al Etihad Credit Bureau on Wednesday the credit landscape is expected to shift amid higher levels of transparency. The next phase will involve the bureau offering credit reports for companies and not just individuals.
Currently Beehive conducts its own credit background checks on the businesses that are looking to raise finance via its platform.