FIBR Briefing Note 3: Alternative Lending

During the past years, the U.S., the UK and China have seen an explosion of what has come to be called ‘alternative lending’—domestic lending by or through digital platforms to distinct niches such as consumers and SMEs which are ignored by conventional lenders. In these environments with rich data sets and relatively developed capital markets, much of the funding has come from institutional investors who are treating these loans as a new asset class. However, in most developing countries, while fintech models have also proliferated, alternative lending has generally struggled to gain scale. The main reasons for this include the difficulties of obtaining local funding and of overcoming regulatory obstacles. This Briefing Note surveys the emerging landscape of alternative lending with a view to informing tech and fintech companies which are already in, or which plan to enter, this space in developing countries. The main message is that fintech companies intending to lend need to ensure that they have a robust funding strategy which will support them to get to the necessary scale. This strategy will include a review of the regulatory requirements for lending and data sharing in the domestic market.