On Zopa

We look to the future, always. As 20th Century capitalism comes to an end what will take its place?

At the root of the present financial crisis is the complete dislocation of lender and borrower. Loans were made with little oversight to people who couldn’t pay them back. These loans were packaged up, sold, repackaged, resold then the risks on the instruments were insured and re-insured so nothing could go wrong.

When bankers started to get the creeping feeling some of these loans were bad nobody actually knew where the bad loans were and in a panic all the loans seemed bad. Banks lost confidence in each other, the credit markets froze and to get them moving again governments around the world have had to step in. Clearly what comes out of the other side will have to be radically different to what has led us into this crisis. The answer lies beyond the West.

Microfinance is the future

Microfinance is a brilliant idea that should not be limited to the developing world. The basic principle is that savers should be able to lend directly to borrowers. The saver has far greater oversight over how their money is used and a much better rate of return. The borrower gets a lower interest rate because of the lower overheads involved.

The drawback for the saver is the risk of default. However as they have control over who to lend to this risk is managed by the lenders themselves.The closest thing we have to this today is Zopa. It is a peer to peer lending service which is close to the model described above. The only difference is that there is no direct connection between borrower and lender as there is in Kiva. This weakens one of the most attractive elements of Kiva which is the borrower making the loan decision about which individual to lend to.

It would be interesting if Zopa went the whole Kiva hog and opened up the lenders and borrowers to each other in the same way. There would be no need for heavy infrastructure and offices, all that would be required is a Kiva like structure to knit together existing credit unions so that capital could flow more efficiently around these small institutions. This is the key. Microfinance already exists in the shape of building societies and credit unions. What we need now is enough imagination to update these trusted structures with new technology and make them the cornerstone of a new financial system.

Related articles by Zemanta

• Social finance: bubble or set for mainstream?
• Fynanz: How Students Spell Peer-to-Peer Loans
• Zopa Says Nopa to US Operation