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Discussion on Peer-to-Peer Lending
Peer-to-peer (P2P) lending is the method of debt financing that presupposes the borrowing and lending of money without the help of official financial institutions as intermediaries. The discussion on peer-to-peer lending has been based on the theory of micro-finance. The theory indicates that social networks are helpful in the reduction of information asymmetry in the process of lending, hence motivating borrowers to pay back loans. P2P loans are valid for 12 to 60 months in such countries as the United Kingdom, but agreements can be sold before the maturity of loans. Notable P2P platforms in the UK include Funding Circle and Zopa. The method under discussion excludes middlemen from the borrowing process. In countries with streamlined regulations in place, like in the US, for example, P2P lending as a source of finance continues to gain prominence.
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On the other hand, using P2P lending as a source of finance in countries with less regulation, such as China, has been challenging. P2P lending has a number of benefits, such as convenience and reduced cost of financing. However, it has been criticized for more time, risk, and effort involved than in the case of conventional lending arrangements. Moreover, the problems encountered in P2P lending may lead to difficulty in supervising the lent resources. The use of P2P lending as a source of finance continues to develop. Therefore, it is one of the strategies that governments could use in the future to solve financial problems, especially those of small businesses that face challenges in getting finances from traditional banks.
This annotated bibliography will provide information from journal articles and other scholarly sources on the topic under investigation, namely peer-to-peer lending as a source of finance and the possible benefits associated with it. Chan and Han seem to agree that P2P lending is an effective model of financing. They also claim that P2P lending provides online users with an innovative loaning or investment source of finance that does not need the intermediation of financial institutions. The findings by Ruiqiong and Junweh also reiterated the same point. The scholars noted that the invention of the Internet, which enhanced the convenience, speed, and transparency of different operations, has improved the functioning of P2P lending. Besides, Ruiqiong and Junweh noted that compared to the traditional financial market, P2P lending is more convenient in the acquirement of information regarding the quality of social capital. The same point is stressed by Liu, who noted that the entry of the P2P lending platform into the Chinese financial market was unsuccessful because of the development and innovation in the sphere of Internet finance. The authors of other articles annotated below also agree that P2P lending is slowly but steadily replacing the conventional method of dept financing.
Ruiqiong, G., & Junweh, F. (2014). An overview study on P2P lending. International Business and Management, 8(2), 14-18.
In their article, Ruiqiong and Junweh seek to provide an overview of the development of P2P lending both at home and abroad from theoretical and empirical perspectives. The authors note that P2P lending became effective with the invention of the Internet, which enhanced the convenience, speed, and transparency of various operations. P2P is more convenient in the acquirement of information regarding the quality of social capital than the traditional financial market. Besides, the authors discovered that since financial intermediaries are merely regulators but not lenders, their continued regulatory activity may cause problems, particularly with the invention of the P2P financing option. For example, borrowers manage to lower the cost of finance through peer-to-peer lending. This article is relevant because the authors list various factors to consider when using P2P lending as a method of debt financing locally and abroad, both from the perspectives of a lender and a borrower.
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Chen, D., & Han, C. (2012). A comparative study of online P2P lending in the USA and China. Journal of Internet Banking and Commerce, 17(2), 1-15.
In their article, Chan and Han state that P2P lending provides online users with an innovative loaning and investment source of finance that does not need the intermediation of financial institutions. The authors base their discussion on the theory of micro-finance, which indicates that social networks are helpful in the reduction of information asymmetry in the process of lending, hence motivating borrowers to pay back loans. The authors reviewed relevant literature and performed a comparative study on peer-to-peer lending practices in the USA and China. They learnt that credit information, both soft and hard, influences the use of P2P lending as a source of finance in the two selected countries. However, the difference is that lenders from China were found to provide more reliable soft information. Apart from being reliable and current, this article is useful because it highlights the importance of soft and hard credit information when using P2P lending as a source of finance.
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Wang, H., Chen, K., Zhu, W., & Song, Z. (2015). A process model on P2P lending. Financial Innovation, 1(3). doi: 10.1186/s40854-015-0002-9
This study was conducted on the background that online P2P lending continues to expand as the popularity of online gains increases. Therefore, the development of a conceptual model for peer-to-peer lending as a source of finance is valuable for managers when approaching issues of management, operation, and marketing. The authors used the process model to achieve their study objective. Relying on a comparative analysis of P2P lending and the conventional loan processes, the authors determined that P2P lending is convenient and transparent. Besides, P2P lending uses a different credit audition strategy. Moreover, the management of a loan is not always complete when using P2P lending as a source of finance due to lack of post-loan records of borrowers. This study is relevant because the key findings point to the need for future research on person-to-person lending processes as well as the key technologies that would help it succeed.
