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Sharia-Compliant Digital Lending

Sharia-Compliant Digital Lending

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With global mobility down and no prospects for physical experiences in foreign lands insight, we are taking a virtual trip towards the Global Middle East! Towards Islamic credit markets, and towards yet another exciting opportunity in digital lending!

A Brief Introduction to Sharia-Finance:

Islamic finance refers to how businesses and individuals raise capital in accordance with Sharia-law, a set of rules that comply with the Quran, the Sacred Scripture of the Muslim community. Key concepts include the avoidance of riba (usury) and gharar (ambiguity or deception). Money is seen as a representation of value, not an asset in itself, leading to the saying’ money cannot make money.

Therefore, simply lending capital with interest (and therefore for profit) is considered riba – and prohibited under Islamic law.

The concept of risk-sharing must be considered when raising capital in accordance with Sharia law. The Sharia-compliant product uses a bank fee rather than an interest payment structure while keeping product features very similar. Lending activities must happen within a banking framework in which the financial institution shares in the profit and loss of the loan it underwrites. To comply with the risk-sharing approach of Sharia-compliant lending, the Islamic bank may pool investors’ money and assume a share of the profits and losses.

Why Sharia-compliant Digital Lending?

As the Islamic Finance Marketing Experiment 2020 found, consumer preferences for Sharia-compliant lending products over conventional products are relatively un-elastic when it comes to religious borrowers. In a randomized experiment in Jordan, the researchers found that Sharia-compliance increased the application rate for loans from 18% to 22%, which equates to a 10% decrease in interest rates.

*Source: Islamic Finance Marketing Experiment 2020

These barriers add to the intrinsic dislike of conventional loans for religious borrowers. The findings suggest that religious considerations are partially responsible for the low utilization rate of household credit in developing countries with a large Muslim-population. High lending rates, an exclusive attitude, complicated procedures, and bureaucratic policies of traditional FIs are common obstacles reported by (M)SME when getting a loan. Muslim-majority countries have a 24% lower participation rate in active borrowing from banks (10.5% versus 7.9%) and a 29% lower rate of having a bank account (40.2% versus 28.6%).

Sharia-compliant digital lending products could not only lower access barriers to Islamic finance, but they could also contribute to mitigating the region’s financing gap, which sits at $335bn for South Asia and $186bn for the Middle East. Digitization could also propel Islamic finance’s growth in general, which is experiencing moderate to sluggish growth (1-2% in the next 2-3 years, S&P Moodys 2020).

Global investments in Islamic economy-relevant companies are already rising. In 2020, VC and other direct investments amounted to 11.8 billion dollars (Dinar Standard , 2019). Almost half of the investment volume, namely, USD 4.9bn, is invested in Islamic Fintech, highlighting the objective of putting technology-enabled finance to use to mitigate the historical slagging growth of Islamic Finance in MEASA.

Notably, the UK accounts for the most registered Islamic Fintech Firms with 27, followed by Malaysia, the UAE, and Indonesia (IFN Islamic Fintechs, 2021). A growing number of more than 120 Islamic fintech firms already offer Sharia-compliant financial products, many of them in the form of digital loans. Examples of Sharia-compliant digital lending platform include MicroLeaP (Malaysia), Dana Syriah (Indonesia), Nusa Kapital (Malaysia)…

Tradition meets Innovation: The Opportunity

According to Dubai International Financial Center (DIFC), Sharia-compliant assets currently represent 25% of banking assets in the Gulf Council Countries (GCC) and 14% of total banking assets in MEASA. Globally, Sharia-compliant AuM are expected to reach $3.8 trillion by 2023, almost doubling their 2020 volume of $2 trillion and growing at a CAGR of 10-12%.

The S&P Islamic Finance Outlook 2020 emphasized the need for inclusive standardization by relevant authorities and stakeholders to sped up Islamic finance advancement. It also hints at the role of Fintechs for supplying the necessary innovations with regards to products and technological infrastructure and for achieving a financial landscape that aligned with ESG objectives.

