Drew Field
Direct Public Offerings





P2P lending and DPOs


Direct Public Offerings market shareownership in a business directly to its communities.  There is no intermediary between the investors who provide capital and the entrepreneurs who will be stewards of that capital.  Their direct relationship is based upon a community of shared values.  While investors look at the return they could get and the risk they would take, they are also motivated by advancing the mission and principles of the business.


Now, DPOs have been joined by a new instrument of direct community finance. 


P2P (“Peer-to-Peer”) Lending,  also called “social lending,” is the use of Internet2 technology to match individual lenders directly with individual borrowers.  Like DPOs, it relies on communities, with some members posting their capital needs and others selecting the loans and terms they would like to make. 


This commentary describes the new P2P lending operations.  It includes the way P2P lending is being used to fund microlending, and compares that to what is happening to microlending as financial intermediaries use it to their own purposes.  It also calls attention to the December 2008 actions by the U.S. Securities and Exchange Commission and the North American Securities Administrators Association, requiring changes in P2P operations.


DPOs are explained in detail on the home page for this website and many examples are on its “case histories” page.  There is a brief section in this commentary summarizing this direct community finance tool.


Direct community finance does away with financial intermediaries.  However, there are service providers who make the process work.  These include the website operators for P2P lending and the microfinance institutions who find, screen and monitor borrowers.  We mention two businesses that work with direct person-to-person lending and with DPOs.


Government regulation is intense in financial transactions, even when capital flows directly from an individual provider to an individual steward of that capital.  A P2P lending website and a DPO advisor must anticipate regulatory constraints.  We include a section on regulatory constraints and how they have been dealt with by direct community finance businesses.


 “Social capital” is another term for the bundle of qualities that communities bring to direct lending and investing.  It is explained as the intangible asset so important for DPOs, P2P lending and the Grameen model of microlending.


P2P lending


These websites allow borrowers to post the amount, term and purpose of the loan they want.  Lenders can bid the amount they wish to lend and the return they want.   Management’s role is limited to operating the site, assigning ratings based on a borrower’s credit history and administering the loans.  Some of the P2P sites operating in the United States are:


Zopa (www.zopa.com) launched the first P2P lending site in 2005, operating in England.    It expanded to Italy in November 2007 and to the United States in December 2007.  Zopa initially matched borrowers and lenders itself, rather than having lenders select from borrower postings.  In late 2007, it began “Zopa Listings,” where borrowers post their stories and lenders bid to make them loans. When Zopa introduced its service to the United States, it suggested a broader business of  “social finance," described as:  “It means we want to improve the tools of financial services--investments, and loans, and so forth--by allowing people to use them to help themselves, and other people, at the same time.  There are lots of variations inside the world of social finance, like online person-to-person ('P2P') lending, which we pioneered in 2005, and the world of international microfinance, which we admire.”  Zopa charges the borrowers a half point transaction fee and charges lenders a half point annual servicing fee.  Zopa withdrew from U.S. operations in December 2008.  See "Regulatory Constraints," below.


Prosper (www.prosper.com) began as the first U.S. P2P lender in February 2006.  By the end of 2007, it had over 500,000 members and had matched over $100 million in loans.  Its investors include Omidyar Network, an investment fund for Ebay’s founder, and its CEO was co-founder of E-Loan.  Prosper generates revenue by collecting a one-time 1% or 2% fee on funded loans from borrowers, and assessing a 0.5% or 1% per annum loan servicing fee to lenders.


Lending Club (www.lendingclub.com) started in May 2007.  It was initially available only to Facebook members.  One of Lending Club’s founding principles is “Technology can be used to match lenders with borrowers, and identify connections among people through social networks and online communities. These connections build up trust on the lender side and responsibility on the borrower side.”  Lending Club charges a borrower processing fee of from 0.75% to 2%, based on the borrower's credit rating, and a 1% lender processing fee on all amounts paid by a borrower to a lender.  Its process includes a securities broker-dealer and a bank In April 2008, it began using a prospectus filed with the Securities and Exchange Commission and state securities regulators.  (www.sec.gov/Archives/edgar/data/1409970/000095013408021116/f50667b3e424b3.htm#104)


Fynanz (www.fynanz.com) is solely for student loans.  "Students apply for loans in an auction marketplace and receive the most competitive rates. Lenders bid on student listings and can place bids in small amounts across many borrowers to diversify and lower risk while getting attractive returns."  Fynanz collects a 1% fee for processing the loans.


