Alternative finance refers to financial channels and instruments that have developed outside of the traditional finance system such as regulated banks and capital markets. It is a 21st century substitute to traditional banks for financing businesses or individual needs.
In other words, Alternative Finance refers to non-banking financial services that fill the gaps left by traditional institutions, offering greater variety, more flexibility and easier access to funds. This serves populations more.
Alternative Finance is increasingly finding ways to combine the best of technology with personal support to help both individuals and businesses.
Some of the first Alternative Finance institutions in Nigeria were the microcredit schemes, which targeted those that don’t have access to finance like the poor members of the community, women’s groups, minority groups, Micro, Small and Medium Enterprises (MSMEs) with no credit history. Now we have other types of Alternative Finance coming up, among which are the Crowdfunding and Peer-to-Peer lending options.
Since the establishment of Nigeria’s first Fintech bank, SunTrust Bank Nigeria Limited in August 2016, the prospects of Crowdfunding and Peer-to-Peer lending looks bright.
Crowdfunding is a form of Alternative Finance that small businesses, corporate organizations and individuals raise money for their projects and needs through contributions from many people through a web platform or portal. Typically, the parties to a crowdfunding transaction include a project owner/campaigner, contributors and a web- based intermediary/ platform, through which the public donate the money.
Crowdfunding has recently emerged as an innovative source of finance for micro, small and medium scale enterprises (MSMEs) with an estimated value of USD 16.2 billion raised in funds, globally as at 2014. The sector has an enormous potential of becoming the largest financier of SMEs worldwide as entrepreneurs continuously seek flexible ways of raising funds beyond traditional bank loans.
Funds raised by way of Crowdfunding ensure that small businesses have the credit to grow their business, which in turn creates jobs and stimulates economic growth.
Types of Crowdfunding
Lending Based – Direct lending where contributors are lenders and project owners are borrowers
Equity Based – Funds are contributed in return for shares in the project/company while it is unlisted on a stock market
Reward Based – Funds are contributed in return for products and services
Donation Based – Funds are contributed for project owners as a form of charity without returns
The foremost benefit of crowdfunding is that it bridges the finance gap for MSMEs and ultimately, leads to job creation and growth of an economy.
Peer-to-peer lending, sometimes abbreviated P2P lending, is the practice of lending money to individuals or businesses through online services that match lenders directly with borrowers. Since the peer-to-peer lending companies providing these services operate online, they usually operate with lower costs and offer lending services more cheaply than banks. Thus, businesses and individuals who cannot easily get conventional funding are lent money by savers who earn much higher interest rates than they can get by putting their money in a savings, while borrowers receive money at lower interest rates.
Peer-to-peer lending brings much-needed competition and choice to the banking industry, providing funds to creditworthy businesses and individuals. With peer-to-peer lending platforms, consumers and businesses can ‘depend on each other’ for borrowing and lending.
Peer-to-Peer lending will grow fast and become a viable source of funding for MSME’s and individuals. Private Investors should also start looking at it as an avenue of investment