Social lending must be going mainstream – McKinsey have analysis here.  In the analysis they conclude the concept is a win-win, but there is a doubt. 

The one thing this piece tells me is that social lending is becoming confused with Microcredit, so before I continue, here is my definition:

1. Social Lending:  an internet business that beings lenders and borrowers together eliminating the requirement for banks.  Borrowers are generally within three categories, (as nicely defined by James in a comment earlier) and mostly 1) & 2):

1. Borrowers who can’t get a loan from a bank for whatever reason, but are willing to pay a higher rate to get a loan from social lenders (probably less than the loansharks!)

2. Borrowers who, for whatever reason, are disenfranchised from banks, and want to strike back by buying products that don’t involve them.

3. Experienced borrowers, especially internet-savvy ones – who have good market information and are able to spot a good deal when they see one.

Microcredit:  provision of extremely small loans to poor people in third world countries.  The defining example being Grameen Bank in Bangladesh.

Back to the post.  Microcredit is highly commendable, and there are sincere lessons there that can be used in development of Social Lending, such as the power or peer pressure and groups.  But my interest in this blog lies with 1) Social Lending.

The McKinsey example is focussed on Microcredit, using the above definitions, and does highlight the very real risks, as well as some solutions.

Unfortunately, this happy dynamic is more the exception than the rule. Low-income consumers just can’t afford many products and services. A shaky infrastructure raises the costs of distribution. Incomplete information makes extending credit difficult, and collecting what’s owed poses enormous challenges. Some low-income consumers feel entitled to connect into water mains or electricity lines illegally. Low-income environments are also more susceptible to insurgent activities that raise security and infrastructure costs.

Source: The McKinsey Quarterly: The Online Journal of McKinsey & Co.

They highlight three models:

1. Collective accountability:  social insurance, where the sub groups are responsible for the larger group
2. Scalable, embedded distribution:  small groups that exert peer pressure to ensure accountability, and take on part of the loan delivery and associated processes (example of water meters required to monitor in one example)
3. Livelihood partnership:  groups and the lender work together on non-credit matters to enhance to overall value of the brand for both

Overall, the examples provided have some interesting lessons that can be levered with social lending applications, such as Zopa/ Prosper and others.