Loanio (www.loanio.com) was launched in September 2008.  It allows for co-signers, to enhance the borrower's credit, and an identification and financial document verification service.


Several P2P programs have started in other countries since 2006.  They largely define their community as their country. 


IOUCentral (www.ioucentral.ca) calls itself "Canada’s first online marketplace where people can borrow and lend money to one another."  It suspended taking loan or investing applications in 2008, "while we resolve a regulatory matter."


Fairrates.dk (www.fairrates.dk) started in Denmark, in April 2007.


Smava.de (www.smava.de) started in Germany in March 2007. 


Ireloans (www.Ireloans.com) is still “Coming Soon.”

Boober (www.boober.nl) started in the Netherlands in February 2007 and opened November 2007 in Italy.    Boober takes a fee of 1% (0.5% from lender, 0.5% from borrower) plus 19.95 Euro fee from the borrower for credit rating and an annual fee of 9.95 Euro from the lender.

IGrin (www.igrin.com.au www.igrin.com.au ) became Australia’s first P2P site in November 2007. (The name came from Internet Group Investor Network.)

Loanland (www.loanland.se) started December 2007 in Sweden.


CommunityLend (www.comunitylend.com) is for Canadians.  Its December 24, 2008 email said it was working toward its Canadian launch.


Nexx (www.nexx.co.nz) plans to be New Zealand’s first P2P lender.


China Private Capital Website matches investors with businesses, using the Internet.


Current events in P2P lending are described at www.wiseclerk.com/group-newswww.rateladder.com and www.p2pnobank.com.  Blogs on the subject are at http://bx.businessweek.com/peer-to-peer-lending/blogs.  


P2P lending has been the model for "peer-to-peer rentals," where an automobile owner may use a website that matches them with short-term renters.  Other sites  provide rental markets for homes, tools and other privately-owned property.  The process for one site, Relay Rides, works like this:  "Private vehicle owners add their cars to the system by filling out an online form, choosing the hours the card is available, and setting a price.  Potential renters log into the RelayRides site and book vehicles at hourly or daily rates. . . . RelayRides handles the insurance, credit-card processing, and installation of a small electronic mechanism that goes inside the wheel well of each car.  The device allows renters to unlock autos with a membership card.  RelayRides keeps 35 percent of each transaction."  Barrett Sheridan, "Stranger, You Can Drive My Car," Bloomberg Businessweek, December 13-19, 2010, page 39, http://www.businessweek.com/magazine/content/10_51/b4208039643579.htm.   France has an auto rental site, www.voiturelib.com, while www.Ecomodo.com in England facilitates rentals of all kinds of property.


P2P meets Microlending


Microlenders, modeled on Grameen Bank in Bangladesh, help the poor start and expand businesses.  Loans are usually well under $1,000, carry interest near market rates and have weekly payments due from the borrower.  Until recently, the lenders were nonprofit organizations or were owned primarily by the borrowers.  Loan terms include borrower support groups, savings programs and other ways of building upon social capital.


Grameen Bank and other early microlenders have experienced lower default levels than many commercial banks and other conventional lenders.  That has attracted financial intermediaries who use some of the social capital tools of microlending, along with their own instruments for maximizing return.  Unlike the Grameen model of financing small businesses, these newer microlenders may use loans as a way to purchase the consumer products they sell.  Their terms often include interest at annual rates near 100% and collateral with liquidation value greater than the loan amount.


In contrast to this institutionalization of microlending, there are some new microlending operations that work like P2P lenders.  Borrowers’ pictures and plans for the loan funds are posted on the website from lists submitted by microfinance institutions.  Lenders look at the help they can provide to poor people, along with the risk/return analysis.  These are some of the P2P/Microlending organizations:


Kiva (www.kiva.org) was developed by Matt and Jessica Flannery in 2004, as a way for individuals to fund very small businesses in poor countries and to be repaid their capital, without interest or other financial return.  By December 2007, it had over 170,000 lenders who had lent over $16 million to 25,000 entrepreneurs.  Its default rate on loans is 0.2%.  Kiva began lending in the United States in 2009. It has provided loans to businesses hit with the BP gulf oil spill, using Accion Texas-Louisiana to make and service the loans.  The average loan amount is $5,500.  Accion USA’s average loan is $5,100.  [Karen E. Klein, “Nonprofits Lend to Gulf Coast Businesses,” Bloomberg BusinessWeek, November 9,




MicroPlace (www.microplace.com) started its website in October 2007, with the motto "Invest Wisely.  End Poverty."  Its founder, Tracey Pettingill Turner, first worked a few months for Grameen Bank.   Ebay has owned MicroPlace since 2006.  Lenders receive interest from security issuers, which channel the capital to microfinance lending institutions, which fund borrowers.  MicroPlace has banner ads on web pages, like the Washington Post, saying "Join the Small Change, Big Change campaign and invest in the world’s working poor,” with an “Invest Now” button. 