While market growth remains paced, it is gaining traction: Sharia-compliant digital lending operators in Indonesia have already doubled their Assets under Management between October 2019 and October 2020 (OJK, 2020). As recently as February 2021, the Bank Syariah Indonesia (BSI) was established after consolidating three state-owned banks. BSI has a net worth of $1.4 billion and works on the efficient integration of the three forming banks: Bank BRI Syariah, Bank Syariah Mandiri, and Bank BNI Syariah. The BSI shall allow platforms to better access credit scoring, e-KYC, and digital signature services. It will also integrate customer data from the forming three banks to help fintech companies partnering with BSI to offer services to its customers.

The digital lending market volume in the Middle East (MEA) has recently experienced impressive three-digit annual growth rates with complementing investments in several Arab lending platforms. Excluding Israel from the Middle East region, it is found that 95% of this digital lending volume stems from Debt-based instruments, roughly 5% from equity-based models, and 0.18% from non-investment models such as Waqf (donation)-based crowdlending (CCAF, 2019).

The biggest Sharia-compliant platform for SME lending in gulf countries is beehive, with approximately $170m in facilitated loans in 2020 (as of spring 2021). The platform recently partnered with government entities to roll-out a digital financing platform for micro and small Saudi Arabia enterprises. Across the UAE region, retail investors account for the dominant share of digital loan investments, with 90% against 10% institutional investors.

Another underlying driver is that since 2017, Islam is the fastest-growing religion in the world. It is already the second-largest religion after Christianity, and by 2025, approximately 30% of the global population will be Muslims. Sharia-compliant lending platforms are not only rolling-out products that their customers desire. They are entering an underserved growth market, while also captivating the general socially responsible investors and borrowers due to an emphasis on fair and equitable treatment of counterparties in the financing agreements.

We at Exaloan are excited to see where the market is headed! If you are interested in country-specific details, please contact research@exaloan.com.

 

Further Read / Interesting sources:

If you want to find out more about our ecosystem, please reach out to us.

We look forward to working with you!

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Junior Process Manager Intern / Working Student

Junior Process Manager Intern / Working Student

Financial Service Technology Company in Frankfurt, Germany 

Who Are We?

We are Exaloan, a financial services technology company. We provide institutional investors with cutting-edge tools to invest globally in digital loans. We operate at the intersection of asset management, software development, and advanced analytics with the ambition to drive innovation in one of the fastest growing FinTech sectors. And we are unstoppable to reach our goals.

Who Are We Looking For?

You identify as a self-starter with an entrepreneurial spirit, a curious, creative mind, and a profound understanding of (or deep interest in) process development, agile work, and organizational design. You are eager to work in the Fintech industry and want to join our team and contribute to the growth of the company. You work independently and like to take on responsibility and your own projects.

 

Your Role

You will be working directly with the founding partners of industry experts across the fields that are at the heart of what we do: capital markets, portfolio management, banking law, software engineering, and machine learning. You will be a full member of our team from day one. You will work directly with our COO on projects to build our corporate structure and implement processes with the team.

 

Depending on your interest and skillset your activities could entail the following fields:

  • Organizational and process development, e.g. Project management to implement agile tools and techniques, conducting workshops and training with the team, building our training and knowledge hub on our intranet
  • Develop controlling tools for the financial steering and forecasting of the company
  • Preparing and Coordinating startup program and award applications
  • Supporting HR and recruiting-related tasks, e.g. developing the employer brand, coordinating and conducting job interviews, and guiding new employees in their onboarding
  • Supporting marketing activities via social media and product-related platforms

Your Profile

  • We are open about you being enrolled in a BSc. or an MSc. Program and will arrange schedules together with you according to your classes.
  • Your studies and/or experience focus on any of these or adjacent fields: general management, business administration, process and project management.
  • You identify as a self-starter with an entrepreneurial spirit, a curious, creative mind and a profound understanding of (or deep interest in) process development, agile work and organizational design. 
  • To work effectively in our team, you should be familiar with project management and agile techniques. Fundamentals in tools such as Jira and Sharepoint/O365 Suite will be a good basis for your work. Some interest in and if you have had some exposure to software development and/or capital and financial markets in the past will be helpful working with us.
  • Being an international team from many different countries we like to see you be confident speaking in English, German would be a plus. 

