My Deals Blog wrote a story on him joining the Lending Club, where he mentions his reason for signing up as the $25 bonus the LC gives when you sign up.
Get Rich Slowly has also written about what is it like to borrow money with Prosper. JD’s reasons appear to be more substantial. He was looking for lenders to finance his credit card debt at a rate lower than that of the credit card company. This he got, and as an additional bonus, he had his lending club encouraging him on as he worked to repay the loan.
To me, the LC and Prosper look a lot like “mini banks”.
If I could simplify their business model, they collect money from people, and they lend it to others. There are people at the centre to coordinate / facilitate all these, and they get a small cut somewhere along the line. Effort is made in trying to match the lenders and borrowers, hence causing a peer-peer relationship.
The key drivers are that people who have extra cash lying around and earning bank/ CD interest get a better return, whilst the borrowers get loans with interest rates lower than what they would otherwise pay.
These two examples are from the US.
Let’s look at what people in our part of the world do.
We have koottus, tontines and arisans.
All the three have the same basic modus operandi, though different from the US model.
Someone (“the leader”) forms a group of between 5 – 20 people. All are known to each other, possibly even relatives, hence a real peer group. The leader is someone everyone in the group acknowledges as being a person of integrity.
They each contribute an agreed amount say, $50, $100 or $1,000 a week or month. The group draws lots to decide the order of receiving. The leader always gets the first draw (no expenses are charged to the pool). The 2nd onwards will be decided by lots.
The advantages to the koottu pool members are that:-
– The weekly or monthly payment ensures forced savings. The peer pressure makes sure of this.
– They get a lump sum when their turn comes. These are used to meet expected big expenses like weddings, birth of a child etc.
Some people call the koottus tontines, though the Wikipedia definition seems to be a lot more ominous, and does not seem reflective of a koottu.
A variation to this koottu formula is the auctioning of turns. The leader as usual gets the first turn. The right for the second, third turns etc. are auctioned. The winner will receive the amount reduced by the amount he/she is willing to forsake for the right to the said turn. This amount is shared amongst all the other members.
In some parts of Indonesia they call these schemes “arisans”. Sometimes, an entire village takes part, hence the rotation may be over a couple or more years. Local “shamans or bomohs” are consulted by people to help assist in their turns being amongst the earlier ones. Also children draw the lots, as they are “less susceptible” to manipulate the draws.
These informal arrangements have existed for years. Many a wedding, purchase of house, children education etc. has been financed by the “koottu” draw.
Shopkeepers also have their own koottus. Textile shop merchants have their pool, restaurant owners have their pool and so on. Like a shopkeeper told me, “How else can we get a big lump sum?”
Integrity being such a scarce commodity these days, there have been cases of the pool money posing too much of a temptation to the leaders, and they run away, with the money of course.
And the Malaysian Government has long banned such schemes.
But the koottus live on. And I think they do serve a useful purpose.
I am not sure of the sustainability of a system of Peer to Peer Lending, when you personally do not know the members and know them well. Having a central team to coordinate / facilitate the whole system, will give rise to overheads that have a strange way of steadily increasing. Then straining either the borrower or lender, or both.
Koottus, despite their warts, have existed for centuries and still flourish today.
I am not sure if such systems exist in the West. If they don’t, it maybe