MyC4 (www.myc4.com), in Denmark, became a public site in September 2007.  The providers receive interest.  Its motto, "Eradicate Poverty Through Business."  Brief descriptions of African entrepreneurs are posted, with pictures and an "Invest" button to click.

GlobeFunder (www.Globefunder.com, Kalamazoo, Michigan) started in January 2008 in the United States and India. The providers of funds must be accredited investors and each offering "will meet the conditions of Regulation D under the U.S. Securities Act of 1933, as amended."

DonorsChoose.org (www.donorschoose.org) was started in 2000 by teachers at a Bronx public high school in the spring of 2000.  On its website, teachers describe learning projects for which materials or services need to be purchased and donors select the project they want to fund.  DonorsChoose.org screens each project proposal, makes the purchases for the teachers and reports results back to the donors.

Saving for Change sponsored by Oxfam America,  www.oxfamamerica.org/whatwedo/issues_we_work_on/saving_for_change  supports village groups that act as their own community banks. Savings group members save, lend, and pay each other interest. Since Saving for Change was launched in April 2005, more than 100,000 poor women and men in Mali, Senegal, Burkina Faso, and Cambodia have joined savings and lending groups. Members have saved a total of nearly $1.3 million so far.

BVS&A, (www.bovespasocial.com.br/institucional/home.aspx) is sponsored by Bovespa, the Sao Paulo Stock Exchange.   Charitable organizations submit their funding proposals to a team of evaluators, who review plans, interview principals and make site visits.  The one in ten that pass this inspection are then listed.  Donors can choose to contribute toward the amount posted.


DPOs (also called Direct Community Offerings)


Gathering capital from friends and family quickly reaches a limit for a rapidly expanding business.  Borrowed funds mean interest expense and repayment.  Venture capital firms and angel investors insist upon having some say in business decisions.  What entrepreneurs really want is capital they don’t have to pay back, that carries no interest cost and lets them continue to run their business.  They can achieve this goal through a direct offering of securities to their own communities.


Underwritten public offerings once worked for these entrepreneurs.  There were hundreds of securities broker firms, each with thousands of individual customers.  A group of brokers, many located nearby, would come together in an underwriting syndicate and sell a new issue among their customer base.  Today, there are only a relative handful of retail brokerage firms.  For the most part, they don’t sell new issues to individuals.  When they do, underwritten offerings are usually in amounts well over $50 million.


The direct community offering is a way for businesses to market their securities directly to the people in their own communities.  The tools are drawn from the very successful direct marketing experience for goods and services, especially “affinity marketing.”


All of the same state and federal securities laws apply to a direct offering as for an underwritten one.  The marketing program has to be designed and fulfilled within the regulatory constraints.  Part of the program design is to provide a way for investors to cash out, when they need or want to.  That generally means having a trading market.


Direct community offerings work best for entrepreneurs who understand that they have added their shares or notes as a major product line.  They realize they will always be in the business of marketing their securities.


Word-of-mouth is the most effective marketing tool in DPOs.  Electronic social networks vastly may enhance its effectiveness.  Once a prospective investor is aware of an offering, the Internet has made it possible for a prospectus to be delivered and securities to be purchased and paid for – all in one sitting. 


The most effective marketing is to the communities of “true believers” in the purpose for which the money is to be used.  Customers, employees, suppliers and neighbors are often “dual purpose” investors, people who want to help the business pursue its mission but can also dream of “what if this investment really makes money?”


Service organizations


In the purest direct community finance, there is no financial intermediary.  Providers send their capital directly to the stewards.  Communications are directly between the steward and its capital providers. 


Except in the simplest transactions, between family members or close friends, the process will likely work better for everyone if an experienced professional is involved.  This is the niche for Virgin Money USA (www.virginmoneyus.com), which administers “family and friends” loans, and for Drew Field/Direct Public Offerings and its licensees (www.dfdpo.com), which advise clients on marketing their securities directly to their own communities.  


