Peer-to-Peer Lending In China: A College Education For Everyone
This past summer I took some time off to visit my family in Boston. Even though I was on the other side of the world, I still felt as though I had a special link to China. On one of the rare opportunities I had to watch American TV, I happened to turn on the television at the exact moment a PBS special came on called “China Prep,†a documentary that follows five Chinese students living in Chongqing through their senior year as they prepare for the national college entrance exam. Overall, I feel that I finish many American shows about China with a sour taste in my mouth about the way they portray China. This, however, is an excellent documentary. If there is one thing you learn after watching it is the realization that Chinese students work VERY hard to get into college. They are not working hard for just a few years before to do some community service, sports, and SAT prep. A Chinese student on a college path feels the pressure to get into a top university from the second they begin their education. Now what if after all those years of prep, you test into your dream school, but then you haven’t even gotten through your first or second year before you find you don’t have the money to pay for the rest of your college education?
Approximately 50 million Chinese cannot afford college and with an underdeveloped student-loan system from banks, it seems like these students have few options to get the money they need. That is, unless they take advantage of several innovative companies that are popping up to offer peer-to-peer (p2p) loans.
Peer-to-peer loan websites connect individual investors with individual borrowers. The three most well-known websites that offer these services in China are Qifang, PPdai and 51Give.
Qifang (Student Loans)
Of the three, Qifang is probably one of the most well-known at this point. The company was featured in Businessweek at the beginning of December, but I discovered Qifang while reading Ryan’s post on the TechDynasty blog. Most of the company’s recent press is due to its selection by the World Economic Forum as a 2009 technology partner on the basis that its business model has the potential to positively impact the lives of millions in the global economy. Here is an image from their website illustrating how the lending platform works:
Thanks Ryan
PPDAI (General Loans and Student Loans)
PPDAI, established in Shanghai in October 2007, provides a channel for borrowers and lenders to post their desired interest rate and loan amount. The company is similar to Qifang, however it also allows for general lending in addition to student loans. The loan amounts range from RMB3,000-100,000. Chinese P2P loans rely much more on the relationship that students develop with potential lenders instead of credit scores like in the US/UK. The average loan interest also depends on this relationship instead of on a credit score. According to an email I received from the company’s CTO and co-founder, Jack Gu, the average interest earned on participating in a PPDAI general loan is around 15%, while the interest for a student loan is lower.
51Give (Microfinance and Student Loans)
51Give is a P2P microfinance lending facilitator for Chinese students. 51give partners with micro-finance and education institutions. The partner borrowers and the students who hold acceptance letters from qualified academic institutions upload their borrower profiles directly to 51give so lenders can select who to lend to. Lenders can likewise see where their money goes, who the money goes to, when they repay, and how the loan makes changes in the borrowers life.
The Observer’s Thoughts
P2P lending is very suitable for China since it is difficult for students to get the money they need for college through traditional lending institutions. Still, I have a few questions about how it all works:
How are students who post their requested loans selected in a fair and unbiased fashion? While there will be specific cases where one student is clearly a more desirable candidate than another, there are bound to be instances where multiple students face similar financial constraints.
I also worry about potential for fraud in the system. For Qifang, they scan Chinese ID cards, record parents’ names and ID cards and document the student’s hometown, grades in her or her major, and school. Another loan default preventative measure is the concept of “losing face.†Perhaps I am cynical but there are a lot of greedy people in this world, and it seems plausible that sometimes necessity may prove more important than traditional cultural values.
Most importantly, what happens to the lenders and borrowers if one of these sites fails?
*If you are interested in microfinance in China another great resource is Wokai. You can check out the Wokai blog here.
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Thanks for the shout-out about Wokai! I think your question about what happens to lenders and borrowers if a site fails is a valid one. I think the best ways to counteract this are low operating costs and effective partnerships.