What We Offer

  • Flexible working schedule.
  • Professional and experienced team.
  • International environment and network.
  • Central office in the heart of Frankfurt.
  • Direct involvement in the entire trajectory of the firm.
  • A steep learning curve.
We hire for talent; hence you will be able to develop your role according to your personal goals and position yourself where you can make the biggest impact and contribution.

 

If you think you are a good fit for our team, send your application now!

Apply for this role


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    Credit Rating Agencies in Digital Lending

    Credit Rating Agencies in Digital Lending

    One of the fundamental issues for investing in digital lending stems from a lack of standardization and transparency in the market. Fragmented into hundreds of lending platforms, with equally many rating methodologies and rates, comparability among investment opportunities is a nightmare. Furthermore, lending platforms typically act as loan originators, brokers, and rating agencies at the same time. It’s an encompassing business model that has enabled digital lending to scale up rapidly, but it also creates an array of problems:

    Crooked incentives

    Agency problems root in the fact, that digital lending platforms benefit from scaling loan originating. A recurring feature of the digital lending market as of now is an excess demand for credit compared to available financing volumes . A common problem with platform business is balancing two sides of one coin: in this case supply of financing with demand for credit. With credit being a function of capital available, the incentive to jack up interest rates to attract and retain investors is imminent.

    In the long-run, the resulting problems are various: painful interest obligations for borrowers, adverse selection of the crowd, the threat of sliding into bad credit segments, a weakened competitive position, and high risks for the lending platform’s longevity.  

    In traditional fixed income markets, agency problems are mitigated by having not the originator, but an independent rating agency assesses the creditworthiness of the borrower.

    So much for (resolving) agency problems.

    Intransparency

    Another problem is information asymmetries. Who’s to say the credit score assigned to the loans is trustworthy? One might argue, that if platform A’s rating cannot be trusted, one can always pivot to platform B. Bad for platform A. And a cumbersome and annoying process for the investor. And then again, how will she compare her investment opportunities if each platform has a unique rating scale and methodology to assess risk? How is she going to decide? Trial and Error? Seems unsustainable.

    The lack of transparency, comparability, and standards in digital lending represents an enormous hurdle for investors. It also puts a ceiling on the industry as a whole with respect to cross-platform investments, scalability, and further institutionalization. Without a unified credit score, the comparability of investment quality across platforms is a nightmare. The problem is only amplified regarding investments across markets.

    In traditional fixed income markets, these information asymmetries between borrowers and investors are mitigated by independent rating agencies. In an independent assessment, a unified score is derived that enables the investor to compare and select amongst various investment opportunities. The rating assigned thereby shows an agency’s level of confidence that the borrower will meet its debt obligations as previously agreed. Some risk and uncertainty always remain, and investors are obliged to trust the agency and the results of its assessment. But having a third-party validator is best practice. Most of all it is helpful in creating more liquidity.

    So much for (resolving) information asymmetries.

    Why don’t we have an independent rating agency in digital lending?

    A rating agency in the digital lending market must score millions of individual loans based on a unified methodology that can be applied to the entire ecosystem in real time. Quite frankly, it may seem unnecessary given that most platforms already have tested and trustworthy credit risk assessment processes in place. However, for the sake of scalability and institutionalization, it will be necessary. And it must come from an independent party.

    It’s number crunching at scale. It requires massive amounts of qualifiable data. But the beauty of this new lending era lies in being digital. Which means, the underlying processes are automatable, and which means the ecosystem is highly scalable.

    Introducing Loansweeper

    We have developed software, that derives a standardized and platform-agnostic credit score in real-time, enabling investors to get a transparent and comparable risk assessment on investment opportunities in digital lending. From an independent third party. And all in on hand on our global B2B marketplace across numerous lending partners.  

    We developed our software because digital lending will fundamentally disrupt the global credit markets. It is already happening with regards to the loan application and assessment process. However, to open this market to institutional investors, we built the necessary technology to not only digitize, but standardize the funding process in digital lending.

    If you want to learn more about how we can provide you with one interface to the source, score, and ultimately fund millions of individual loans across markets, reach out to us.

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    Exaloan Participates in Cisco’s Global Problem Solver Challenge 2021

    Exaloan Participates in Cisco's Global Problem Solver Challenge 2021

    2020 has been a tough year for everyone with many challenges that we were not prepared for. Despite all the difficulties, Exaloan managed to continue working, running its operations smoothly and achieving great things. In 2021, we aspire higher.

