How Alternative Micro Loans Industry is Changing the World in China, U.S and Emerging Countries.
If you didn’t already know, China is leading the market in alternative micro loans with its sophisticated financial lending technology. Upon personal interviews with Alibaba subsidiary executive for Ant (formally Alipay), the company can underwrite and approve loans in as little as 3 seconds. Currently, Ant is the highest valued FinTech in the world.
This is primarily do to the AI technology and excess of data generated from Alibaba’s marketplace which makes up 60% of GDP according to an article by Kevin Hamlin of Bloomberg Businessweek.
In the U.S., Micro-lending is still a growing concern as few banks or private financial institutes are willing to take the risk on under qualified businesses. For this reason, there is room for alternative micro lenders with careful due diligence and a heart for small businesses and entrepreneurs.
Internationally, there are needs to develop alternative micro lending vehicles in emerging counties and additionally work along side with local companies to build sustainability. World bank, in a report for year end 2018, estimated poverty rates were roughly at 10%. The overall rate has decreased over 50% since 2005. This shows an overall positive indicator for more viable investment opportunities abroad and less harsh climate. Although there are more extreme concentrations of poverty developing in some areas of Africa.
Despite these drawbacks the opportunity is increasing in the private sector as the demand rises and few financial institutions are set up to fill this void. This creates opportunity for global financial institutions to specialize in alternative micro lending if risk were adequately managed. For most, lending in this space would not make sense, according to most mainstream investment strategies, as risk of non-repayment is too high of a threat. According Bloomberg article mentioned earlier, “Mini-Loans Have Spurred a Business—And Debt—Boom in China,” unsecured consumer lending has increased over 20% over the last decade.
Alterative Micro Loans in China
Online giant Alibaba Group only set up MYBank in 2015, but it’s already provided micro loans worth more than 2 trillion yuan to some 16 million small businesses. It offers non-collateral credit via a model known as “3-1-0″: 3 minutes to apply, 1 second to approve, 0 humans involved.
That’s possible because of the reams of data accumulated by Alibaba’s Taobao.com online shopping platform, one of the world’s biggest. Taobao gave small businesses access to consumer markets. MYbank can scrutinize those transactions to assess the creditworthiness of both sides, which traditional banks had struggled to do—and improve access to loans.
The result has been to wring out greater efficiencies from China’s private sector. Comprised mostly of small and medium-sized enterprises, it accounts for 60 percent of GDP and 80 percent of jobs. Yet it had been starved of credit, despite official efforts to funnel more loans, because state banks prefer lending to lower-risk (but less efficient) companies that are owned by the government.
Opportunities for consumers to borrow have also mushroomed, with unsecured consumer lending growing at about 20% a year over the past decade. That’s boosted consumption, helping to rebalance the economy away from China’s traditional reliance on investment and exports.
And there’s room to run: Consulting firm IResearch projects that online consumer finance will more than double to 19 trillion yuan by 2021.
Former Chinese leader Deng Xiaoping once said that when a window is opened, some flies will come in—and so it has been with the opening of China’s financial system.
Regulators last year launched a crackdown on peer-to-peer lending after some platforms failed, triggering protests from angry investors. And easier access to credit, especially for young consumers, has pushed household debt above 50% of GDP. That’s still low by global standards, but when added to China’s pile of business debt, it’s enough to worry some analysts.
Currently according to SME Finance Forum, East Asia makes up about 45% of global financing needs for micro, small, and medium enterprises (MSME). The estimated need is over $5 Trillion dollars which is a readjustment from 2010 conservative numbers of $2 Trillion. The U.S. is not included as the estimated needs are set around $8.9 Trillion Dollars.
Other countries with large percentages of global financing needs include Latin America & Caribbean making up approximately 21% and Europe & Central Asia accounting for approximately 15%.
The Future of Alternative Micro Loans
As the inverse correlation with poverty and lending opportunities are growing with the needs. New technologies that provide more efficient solutions for MSMEs are becoming increasingly desired amongst investors and lending ecosystems. With this new demand and technology, we must also continue to improve accountability and metrics for our current model so we can excel into the future faster. The SEC continues to seek ways to keep financial markets secure and safe. We will specifically highlight these topics more in depth in future articles.
For more information subscribe to our newsletter to receive updates on new trends.