Is Haldane right? Could peer to peer lending fill the gap in business lending left by the High Street banks?

17th December 2012

One of the top thinkers at the Bank of England Andy Haldane, who also holds the rather significant job role of director of financial stability, says that peer to peer lending could cut out the banking 'middlemen' in an interview with the Independent newspaper.

“I see opportunity knocking for finance. Hopefully, the growth of peer-to-peer lenders and those involved in crowd-funding will help solve the problems we have with lending for small and medium enterprises … The banking middlemen may in time become surplus links in the chain,” Haldane told the Indie. 

Haldane also suggested that the lending could even see a shake up to rival that in the film and music industries.

Even the Government is a fan. It has injected £55m into peer to peer lending, money to be matched by the private sector and loaned on to small businesses as the Telegraph reported recently. The sector is going to be regulated by the Financial Conduct Authority, the new financial watchdog due to be launched later this year which will give the people who lend through such sites another layer of protection.

The Independent also reports that the leading firm Zopa has lent £250m to date since its foundation in 2005. It is certainly a not insignificant amount of money and sounds very good for such a pioneering concept, but Mindful Money has one concern – that it doesn’t exactly replace loans now not being offered by the banks as they repair their balance sheets and lend to businesses and customers in a much more conservative way.

The BBC business editor Robert Peston wrote about peer to peer lending in his website blog earlier this year and includes a very good description of the benefits but also the downside if you are one of the 'peers' doing the lending.

He wrote: “The important point is that businesses like Zopa and Funding Circle do everything that banks do, except that all the credit risk (the risk that the borrower can't repay) and all the liquidity risk (the risk that you as lender won't be able to get your cash when you need it) is with the lender – not with Zopa or Funding Circle. Now you may think that you would be out of your mind to take on all those risks.

"You may say hooray for banks that are happy to insure you against credit and liquidity risk. But there is quite a big cost of being insured by the banks against those risks. If you are prepared to take those risks, you in effect extract the hidden insurance premium you pay to the banks. Or to put it another way, you get a massively higher interest rate.”

Any additional source of capital to British business is surely to be welcomed, but faced with the sheer length of the recession with its two dips (so far) and our weak recovery, we’re not sure if peer to peer is anything but a small part of the answer. We probably st
ill need RBS, Barclays, Lloyds and HSBC firing on all cylinders again. That is certainly not happening as even the Bank of England’s own report from October Trends in Lending shows. (Table 1A is the key one).  

Haldane in previous comments has said that even Google started small and of course it now has a market cap of more than $230bn. If one of these businesses got to one twentieth the size of the internet search engine giant, it really could be a big part of the answer

In the meantime, a decent bit of competition for the High Street banks and at least some more money for business certainly won’t do any harm. 

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