JOHANESSBURG - Inspired by success stories overseas, IT businessman Sean Emery has launched a social lending website in South Africa. The website, www.rainfin.com, connects lenders and borrowers directly with each other, removing the need for them to deal with a bank.
The appeal of social lending is that by putting lenders directly in touch with borrowers, each party can reach a better deal. The borrower ought to be able to get a cheaper loan, and a lender should earn a better return on his money than he would if he deposited it in a bank account.
But there are disadvantages to cutting banks out of the money-lending equation. The most obvious is that a deposit holder at a bank is arguably less likely to lose money than someone who makes a loan via a social lending website.
Despite the overseas success, social lending has not taken off in South Africa. In 2008, a company called Angelmoola tried to make a go of it, but was apparently unsuccessful. One stumbling block was the need to tiptoe carefully around legislation regulating banks and lenders.
RainFin’s Sean Emery (Twitter @SeanPaulEmery) says that South Africa has some unique rules and regulations, and that much effort was required to make sure that the business was compliant with all relevant legislation.
Rainfin is not a licensed bank but it is registered with the National Credit Regulator. Emery says that RainFin does not accept deposits, and thus a banking license is not required.
Says Emery: “Social lending is bringing massive disruption to the financial services sector around the world by using the Internet to disintermediate banks, the traditional middlemen between people who have money to invest and those who need to borrow.”
But removing banks as middlemen does not mean that the middleman is removed entirely – he is simply replaced with a new one in the form of RainFin.
For taking the place of middleman, RainFin charges a fee equivalent to 3% of the value of every loan granted on its system. This is split between a 2% “origination fee” paid by the borrower and 1% charged to the lender.
In contrast, banks make their money from the difference between the interest rate charged to borrowers and the lower rate paid to depositors.
Any South African resident over 18 can borrow and lend through RainFin. After passing a “strict credit vetting process”, borrowers can apply in the marketplace for loans of between R1 000 and R75 000 with a maximum repayment period of one year.
Borrowers can specify the loan amount, the maximum interest they are willing to pay and the loan duration up to a year.
Emery says that strict vetting of borrowers is key to RainFin’s success. Thus, he estimates that 85% of applications will be declined. He hopes to create a “good pool of highly creditworthy individuals.”
RainFin’s system will start with unsecured loans. But it hopes to grow its offering to include secured loans such as mortgages and vehicle finance.
The National Credit Act stipulates that a lender does not need to register with the regulator, provided loans granted do not exceed R500 000 and the number of borrowers is not greater than 100. RainFin’s system enforces these limits.
Lenders can invest between R100 and R500 000 across a portfolio of loans on the RainFin platform.
Individual lenders can invest between R100 and R500 000 across a portfolio of RainFin loans.