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Organisations and the financial system
Organisations and the financial system

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2.2 Peer-to-peer lending

Peer-to-peer (or P2P) lending is a method of raising funds in a manner similar to crowdfunding. It is a form of borrowing and lending between ‘peers’ without the involvement of a bank or other financial institution. As with crowdfunding, the process is intermediated by an online platform that tries to match individuals willing to lend to those that need funds. These platforms give the prospective borrower the opportunity to access a pool of lenders after a credit check, which can lead to competitive interest rates in cases where the borrower has an excellent credit history.

The risks associated with this practice are the potential inability of the borrower to repay the lender, and the fact that money lent through P2P is not guaranteed by governments, as in the case of banks. In fact, current accounts in most countries are protected (up to a certain amount) from potential bankruptcy of the bank in which they are held. With P2P lending, if the borrower defaults on its debt then the lenders will lose all their funds.

Currently, P2P lending is by far the largest type of alternative finance worldwide, while reward-based and equity crowdfunding remain limited, accounting for approximately a quarter and a tenth of P2P lending volume, respectively.

Activity 4  Which type of organisations could benefit from alternative ways of financing?

Timing: Allow around 20 minutes for this activity

Can you give one example of an organisation for which crowdfunding or P2P lending has been a useful source of finance? Search online for a success story (or a story of failure) and provide a short summary in the box below.

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Discussion

The most common example of organisations suited to this type of finance are non-profits, charities, social enterprises or start-ups looking for funding to sustain small-scale projects, campaigns, or a new product. Even individuals usually refer to P2P lending or crowdfunding to sustain small-scale projects. Crowdfunding has been very important in the music industry as well. If you have time, have a look at this story about crowdfunding in music [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)] .