     

    It is our pleasure to announce our participation in Cisco’s Global Problem Solver Challenge 2021 as a great way to kick off the year. What is the challenge about? At Cisco they aspire to identify and empower early-stage innovative technology solution providers to solve huge social and environmental problems. They aim for solutions that are not just going to make these problems disappear but will also stay persistent in our increasingly digital economy. Cisco truly believes that good ideas put in practice with digital technologies that bring together many devices and a bunch of data, always have the potential to make the difference.

    With this support and cooperation, we would be able to extend and foster our outreach to even more regions where under-baking and a lack of financial inclusion hampers local economy and potential for individuals.

     

    We have applied for the main challenges as well as for the digital inclusivity challenge and we are looking forward to having the first results in March of this year.

     

    Check out our application video to see how we want to solve a global problem and close the global funding gap.

     

     

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    Full Time Data Scientist

    Full Time Data Scientist

    Financial Service Technology Company in Frankfurt, Germany 

    Who Are We?

    We are Exaloan, a financial services technology company. We provide institutional investors with cutting-edge tools to invest globally in digital loans. We operate at the intersection of asset management, software development, and advanced analytics with the ambition to drive innovation in one of the fastest growing FinTech sectors. And we are unstoppable to reach our goals.

    Who Are We Looking For?

    You are open minded, self-driven and an expert in your field. You are eager to work in the Fintech industry and want to join our team and contribute to the growth of the company. You work independently and like to take on responsibility and your own projects.

    Your Role

    • You will be working directly with the founding partners of industry experts with more than 100 years of combined experience across the fields that are at the heart of what we do: capital markets, portfolio management, banking law, software engineering and machine learning.
    • You will be a full member of our Software Development team from day one.
    • You will be in charge of your own projects.
    • You determine the effectiveness and certainty of new data sources and data gathering approach. 
    • You analyze large structured and unstructured data sets and derive insights from them.
    • You develop custom data models and algorithms to apply to data sets. 
    • You will manage components of our analytics infrastructure from data source to visualization.

    Your Profile

    • You have a Bachelor or Master’s degree preferably in the field of Computer Science, Applied math or Information technology ideally with a focus on Data Science.
    • You already have some practical work experience in a relevant field, ideally 3-5 years
    • Good knowledge as well as previous working experiences are a plus.
    • Joining an international team from many different countries excellent English language skills are essential.
    • Ideally you are adept at using large data sets to find opportunities for product and process development.
    • You identify as a self-starter with an entrepreneurial spirit, a curious, creative mind and a profound understanding of (or deep interest in) data science quantitative analytics, and/or capital markets.
    • You are dedicated and familiarize yourself quickly and comprehensively with new topics while also being able to prioritize and achieve objectives.
    • To work effectively in our team, you should be familiar with Python, Node.js, and ideally NoSQL Databases. Essentials in Machine Learning and Big Data Applications such as h2O, Apache Spark or similar, are your daily business.
    • You have a very good knowledge of MS-Office applications.

    What We Offer

    • Flexible working schedule.
    • Professional and experienced team.
    • International environment and network.
    • Central office in the heart of Frankfurt.
    • Direct involvement in the entire trajectory of the firm.
    • A steep learning curve.

    We hire for talent; hence you will be able to develop your role according to your personal goals and position yourself where you can make the biggest impact and contribution.

    If you think you are a good fit for our team, send your application now!

    Apply for this role


      Full Name *


      Email *


      Phone number


      .


      What are you interested to contribute to Exaloan? *


      Documents

      * Please submit CV/Resume and Cover letter in English

      Resume/CV *


      Cover letter *


      Other documents


      Linkedin URL


      Twitter URL


      Github URL


      Portfolio URL


      Other website



      Salary expectation


      Additional Information


      .

      .

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      Full Time Data Engineer

      Full Time Data Engineer

      Financial Service Technology Company in Frankfurt, Germany 

      Who Are We?