Liu, L. (2016). Peer-to-peer lending supervision analysis base on evolutionary game theory. International Journal of Innovative Science, Engineering & Technology, 3(1), 153-157.
In his study, Liu aimed to analyze person-to-person lending entities and their regulators in China using an evolutionary game theory. The author argues that since its entry into the Chinese financial market two years after its inception in 2005, the P2P lending platform has significantly developed. According to the author, the considerable growth has been driven by the development and innovation in the sphere of Internet finance. The P2P lending model has been warmly embraced by small and medium investors since its inception. However, due to certain laws, regulations, and peculiarities of the credit system, the establishment of P2P lending in China has been characterized by dealing with the risks involved and certain manipulations. The article is relevant because the author uses the evolutionary game model to highlight how P2P lending and the respective government regulations have evolved. Besides, Liu explains the problems encountered in P2P lending supervision, the potential future development tendencies, and the possible strategies that the government could use to solve the problems associated with P2P lending as a source of finance.
Atz, U., & Bholat, D. (April 2016). Peer-to-peer lending and financial innovation in the United Kingdom: Staff working paper No. 598. Bank of England. Retrieved from http://www.bankofengland.co.uk/research/Documents/workingpapers/2016/swp598.pdf
In their work, Atz and Bholat describe the history of lending and regional geography. The authors argue that the history of peer-to-peer lending can help to shed light on financial innovation. The authors of the report conducted semi-structured interviews regarding the UKs most used P2P platforms, namely RateSatter, Funding Circle, and Zopa. The post-global economic crisis has resulted in a wave of financial innovation, particularly in the United Kingdom. In retail finance, lending companies that offered short-term and high interest loans experienced a period of development as well. Moreover, the authors indicate that the new financial providers in the UK referred to P2P lending platforms since they allowed borrowers to solicit investment funds. P2P loans are valid for 12 to 60 months, but agreements can be sold before loans reach maturity. This article is relevant because it is research-based and provides authenticated quantitative data regarding borrowings that have been created through the P2P platform.
Mach, T. L., Carter, C.M., & Slattery, C. R. (2014). Peer-to-peer lending to small businesses: finance and economics discussion series Division of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C. Retrieved from https://www.federalreserve.gov/pubs/feds/2014/201410/201410pap.pdf
In their work, Mach, Carter, and Slattery examine the loan-level data obtained from a lending club to evaluate P2P borrowing by small businesses. The authors begin their evaluation by looking at the application characteristics of loans that were funded as well as those that were not funded. From the summary statistics, the researchers were able to learn about the number of loans that small businesses took over time. In addition, the study shows that compared to traditional sources of loan/finance, borrowers from small P2P businesses paid nearly twice higher interest rates. Besides, data analysis demonstrates that loans for P2P small businesses were charged a higher percentage of interest rate premiums in comparison to non-business loans. Finally, data analysis indicated that with regards to loan performance, loans for small businesses were highly likely to be negligent and charged off. This article is relevant because it presents valuable data related to P2P lending as a source of finance, and the Federal Reserve Board is reputed for providing credible research-based articles.
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Yang, H. (2016). Comprehensive evaluation of online peer-to-peer lending on the province-level regions in China based on generalized principle component analysis. Open Journal of Business and Management, 4, 171-176. http://dx.doi.org/10.4236/ojbm.2016.42019
In his article, Yang notes that with the increased reliance on P2P lending and the enhanced quality of mobile payment in China, a quantitative evaluation would provide credible information regarding the development of P2P lending. The author notes that the penetration of the Internet technology usage in financial services deepened, while traditional financial services failed to meet the increasing financial needs of different types of small and micro-enterprises. Therefore, P2P lending became the new development trend that could meet the financial needs of the industry in the future. According to the author, P2P lending is based on the transformations that take place in the fields of information technology and Internet finance, thereby creating a platform for a new credit and security model. In addition, the author claims that P2P net loan offers additional market financing channels, hence effectively reducing costs of transaction and enhancing an efficient utilization of idle funds. This article is appropriate because it is peer-reviewed; therefore, it meets the criteria for publication.
