New Zealand: Small Business crying out for Microfinance
June 18th, 2009Following on from the news about Kiva moving into the US small business market, fleet footed Ben Kepes calls us to action in New Zealand.
Small businesses in NZ have seen no relief from high interest rates in the recent lowering of rates here. At the same time credit is hard to come by and many business owners have resorted to credit cards to keep their businesses going.
This is a troublesome state of affairs given its the productive economy that has to earn the dollars to pay back the humungous debt necklace hanging around the necks of Kiwis.
So what’s the state of play with microfinance at the moment? Well Kiva is going great guns. It’s really tapped into people’s desire to help and be generous in giving but created this new joy of creating and empowering change for people. It connects people together and that personal touch pulls the punters in.
The more tradtional p2p lending services are not finding life so easy. Charis Palmer reports here on recent developments citing problems for Prosper in the US and some success for Zopa in the UK. Locally Peermint has fallen by the wayside, Nexx hasn’t really got going and Lending Hub has joined a busy Australian market.
So there’s no shortage of platforms but it’s proving harder than expected to deliver the business. But there seems to be no platform for small businesses to secure funding. This is certainly an opportunity as there is certainly a strong and established market on the borrowing side with appropriate forms of due diligence available.
The major stumbling block for p2p start ups has been compliance with various regulatory authorities. However there may be ways around this and with politicians supportive of the small business sector the time may have come for a serious attempt to create what would be a mini-corporate bond market funded by the retail investement market direct.
Now that sounds like a major step forward in building a more productive economy.
Tags: banking, borrowing, credit, economics, interest, kiva, lending, lending hub, loans, microfinance, money, new zealand, nexx, p2p, peer to business, peer to peer, propser, small business, zopa
June 18th, 2009 at 6:00 am
Great summary of the current ‘pain point’ in the small business lending market in New Zealand - both in terms of what it means on the ground for companies trying to grow, as well as the larger economic effect of providing capital to New Zealand’s biggest business sector.
Providing better access to capital through peer-to-peer or ‘microfinance’ systems is, we think, a great idea. It allows freer flow of capital to companies that need it most, and gives real rewards to people who take the risk. It’s just very hard to do.
And it’s not like people haven’t been trying - but it’s easy to underestimate how high the barriers to entry are on new financial services.
Kiva has been lucky. They’ve decided to operate first and regulate later (we call this the PayPal approach). They’ve used the fact that for many people this is a charity based activity, with no expectation of repayment, let alone a return on investment.
But we think this approach has serious limitations when applied to developed nations, for three reasons:
1. There is no appetite for unregulated financial services in the current climate (and perhaps for the immediate future), either from investors or regulators;
2. If you break the law as applies to issuing financial products, criminal penalties apply. That’s a great disincentive to innovation in the sector - jail just isn’t a very good exit strategy
3. It’s an unsustainable practice - the effect of a ‘cease and desist’ was hard enough on big players like prosper.com and lendingclub.com, let alone for startups in smaller and closer markets like Australia and New Zealand. This is especially so with the effect of market failures in the 80′s and 2008 still fresh in peoples minds.
At the end of the day, beyond a smallish group of enthusiasts, we just don’t think there is enough interest in making microfinance work as a not-for-profit, or as an unregulated venture. This solution to the current problem requires a much larger group of investors has access to it. And this group is used to safety measures, not to mention a rate of return.
So the question then is whether the Government might change its mind about peer-to-peer finance.
Firstly (without a law change), in the current form, it’s in the hands of the Securities Commission, who have shown reluctance to engage with the model. Of course this could change given appropriate political will, but a law change would possibly take years.
Secondly, for many regulators, the easier provision of credit simply isn’t a priority when weighed against competing interests in the present climate.
Thirdly, it’s not a model that is easily turned into a soundbite. It takes some understanding to see how social lending isn’t just for people with bad credit histories, or another ‘flaky’ investment option. For legislators that do understand, it’s easier to let countries with more sophisticated regulatory environments and more powerful enforcement agencies undertake the process of proving the model.
You could say that the NZ Government is doing some updating - recent RBNZ changes as well as a MED review of the Securities Act should do something to make things easier in certain segments, but not likely for P2P operators.
We know there are ways forward through the regulatory mire, but as with all good things it won’t be quick, cheap, fast, or easy.
PS: Just a little correction, but potentially an important one - LendingHub isn’t actually a peer-to-peer system in the true meaning of the word, they just allow loans between friends and family online (a bit like Virgin Money in the US). It looks like they’ve given up on the peer-to-peer dream in Australia (but we haven’t…)
June 18th, 2009 at 6:23 am
Hey Ben,
Great comments thanks.
It’s definitely a tough area to operate in. To address your comments I would say:
1) Yes let’s not talk about the SecCom but political will is a different story. I think the politicians can be persuaded to see the light on this one.
2) It’s not so much about easier credit. It’s about redirecting savings away from bank deposits and into businesses. So instead of lending my money to the bank (which is the legal position given a bank deposit is regarded as an unsecured liability of the bank), I am lending it to a business, in fact hopefully many businesses thus spreading my risk and I am likely to be earning a much higher rate than I would receive in the bank and the business will be paying a way lower rate than the bank would charge.
3) I don’t think we should look at p2b as social lending. It’s something different, maybe community lending or similar. A decent name will appear to describe this I am sure.
But yes there is a lot to consider. At the same time there is a clear demand for the service and I think investors would buy the story and the return. After all they invest in corporate bonds (a very small market in NZ) and let’s not mention the finance company debacle.
This is about investing via lending in our productive base. It’s a good story I think.
How and when it happens is open to debate.
I’m all ears
P.s thanks for the update on Lending Hub (good to see you’re paying attention).
June 28th, 2009 at 5:41 am
[...] as I’ve probably dealt through a boker or investment advisor. What I am keen to see is more peer to small business in developed countries. We’ve seen Kiva open up loans into the US now and soom we will see more acceptance in people [...]