Peer-to-Peer Lending and Vdolg.ru

This week I have been exploring the subject of peer-to-peer (P2P) lending in microfinance—transactions that take place between borrowers and lenders without financial intermediaries. While the first P2P models were created years ago in the UK (Zopa in 2005) and the US (Prosper in 2006) as noted in Jennifer Powers’ presentation below, Russia just launched its first P2P model a few months ago. Vdolg.ru is an online portal where individuals can borrow and lend money without a bank or a financial intermediary. Those who lend 3000 rubles for a month can earn a profit of 500 rubles, and those who lend 10,000 rubles through Vdolg.ru for six months can earn 5,000 rubles. The founders of the project invested the first 200,000 rubles and that sum was completely borrowed by external users within a month. There is a 1.5 percent fee per each transaction charged by mobile operators. In addition borrowers are charged commission per each transaction. Commissions are deducted from the borrowers’ phone prior to sending a message with a code that they have to use to retrieve their loans. Commissions go directly to the founders of the website.

While Vdolg.ru uses traditional methods to identify reliable borrowers and to redeem the borrowed funds, according to an article recently published in Russian Forbes, the company already has a 15 percent default rate within a few months of its existence. In addition, in Russia electronic signatures have never been used in the court of law to prove contractual obligation; therefore, founders of the site bear additional risks when operating in such an unregulated environment. Vdolg.ru is translated in English as “In Trust” or “In Credit” and while the site is meeting an unmet need of the Russian unbanked, it will be difficult for Vdolg.ru to continue operating if default rates do not decrease and if Russian government does not create a necessary regulatory environment.

To learn more about peer-to-peer lending, I would like to refer you to a very informative presentation delivered in 2008 by Jennifer Powers from EA Consultants, "Peer-to-Peer Lending: Is Financial Democracy One Click Away?" Along with other speakers, Jennifer discussed this subject as it related to the release of two studies.

The point that I want to emphasize after listening to Jennifer’s presentation is her statement that in order for peer-to-peer models to work there should be trust between strangers and enforced rule of law to make electronic signatures as trusted as paper signatures. Vdolg.ru is currently operating in a country where neither of these requirements is met.