Peer to peer lending volumes in the UK reached a new high in 2015 of GBP 2bn and is now expected to double in 2016 to GBP 4bn. This upward momentum has been driven due to the following 5 factors:

1) Maximise Use of Technology: allows the peer to peer lending platforms to introduce investors directly to individuals or businesses looking for loans. The cutting edge technology has facilitated new platforms to make loans faster and cheaper whilst operating at a very low cost compared to traditional financial institutions with their large and expensive corporate infrastructure and branches.

2) Demographics: the younger generation are very comfortable and prefer managing their finances online and are also most likely to be rejected for loans by traditional financial institutions, hence for this generation peer to peer lending is seen as win-win. Also, they see banks in particular in a negative light since the global financial crisis of 2008 and prefer to seek alternative financing solutions.

3) New Capital Requirements for Banks: following the global financial crisis, banks are now forced to hold more capital in general and also allocate more capital to customers considered to be of higher risk. Banks have also grown more risk adverse with their lending decisions. This in particular impacts small to medium enterprises who are considered riskier than large corporates, but are essential for the growth and providers of many jobs in any economy. Hence, a need for alternative funding was established.

4) Higher Rate of Return: with Bank of England keeping interest rates at near zero, savers are looking for a higher return on their cash. By lending money to individuals or businesses at reasonable rates of interest as an investment it has provided a good source of income whilst diversifying from traditional shares and bonds.

5) Government and Regulator Support: The UK Government is supporting lending to businesses via peer to peer lending platforms even with taxpayers funds, whilst also the regulators have ensured a suitable framework has been laid out to support the growth of the industry and ensure the peer to peer lending providers are monitored to reduce any potential blow-ups.

The future looks bright for the peer to peer lending sector as the underlying conditions that have fuelled its growth in the last 5 years are set to remain. Presently, despite its exceptional growth so far – the industry only accounts for less than 4% of the credit lending market in the UK, which mean there is plenty of opportunity to continue its extraordinary growth rate over the next 5-10 years. Which is good news for both borrowers and investors.

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