      We are Exaloan, a financial services technology company. We provide institutional investors with cutting-edge tools to invest globally in digital loans. We operate at the intersection of asset management, software development, and advanced analytics with the ambition to drive innovation in one of the fastest growing FinTech sectors. And we are unstoppable to reach our goals.

      Who Are We Looking For?

      We are looking for a savvy Data Engineer to join our analytics team. You are open minded, self-driven and an expert in your field. You are eager to work in the Fintech industry and want to join our team and contribute to the growth of the company. You work independently and like to take on responsibility and your own projects.

      Your Role

      • You will be working directly with the founding partners of industry experts with more than 100 years of combined experience across the fields that are at the heart of what we do: capital markets, portfolio management, banking law, software engineering and machine learning.
      • You will be a full member of our Software Development team from day one.
      • You will be in charge of your own projects.
      • You design and maintain aspects of our data center.
      • You collect large and complex data sets according to the business requirements. 
      • You consolidate, prepare and stage data for further processing and improve data reliability, efficiency and quality
      • You help define, develop and maintain our data infrastructure and automate and optimize data pipelines

      Your Profile

      • You have a Bachelor or Master’s degree preferably in the field of Computer Science, Applied math or Information technology ideally with a focus on Data Engineering.
      • You already have some practical work experience in a relevant field, ideally 3-5 years
      • Excellent English language skills are essential.
      • You identify as a self-starter with an entrepreneurial spirit, a curious, creative mind and a profound understanding of (or deep interest in) capital markets, data science and/or quantitative analytics.
      • You are dedicated and familiarize yourself quickly and comprehensively with new topics while also being able to prioritize and achieve objectives.
      • To work effectively in our team, you should be familiar with Python, Node.js, and ideally NoSQL Databases. Essentials in Machine Learning and Big Data Applications such as h2O, Apache Spark or similar, are your daily business.
      • You have a very good knowledge of MS-Office applications.

      What We Offer

      • Flexible working schedule.
      • Professional and experienced team.
      • International environment and network.
      • Central office in the heart of Frankfurt.
      • Direct involvement in the entire trajectory of the firm.
      • A steep learning curve.
      We hire for talent; hence you will be able to develop your role according to your personal goals and position yourself where you can make the biggest impact and contribution.

       

      If you think you are a good fit for our team, send your application now!

      Apply for this role


        Full Name *


        Email *


        Phone number


        .


        What are you interested to contribute to Exaloan? *


        Documents

        * Please submit CV/Resume and Cover letter in English

        Resume/CV *


        Cover letter *


        Other documents


        Linkedin URL


        Twitter URL


        Github URL


        Portfolio URL


        Other website



        Salary expectation


        Additional Information


        .

        .

        Categories
        News

        Credit platforms and their key role in the context of global funding bottlenecks

        Back in October, Exaloan became a member of the Association of German Lending Platforms, representing digital debt financing in this association. Earlier this month, we featured an article on their quarterly briefing where our CEO and co-founder, Luca Frignani together with our Business Developer for SouthEast Asia, Katharina Lentge, talked about the role of credit platforms in closing the Global Financing Gap.

        Credit platforms and their key role in the context of global funding bottlenecks

         

        Even before the pandemic, access to finance was considered one of the biggest growth hurdles for companies, especially in developing countries. Around half of all companies worldwide have no access to credit products. As a result, every year there is a shortfall of around $ 5.2 trillion in funding that investors could raise. In the coming months, this problem will increase further due to the difficult physical access to financial institutions and recessive tendencies. Financial inclusion as a development goal includes the responsibility to make affordable financial services available to the players in our economy according to their needs. Innovation in the form of digital marketplaces represents an opportunity to fulfil this responsibility and to close the structural gaps in our financial systems. By digitizing the credit process, credit platforms are significantly simplifying access to capital for borrowers and opening up new markets for investors. The allocation of financial resources can also be managed effectively through data-driven risk assessment and sensibly through the promotion of certain market segments…

        To read the full article, please visit the Verband deutscher Kreditplattformen‘s website.

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        Rise of Digital Lending

         

         

        2020 – A year that put a spotlight on Digital Lending 

         

        After an exciting, disruptive, and challenging year 2020, it is time for us to recap the rise of digital lending. How did 2020 shape the nascent industry, and where is it headed? Let’s have a look.  