Serrano-Cinka, C., Gutierrez-Nieto, B., & Lopez-Palacios, L. (2015). Determinants of default in P2P lending. PLOS ONE. http://dx.doi.org/10.1371/journal.pone.0139427
This article provides a study on P2P lending and the factors associated with loan default. The authors believe that the identification of the aforementioned factors is critical because in P2P lending, it is individual investors who bear the credit risk, rather than financial institutions that are considered experts in dealing with those risks. Moreover, the authors highlight information asymmetry as the major problem that P2P lenders encounter because they are always at a disadvantage of facing a borrower. Consequently, potential lenders always need to get information about borrowers and their loan purposes from P2P lending sites. The factors identified as helpful in explaining loan default include credit history, loan purpose, housing situation, annual income, and indebtedness. This peer-reviewed article is relevant because it provides valuable information regarding possible factors that can lead to loan default when using P2P lending as a source of finance.
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Wang, P., Zheng, H., Chen, D., & Ding, L. (2015). Exploring the critical factors influencing online lending intentions. Financial Review, 1(8). doi: 10.1186/s40854-015-0010-9
In their article, the authors state that online lending is a type of Internet finance that meets the financial needs of small and medium-sized business enterprises and the needs of individuals. According to the article, P2P lending supplements the traditional financial system. The authors focused on the most influential online website in China to extract the information that they needed to achieve their study objective. Their aim was to study the factors that affected lenders trust towards loans and lenders perception about information asymmetry. Besides, the authors examined how those factors affected the lending intention. In the course of the study, the researchers identified trust as the major factor that influenced the lending intention. Moreover, according to the authors, information asymmetry is caused by such structural assurance as legitimacy. Further, they state that the development of online peer-to-peer lending is prevented by the perception about information asymmetry. This article is relevant because the findings of the researchers highlight how notable differences between online lending and purchasing tendencies negate the possibility of using traditional electronic commerce in online lending unless there is verification. Besides, the article helps address the fears of the security of the method of debt financing.
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Lin, Z., Whinston, A., & Fan, S. (2015). Harnessing internet finance with innovative cyber credit management. Financial Innovation, 1(5). doi:10.1186/s40854-015-0004-7
In this article, the authors state that tremendous beneficial changes happened in the society because of the development of the Internet technologies. The aforementioned technologies reshaped the ways in which businesses are transacted in different industries. The authors claim that online P2P lending is currently one of the most popular online loan services. In addition, they list some distinguished P2P lending companies. Moreover, they claim that in countries with appropriate regulations in place, like in the USA, this source of finance continues to gain prominence. Besides, the authors identify China as one of the countries with less regulation, which makes the operation of the platform difficult. This article is relevant because it explains how P2P lending as a source of finance spread globally. Besides, the authors claim that some countries adopted adequate regulations, while others still lack appropriate regulations. Thus, the article can help the nations that have not yet come up with effective regulations to act faster since there is an increased use of online platforms in the lending business and in other transactions.
K?fer, B. (2016). Peer-to-peer lending-a financial (financial stability) risk perspective. Joint Discussion Paper Series in Economics No. 22-2016. Retrieved from https://www.uni-marburg.de/fb02/makro/forschung/magkspapers/paper_2016/22-2016_kaefer.pdf
This paper discusses P2P lending from a financial risk stability perspective. The authors focus on the role of dimensions such as herding, soft information, liquidity risk, default risk, and institutionalization of peer-to-peer markets. The authors state that P2P lending carries more risks than traditional banking. Nonetheless, the evolution of commerce and the ever-changing nature of the platform imply that the perception about the increased riskiness is based on diverse arguments that were relevant at different times. The finding that P2P platforms satisfy most of the definitions of shadow banking and that there are numerous similarities between this mode and traditional banking and shadow banking means that P2P may act as shadow banking. This article is relevant because it shows that P2P lending is an effective alternative to conventional banking platforms, and that it is a valuable source of finance for small businesses. Besides, the information is thoroughly researched by scholars from several universities. Finally, the authors are able to highlight and address some of the security issues associated with this method of lending.
Wardrop, R., Zhang, B., Rau, R., & Gray, M. (2015). Moving mainstream: The European alternative finance benchmarking report. University of Cambridge, UK: Wardour. Retrieved from http://www.ey.com/Publication/vwLUAssets/EY-and-university-of-cambridge/%24FILE/EY-cambridge-alternative-finance-report.pdf
The authors argue that since the global financial crisis, alternative finance methods have spread in the US, the UK, and some other European countries. They claim that peer-to-peer lending is among the alternative sources of finance that have thrived, and now this model supplies credit to SMEs, venture capital, and start-ups. Besides, P2P lending offers transparent and diverse ways of investing and borrowing. The article focuses on certain European countries because of the scarcity of information available about them. This article is relevant because it provides the data that highlight how P2P lending became an efficient alternative source of finance in Europe. Moreover, this report is presented by credible scholars.
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