Influencing Factors on the Willingness of Lending in online P2p Market in China

Influencing Factors on the Willingness of Lending in Online P2P Market in China

Liu Meichen

1001232060

CHAPTER 1

INTRODUCTION

1.1   Research Background

With the development and popularity of Internet, a new financing model guided by information technology is witnessed, the Internet finance model, which is an online P2P finance. P2P lending means people-to-people lending model that allows people who wanted lend micro loan with those who want to borrow via online financial platform, rather than borrow money in traditional financial institution, such as a bank (Chen & Han, 2010). It unlike traditional financial institution, the online P2P lending platform act as an intermediary, which emphasis on the direct contact between borrowers and lenders to achieve lending transactions, therefore, the platforms’ responsibility is effectively transfer all the loan information and personal information to both borrowers and lenders, and the platform will profit from service fees charged by both borrowers and lenders (Klafft, 2008). Thus, this kind of online P2P lending model is effectively combined internet technology, e-commerce technology, and micro-credit together, and which company can provide such online lending platform is called “P2P lending company”.

In 2005, the first platform of online P2P lending was born in Britain, called Zopa. Nowadays, Zopa has more than 63,000 lenders and 150,000 borrowers, it has lent over £1.72 billion to UK consumers (Zopa Limited, 2016). Zopa as a precedent lending model which has been rapidly copied and adapted in many other countries, and various online P2P lending platforms are increasingly set up in the world, such as U.S.A’s Prosper, which is currently the most biggest online P2P lending intermediary in the world, it is founded in 2006, and which has attracted 2 million members and over 7 billion U.S. dollar in funded loans (Prosper Funding LLC., 2016). In 2007, the first China’s online P2P lending company founded in Shanghai, called PPDai. Soon afterward, with the advantages of P2P lending model of convenient, low entry barrier, and solving the difficulties of financing, there are increasing number of pool people join this financing platforms to get loan. According to the annual report of P2P lending published by “wangdaizhijia.com”, China’s P2P lending platforms has been growing at an unprecedented pace since 2012. Specifically, the total number of Chinese P2P lending platforms grew from 200 in 2012 to 2,959 in 2015, and the cumulative volume in entire online P2P lending platforms in China totaled 1.3652 trillion Chinese yuan (approximately $20.478 billion) until December of 2015 (WDZJ.com, 2016).

Figure 1.1 The Number of Online P2P Lending Platforms in China[pic 1]

PPDai is the first Chinese online P2P lending platform, which is a pure credit unsecured loan operation model, which means the occurrence of lending transactions are totally rely on lender’s credit analysis of borrower to decide whether to lend, in addition, borrower can obtain the loan without the needs of guarantee or collateral, and the platforms only act as intermediary service where have no responsibility if borrower defaults. So lenders take a considerably risk under this lending model. But, the emergence of this kind of lending model solved difficult financing problem for a number of pool and small and medium sized enterprises who can’t get loan from bank. According to the China’s small and medium sized enterprises survey in 2016, which shows that, until the end of 2015, there has more than 130,000 small-medium sized companies in China, medium sized company occupied 2%, while small sized companies accounted for 98%. However, only 24% of them can get a loan from bank, and 13% companies have to borrowed money from other channels, more than 70% of companies have no qualification to get loan from bank due to they are lacking of real estate mortgage (www.sme.gov.cn, 2016). Thus, compared to the traditional bank lending model, online P2P lending industry has three attributes which are lending participants universality, provide flexible position on transaction, but can yield high risk and return. Therefore, online P2P lending satisfied the needs of individual consumption loans and personal finance and investment, and getting stronger day by day in China.

Despite the fast growth of P2P lending industry, comparing with abroad P2P lending platforms, Chinese P2P lending platforms still are immature. There are many problems exist in Chinese P2P lending markets. For example, Chinese legal system lacks the specific regulatory requirements for P2P lending platform and a majority of P2P lending platforms don't have a sound risk management system (Takeshi, 2014). With the more and more entities step into the P2P lending industry, these problems become more obvious and caused high trust risk of investment. Meanwhile, during the online P2P transaction, point to point information exchange and capital flow related to the lending participants bring worries about credit risk, and under the situation of information asymmetry, which can resulting the adverse selection and moral hazard between borrowers and lenders (Lin & Viswanathan, 2009) and thus it become the biggest barrier of operation in online P2P lending industry. Furthermore, due to high transaction cost in traditional bank, the formal financial system is difficult to completely cover the micro loan area for small-medium sized enterprises and poor people, but Internet finance which based on the big data can help to overcome this problem to some extent (Manyika, et al., 2011). Therefore, this research has certain reference significance which can improve the trust between borrower, platforms and lenders, and thereby increase lender’s willingness of lending in the network lending industry.

1.3   Problem Statement

In China, P2P lending platform as a new private lending model, which enables people who has an idea to make investment and financing via third party to lend money with who want to borrow. Through figure 1.1 can be found that Chinese P2P lending platforms grew up very quickly since 2012, however, since 2014, the Chinese P2P lending market erupted widespread collapse. According to annual report of China’s online P2P lending market of “Wangdaizhija.com”, there was 896 problematic platforms in 2015, which was 3.26 times higher than the total volume in 2014 (WDZJ, 2016).