Virgin Money USA was known as CircleLending from its 2001 beginning until late 2007, when it was acquired by Virgin Group, owner of Virgin Airlines and other businesses.   It calls itself a “specialty loan administration company,” providing services such as loan documentation, payment schedules, loan servicing, payment processing, year-end reporting, credit reporting and help with restructuring loans between relatives and friends. For loans secured by real estate, it also provides services for mortgages, deeds, and Uniform Commercial Code filings, searches, owner reports, escrow and tax payment administration and closings.  


The real attraction for using Virgin Money USA is that someone independent of the family or friend relationship is handling the details and bringing discipline to the process.  This not only takes care of some chores, but it improves the chances that payments will be made on time and the transaction will be treated in a more businesslike way.  In its first six years, CircleLending had set up $200 million in loan volume while maintaining a default rate of less than 5% on private loans and less than 1% on private mortgages.


In 2006, before the Virgin acquisition, CircleLending received $10 million in venture capital funding from Venrock Associates, the Rockefeller family venture capital firm, Intel Capital, the venture capital arm of Intel Corporation and Omidyar Network (which also invested in Prosper, the P2P lender).


So far, Virgin Money USA has limited its services to loan administration, staying away from equity investments.  CircleLending’s founder, Asheesh Advani, in his book Investors in Your Backyard:  How to Raise Business Capital From the People You Know, Nolo Press 2006, said:  “As your attorney will undoubtedly tell you, selling securities creates a lot of paperwork . . ..  Determining precisely which exemptions apply to your offering is your attorney’s job.” page 66.  “Raising money for your business through equity investments is very different from raising it through borrowing money.  You’ll need to:

            • compensate your investors for the risk they’ve agreed to take on

            • share ownership in the business

            • comply with securities laws, and

            • hire an attorney to put all these agreements into a legal document

  unique to your financing situation.” page 62.


Frances Farrow, the CEO of Virgin USA, said in a press release, reported in the May 17, 2007 American Banker: "Our investment … is consistent with Virgin's focus on developing fresh approaches to consumer issues" and "will form the foundation for a major new Virgin-branded financial services offering in the U.S. "  Mr. Advani, the founder of CircleLending was quoted as saying:  "We've just scratched the surface on understanding the power of family and friend transactions and how they can change the financial services landscape."  The task ahead "really is about taking what we've learned about the motivations of family and friends to help each other in financial transactions, and translating that."  Virgin is also trying to acquire Northern Rock, a United Kingdom Bank.  CircleLending has said it is considering making mortgage loans that combine P2P funding with bank money. 


iGrin  This P2P lender in Australia also offers a "Member Direct Loan," described in the Frequently Asked Questions page of its website.  The lender and borrower members agree on the amount, interest rate and due date.  iGrin handles transfer of the funds, ongoing payments and any collection efforts.


GreenNote (www.greennote.com) operates like VirginMoney but is limited to student loans.  "Using the GreenNote online platform, students connect with their social network—friends, family, friends of family, community leaders and others—to ask for small student loans. GreenNote helps formalize everything into legally binding loans and handles all the details from loan documentation through repayment."


Drew Field/Direct Public Offerings (www.dfdpo.com) advised its first direct public offering client in 1977.  It has helped businesses market over $250 million of securities directly to their communities.  Offering amounts have ranged from $500,000 to over $45 million.   


The first clients were banks, which marketed shares of their common stock.  They had a broad, local base of customers who had already trusted the business with their money.  The banks had a good customer data base, with current information which could segment the market in ways that predicted an ability and inclination to invest.  Neighbors liked the idea of owning a piece of the local bank.


The next clients were direct marketing businesses.  Like the banks, they had good customer data and some ability to sort customers in ways that could correspond with buying interest.  Their customers had done business with them through the mail, telephone and, later, the Internet, so a level of trust already existed.  Even with nationwide businesses, most investors came from within 100 miles or so of the client’s main location.


It was a big step to take on clients who did not have a direct relationship with their customers, ones who sold through distributors and retailers.  Tools for reaching the customer community included offering announcements that were part of the product packaging, as well as advertisements in newspapers, magazines, billboards, radio and cable TV.  Print and electronic announcements were sent to selected lists of individuals who seemed to share an interest in the business goals.  These direct community offerings worked for beverages, packaged foods, clothing and other consumer products.


Drew Field/Direct Public Offerings has built and beta tested two electronic toolkits for direct community offerings.   Licensees are trained in using both a guide to doing a direct offering, with all the related forms, and a state-by-state explanation of securities laws, with forms and step-by-step instructions. 


