Crowdfunding in Nepal, can it help us?

Can crowdfunding help us? According to a World Bank report from Oct 2013 the answer is yes. Many of us feel, that it is sometimes really difficult and time consuming to get bank loans in Nepal approved. But may be there is a new way to reduce this stress.

 Over the past 10 years, financial technology has proven to be a disruptive force worldwide to traditional financial services, and we will see this hopefully soon in Nepal as well. Many aspects of finance have been digitized and automated. In the Nepali banking sector we are seeing more and more competition for quality borrowers, but new competition for lending might also soon come via internet called crowd funding.

 How does crowd funding work?

 Unlike traditional bank loans, where banks lend their own funds, online lending platforms connect borrowers directly to investors. Investors may include institutions and/or individuals. Unlike our existing parallel lending sector, online lending poses a significant threat to traditional banks. Still many banks and institutional investors in US have already added so called peer to peer (P2P) loans to their own portfolios. Lending platforms provide investors a simple process and attractive return on investment.

 Borrowers are provided loans with rates dependent from a number of factors like amount, purpose for which funds will be used and available data about the borrower. In our time of big data everywhere, it shouldn’t be too difficult to arrive at really helpful borrower as well as investor profiles. As online lenders become bigger and diversify into multiple asset classes, the average loans will inevitably increase.

While still in its early stages, online P2P lending has emerged as a viable alternative to commercial bank loans. In US, the leader in crowd funding for now, P2P platforms issued in 2014 $5.5bn loans. While still a relatively small share of the overall lending, online lending is estimated to reach in US a yearly issue of $150bn by 2025. 

Currently crowd funding platforms in US offer personal loans for home renovations, mortgages, small business expenses,financing student loans and entered also into the start up financing. Borrowers benefit from a simplified way to receive credit. And interest rates are normally lower than bank loans. Since the whole process is conducted online, borrowers are instantly updated, when their applications are approved and receive real-time updates tracking their funding. As a result this alternative finance market has grown 2014 in US by 128% year on year.

 Crowd funding platforms meanwhile expanded from US to Asia, mainly India and China, and western Europe, here esp to UK and France. While crowd funding creates an opportunity, that smaller businesses may not have gotten from traditional finance institutions, it also is a great outlet for more established companies. These businesses may be interested in expanding their product range or re engineer their financing, as crowd funding is normally cheaper than bank lending due to significant lower administration costs.  Besides crowd funding has also proven itself to be a great marketing tool in sourcing potential customers and growing an audience.

 While the growth in funding volumes is up to now mainly lending-based, we start to see significant growth in equity-and  hybrid (loans and equity) based models as well, indicating, that the allocation of funding will be more balanced over coming years.

 Start ups, now also streaming into this sector, are asked to create a profile typically supported by a short video introduction of  their projects showing its attractiveness to potential investors. Project creators are also enabled to create a community of potential investors. Instead by traditional investors like Venture funds, Angel investors or friends, crowd funding campaigns for ventures and start ups are funded by the general public.

 Worldwide the crowd funding market reached 2015 $34.4bn vs 2014 $16.2bn  2013 $6.1bn and 2012  $2.7bn acc available statistics, showing a compound growth rate of more than 160%. That’s something! While North America is still the largest market, Asia is now on second place followed by western Europe.

 For 014 the crowd funding volume showed North America volumes at $9.5bn up 145% year on year (y/y), Asia volumes at $3.4bn up 320% y/y and Europe  $3.3bn up 141% y/y. Even in South America, and Africa we start to see crowd funding. In 014 crowd funding volumes were up by more than 100% y/y.

 Who in Nepal is ready to initiate this new way of funding in a sizable volume? You will not be the financier, but the intermediary. But any successful platform has to create trust first, otherwise it will not succeed. Trust and transparency in facilitating a healthy crowdfunding sector are important with wide-ranging participation among potential investors. Acc to the World Bank report mentioned above crowdfunding is “a socially mediated phenomenon which relies in great part on the trust people place in shared connections on social networks, community affinities, and the ratings of others on trusted, mainstream websites." Trust between investors and investees is important. Trust between investors and platforms is even more important, and that is a challenge. So the very first step a platform creator has to create is? Yes trust. 

Acc to the World Bank report attempts at fraud have been made, but were thwarted by the transparency inherent in crowdfunding as would-be investors asked questions and challenged the fraudulent postings, revealing the frauds and resulting in their removal from funding platforms within 24 hours. So Transparency and education are everything. 

It looks someone will soon take the lead to start a crowd funding platform, as the earning potential for this activity is attractive, if we can take the results in other countries all over the world as an indicator.

Good luck and all the best.