         

         

        The Origins – Building on the Crowd

        Digital lending emerged in line with the expansion of digital financial services. Its origins are thereby largely based in Crowdfinancing.

         

        Crowdfinancing is a concept that describes the opportunity for individuals, entrepreneurs, and companies to raise funds online by applying to a pool of investors, typically in the form of a campaign. Crowdfinancing platforms lower the threshold for borrowers and investors to partake in a transaction alike, by enabling direct and more fragmented interactions. The use of technology allows for improvements in speed, transparency, and costs. Various technologies are deployed to automate the entire credit process, from online-only applications, to data-driven risk assessments and automized matchmaking and allocation processes. Furthermore, borrowers can directly test the market value of their endeavor by being directly exposed to potential financiers.

         

        Common Crowdfinancing models include Equity-based Crowdfunding or “Crowdinvesting”, Reward-based Crowdfunding, Donation-based Crowdfunding, and ultimately Lending-based Crowdfunding or “Crowdlending”. Crowdinvesting thereby describes a form of equity financing, while Crowdlending is a debt-based financing solution.

         

        In Equity-based Crowdfunding, the loan is granted in the form of shares or mezzanine financing instruments. Accordingly, the investor acquires a share in the company and participates in its success, i.e., in the profits.

        In Reward- and Donation-based Crowdfunding, the borrower may provide a material consideration to his investors for contributing their capital, although the reward is not necessarily of financial nature, but may be idealistic. With donation-based Crowdfunding, the investor does not receive any financial or material consideration for his investment, but donations are made for ideological reasons only.

        Lastly, lending-based Crowdfunding describes a concept akin to a bank loan. As with any debt security, every investor that financially participates in the corresponding crowdlending project receives a fixed interest rate in return for his investment for a certain period of time and is repaid the principal.

         

        The latter is what is also commonly referred to as Digital Lending.

         

         

        The Rise – Redefining the Lending Value Proposition and Driving Financial Inclusion

        Lending is traditionally banking business. In more established credit markets, efficiency concerns drive digitization in the credit process, enabled by technological advancements and changing business requirements. Speeding up the lending process by means of automation is a significant advantage of Digital Lending over traditional lending products. It enables players to cater to changing consumer preferences for speedy and flexible financial services. Through automation, Digital Lending has extensively reduced the amount of time needed to obtain a loan from a couple of months to just a few hours. Furthermore, procedures from application to risk assessment and disbursement are becoming more transparent. Meanwhile, a lot of waste linked to cumbersome, manual processes is reduced by paperless and largely data-driven systems.

         

        In developing markets, the lack of traditional credit options has led to an enhanced proliferation of digital financial services. Globally, millions of people still lack access to traditional financing institutions due to structural barriers or simply because they do not fulfill conventional customer requirements. The result of an insufficient financial infrastructure is that a suboptimal amount of capital finds its way into these economies. By offering digitized solutions, digital lending platforms can also contribute to financial inclusion and make credit more widely accessible by reaching previously excluded borrower segments. Since credit is the backbone of economic growth, improved lending services are widely regarded as a key element in financial and capital systems. The potential value of Digital Lending for the real economy is largest in emerging economies that are characterized by a flawed banking system, high demand for credit and a young, and tech-savvy population.

         

        Digital Lending also opens a new segment for investors, leading to a broader, more diverse investable ecosystem. Compared to traditional asset classes, Digital Lending thereby offers an attractive new investment opportunity characterized by steady income generation, short duration and competitive returns. It can be accessed by technology-enabled players who can exploit process efficiencies using standardized default predictions based on qualifiable data and applied machine learning techniques.

         

         

        Current Situation – New Regulation and Institutional Capital Needed

        Digital alternatives thrive, where traditional services and products fail or become outdated. As of now, only a small fraction of lending activities is truly digitized. Of the trillion-dollar global lending market, a few hundred billion in transaction volumes are covered by digital lending platform activities every year – although at rapidly increasing growth.  

