Crowdfunding innovations in emerging economies: Risk and credit control in peer‐to‐peer lending network platforms

• Author: Mariateresa Torchia,Guru Prabhakar,Tahir M. Nisar
• Date: 01 May 2020
• DOI: http://doi.org/10.1002/jsc.2334
• Published date: 01 May 2020

RESEARCH ARTICLE

Crowdfunding innovations in emerging economies: Risk

and credit control in peer-to-peer lending network platforms

Tahir M. Nisar

1

| Guru Prabhakar

2

| Mariateresa Torchia

3

1

Southampton Business School, University of

Southampton, Southampton, UK

2

Faculty of Business & Law, Bristol, UK

3

IUM—INSEEC Research Center, Monaco

International University, Rue Hubert Clerissi,

Monaco

Correspondence

Tahir M. Nisar, Southampton Business School,

The University of Southampton, Southampton,

SO17 1BJ, UK.

Email: t.m.nisar@soton.ac.uk

Abstract

Peer-to-peer (P2P) lending has emerged as a network form of crowdfunding that

facilitates the loan originations outside the traditional banking model. In China, the

combination of imperfect financial development and Internet technology has led to

the widespread growth of a P2P network lending market. Using the theoretical lens

of information asymmetry, we identify the key sources of risks facing contemporary

Chinese P2P companies. Results from our two regression models reveal several fac-

tors that can be used as predictors for risk and financial management, including mar-

riage, income, and house property. Our findings also show that collective inference

by non-expert lenders can accurately draw an inference from soft/nonstandard infor-

mation. The construction of such a predictive system is important for ensuring the

good operation of P2P network lending platforms in emerging economies.

KEYWORDS

chinese P2P, credit control, enterprises, information asymmetry, Peer-to-peer (P2P) lending,

risk, soft/nonstandard information

1|INTRODUCTION

During the past few years,the accelerating pace of innovation has trig-

gered the rapid development of Peer-to-Peer (P2P) lending platforms,

which play an important role in adapting credit supply to the changing

needs of differenttarget groups. In the UK andthe United States, these

newly established P2P financial platforms have contributed to support

personal lending, generating small-business loans, facilitating invoice

discounting, and foreign exchange transactions (Funk et al., 2015;

Milne & Parboteeah, 2016). Generally speaking, P2P lending platforms

lead to substantialcost savings through the effective utilizationof tech-

nology. Several academics have asserted that P2P essentially repre-

sents a type of securitization in which individual loans can be divided

into numerousnotes issued to investors throughthe enhanced efficien-

cies of automation. As documented by Lin, Prabhala, and Vis-

wanathan (2013), when allocating funds, P2P lenders usually take into

account the ratings assigned by these platforms. While the traditional

lending platforms (e.g., banks) approve loan operations by using

information from risk analysts, both borrowers and lenders in the P2P

industry are involved in a social network, which indicates that lenders

will assess andselect the borrowers themselves.

According to Savarese (2015), in many of the world's developed

financial markets, traditional financial credit (e.g., bank loans) remains

the most common source of external funding for most SMEs. For

instance, in the UK, P2P lending constitutes less than 1% of the aggre-

gate scale of bank lending (Milne & Parboteeah, 2016). Nevertheless,

in terms of the number of platforms and the amount of raised capital,

P2P lending has enjoyed exceptional growth in the aftermath of the

2008 global financial crisis. This fact is due to the onset of the credit

crunch, which has posed a significant challenge to the traditional

financial system. Allowing for cost efficiency issues, banks in the

European Union (EU) have tightened access to credit (this is typically

the case for loans of small volume).

Moreover, owing to risk management considerations, banks will

not lend to SMEs without sufficient collateral. From the perspective

of loan suppliers, it is evident that people are willing to maintain con-

trol over their funds in the case of saving and investing. Thus, today,

rather than putting their money into banks, people choose to invest in

JEL classification codes: G32, M13, O30.

DOI: 10.1002/jsc.2334

Strategic Change. 2020;29:355–361. wileyonlinelibrary.com/journal/jsc © 2020 John Wiley & Sons, Ltd. 355