         

        We count more than 1,500 digital lenders globally, facilitating around 300bn USD in digital credit on an annual basis. At the same time, we observe that, on average, less than 20% of approved credit applications ultimately receive financing with the existing (mostly retail-based) investor basis. The fact that the demand for digital credit widely exceeds available funding volumes is a worldwide phenomenon. Now that the pandemic and subsequent economic scrutiny has forced many private investors to retreat their capital off digital lending investments, this problem is likely to persist.  

         

        The findings are critical, given the already existing financing gap of more than 5bn USD annually, which hinders in particular SMEs in developing countries to receive appropriate funding via traditional channels. 

         

        With these considerations in mind, several regulators in emerging economies have adopted progressive Fintech frameworks to incorporate digital financial services – and digital credit – into their conceptualizations for new, inclusive, and sustainable economic systems. With the groundwork of Fintech regulations almost done, in Southeast Asia, it is assumed that by 2025 around 8% of the local lending market will become digitized, representing more than 100bn USD in aggregated loanbook values across the region (Google, Bain & Temasek, 2020).

         

        A significant development this year has also been the proposal for a new European crowdfunding regulation by the European commission. The regulation, which is aimed to come into force in November 2021, acknowledges not only the importance of a Pan-European, harmonized regulatory framework for digital lending activities, but also the difficulties for the necessary institutional capital to enter the market. Proposed measures should ease the entry of institutional money.

        In line with these developments, few prominent players are opting for institutional capital as their only source of funding in the future, as the AltFi team reports in their alternative lending predictions for 2021.

         

        While these are favorable outlooks, one may put the careful caveat that the necessary technology for standardized, large-scale institutional investments in digital credit is yet to be implemented. Nonetheless, the introduction of large-scale institutional capital is certainly what Digital Lending needs to transform successfully into a full-fledged digital financial market. 

         

         

        Outlook 2021 – Great Fundamentals & Key Year Ahead

        Overall, 2020 has been a stress-test for the industry, highlighting the advantages and challenges with Digital Lending activities. Regulators all around the world, established financial institutions and governments locked their focus on digital lending platforms, closely eying their ability to distribute capital and process loan request rapidly and efficiently without personal contact over the past months of the pandemic.

         

        We have seen businesses being driven out of the market as their investor base crumbles. Other players have mobilized to adopt and conquer the challenges of 2020 successfully by means of new collaborations and improved risk management.

        Digital lending is still relatively young, but its sound fundamentals and far-reaching value proposition indicate, that the credit platform economy will continue to shape lending as we know it.

         

        At Exaloan, we look forward to an exciting new year for digital lending and welcome the unique challenges and opportunities of 2021!

         

        PS: Which topics would you like to read about in 2021? Let us know, which aspects of the digital lending investment ecosystem you would be interested in learning more about by submitting your feedback via info@exaloan.com

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        Revisiting the effect of COVID-19 on the digital lending market

        Revisiting the effect of COVID-19 on the digital lending market

        coronavirus-4937121_1920

        Months into the pandemic, we are taking another look at the global digital lending market and its response to COVID-19. As we approach the last weeks of 2020, loan origination volumes are still significantly down compared to 2019 levels, but a few signs of a potential recovery are starting to emerge. At the same time, further consolidation among lending platforms is likely. Credit defaults have remained quite well under control, albeit the full effect of the COVID-19 shock on lending platform loan books remains to be monitored. Some fintech lenders have demonstrated great flexibility in expanding their lending activities under government-backed programs, which indicates a sound basis for further recovering lost ground in terms of origination volumes. Having access to an institutional investor base thereby continues to be key for digital lending platforms’ future growth.

         

        Origination volumes & performance

        We see an expectable decrease in origination volumes across the product palette, particularly for consumer loans and mortgage loans. This trend is manifesting and likely to continue for a short-to-medium term outlook. 

        In Indonesia, one of the largest digital lending markets in Southeast Asia, with more than 9bn in originated loans as of September 2020, credit demand is slowly returning to pre-COVID levels, but loan performance continues to worsen. TKB, a measure of non-performing loans (NPLs) after 90 days, increased 4.8% YTD, standing at 8.27% in September 2020. In January 2020, TKB stood at only 3.6%. 

        Looking at Europe, origination volumes are also regaining pace. For Mintos, one of the largest European players, monthly originations in September stood at 87m EUR (Euro-Area only), a volume comparable to October 2018 levels. Nonetheless, the development marks a steep recovery from 40m EUR in April, especially since several loan originators listed on the Mintos marketplace have been defunct or closed operations during the summer. 

        Finland-based digital lender Fellow Finance also shows a reduced amount in funded loans, standing at 11.4m EUR in October 2020, down from 15.5m in January, but up by about 37% from the April low of EUR 8.3m. Since average interest rates have been raised by roughly 2% across the board since Q2 2020, demand for new loans has been sluggish. Nevertheless, a significant amount of loan applications remains available for funding, and further investment interest following the higher rates is likely.

         

        Loan performance across the digital lending segment is holding up reasonably well so far. With extended repayment schedules and extensive restructuring, some established lenders have managed to contain pre-COVID adjusted defaults. Still, we observe that delinquencies are starting to rise across outstanding loan origination vintages for several fintech lenders. With tighter credit conditions and modified risk assessment models, new loans originated after the COVID shock in April are performing seemingly well. However, the evolution of default rates across the loan book remains to be monitored in the upcoming months. 

         

         

        Collaboration and institutionalization

        Apart from demonstrating the need to rapidly deploy funds through technology, the pandemic has also invoked an unprecedented wave of collaboration between governments and Fintech companies. French SME lender October secured almost 160m EUR in support of European SMEs. The platform is now offering state-backed loans to French companies in the tourism sector as well as state-guaranteed loans to Italian SMEs. The Danish lender Flexfunding has also secured state-support, now offering specialized debt-instruments to Danish companies. In the UK, Europe’s most established digital lending market, the Coronavirus Business Interruption Loan Scheme (CBILS) has already accredited more than 100 bank and non-bank lenders to help UK’s small businesses affected by the pandemic in accessing finances.

         

        Positive investment signals in Fintech lenders also come from the private sector. Germany-based SME lender Creditshelf recently set up a new direct loan fund, backed by its founders and EIF, to support German SMEs hit by Covid-19. In a similar fashion, the largest German Fintech lender, Auxmoney, secured 150m Euro from US private equity firm Centerbridge Partners to expand its leading market position and announced to be funding up to EUR 500m in loans along with other investors on its own marketplace.

         

        With retail investors retrieving their capital during economic uncertainty, such collaborations are vital for Fintech lenders to continue distributing loans efficiently via their tech platforms. Qualifying as eligible distributors of government aid schemes also signals increasing acceptance of Fintech lenders into the mainstream. 

         

        Outlook

        The pandemic is the first real stress-test for the industry. While some digital lenders have found themselves at a crossroads, several established players have adapted well to the circumstances and struck new partnerships to cater to borrower segments in need of funding. Still, the most recent events have shown that access to a broad institutional investor base continues to be the essential growth driver of marketplace lenders. At the same time, loan selection and analysis will be essential to generate a solid investment performance for investors in digital lending.

        If you want to learn more about how we can provide you with one interface to the source, score, and ultimately fund millions of individual loans across markets, reach out to us.

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        Exaloan becomes a member of the Association of German Lending Platforms

        Exaloan becomes a member of the Association of German Lending Platforms

        Dear Exaloan Community,

        We are very happy to let you know that we are now a member of the Association of German Lending Platforms (VdK). It is a pleasure for us to become a representative of digital debt financing in this association.

        The Association of German Lending Platforms (VdK) has brought together a total of 18 members since its start in June last year. The core goal of the association is to bring together players that are working in the private debt environment. Through digital debt financing, private and institutional investors can invest in a variety of loans, bonded loans and bonds. Here is where the Association of German Lending Platforms comes into play by improving the supply of external capital, promoting financial inclusion as well as creating a positive impact in the economy. “I am very pleased to welcome Exaloan as a new member of the association. Even though Exaloan is not a platform in the traditional way, it contributes to its success through recognized expertise and various services. With Exaloan’s support, our association can keep presenting the digital debt financing even more intensively to political and media representatives.”– Managing director of the Association of German Lending Platforms, Constantin Fabricius said.

        Besides continuing to offer its core services, Exaloan aims to contribute to the principles of the association namely integrity, professionalism, quality, and transparency. We look forward to working closely together and move towards achieving our goals.

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