Real estate capital provider clubs  Investors in real estate lending and ownership have hundreds of individual clubs for making direct investments.  They are served by a nonprofit trade association, www.nationalreia.com, started in 1993 and now having 40,000 members.  No Internet service has yet appeared to match members of larger communities.  There are brokers who arrange for investments, make the loans and service payments, described at www.californiamortgageassociation.com.  No direct community finance or social capital is involved in their intermediary role.   


Angel investor groups  Angel investors are the largest source of external equity capital for small businesses in the United States, with about $25 billion a year invested by over 250,000 individuals in nearly 50,000 ventures.  (Information about angel investing is maintained by the Center for Venture Research at the University of New Hampshire and the Angel Capital Association.  Also known as informal investors, they are usually relatives or friends of the entrepreneur, or individuals with the wealth and experience to take significant risks for possible long-term rewards.  They are brought together through word-of-mouth, through someone (or a series of someones) they both know.  There are many geographic groups of angel investors and they often gather to hear presentations from entrepreneurs and discuss whether they’ll make individual investments.


In the mid-1990s, the U.S. Small Business Administration began an “Angel Capital Electronic Network (ACE-Net)” to match entrepreneurs and individual investors.  It was to bring a structured, electronic-based process to what has been known as “informal investing.”  The program today is a partnership between the U.S. Small Business Administration and a network of universities and nonprofit entities. ACE-Net operates under a "no-action letter" issued by the US Securities and Exchange Commission. 


Regulatory constraints


Financial intermediaries were created to take in capital from providers and let it out to stewards.  They grew into banks, securities broker-dealers and investment funds.  Their customers, the providers and stewards, didn’t need to share a community of interest. 


Then governments brought regulation, ostensibly to protect one side from unfairly treating the other side.  In practice, the regulators often operate as a barrier to competition from direct transactions.  Licenses are required.  Registrations must be made.  Individuals must be employed by regulated organizations.  


Federal and state laws govern the issuance and sale of securities and the people who perform services in the process.  These laws broadly define a “security” as including, for instance, any “evidence of indebtedness” or “investment contract.”  Courts and agencies have supported this broad definition, often calling a structure a “security” if there is anyone managing the use of capital.  A “security” has included sales of orange trees and pay telephones, because agreements included someone picking the oranges and collecting change from the telephones.   


Certain securities, like those issued by governments, charities and banks, are specifically exempted from regulation by securities agencies.  Particular transactions, such as ones involving small amounts or a limited number of people, are also exempt.  Direct community finance methods often fit within a regulatory definition of exempt security or exempt transaction.  Otherwise, the securities must be registered with securities law administrators and the people working on the transaction may need to be licensed.  This is how the issue is being handled in direct community finance:


Microlenders have thus far organized as banks, charities or government-sponsored entities.  Only a relative few operate in the United States.  The securities they issue are exempt from most regulation by the Securities and Exchange Commission and state securities administrators. 


P2P lenders are faced with significant regulatory constraints.  Many states regulate their transactions with borrowers.  However, it is their activities in relationship with the lenders that seems to involve the issuance of a security.  The P2P lenders collect from borrowers and pay to lenders.  More significant is their practice of allotting funds among several borrowers, to diversify the risk to lenders.


Prosper’s website includes a chart of “State Licenses and Lending Limits.”  For many of the states, Prosper has a license, such as “consumer loan” or “money broker” or “supervised lender.”  This relates to the borrower side of the transaction.  On November 24, 2008, The Securities and Exchange Commission issued an order that Prosper cease and desist from violating sections of the Securities Act of 1933.  www.sec.gov/litigation/admin/2008/33-8984.pdf  On December 1, 2008, the North American Securities Administrators Association announced a settlement in which Prosper "agreed not to offer or sell any securities in any jurisdiction until it is in compliance with that jurisdiction’s securities registration laws. Prosper also agreed to pay a fine totaling $1 million to the states. In consideration of the settlement, the states will terminate their investigation of Prosper’s activities related to the sale of securities before November 24, 2008."    www.nasaa.org/NASAA_Newsroom/Current_NASAA_Headlines/9906.cfm Canada has raised similar regulatory issues.


When Zopa launched operations in the United States, it solved the regulatory issues by acting as the marketing arm for a group of 11 credit unions.  The capital provider purchases a certificate of deposit from one of them and may designate the borrowers and amounts for funding loans.  (The provider can help the steward get a lower loan rate by accepting a below-market CD rate.)  As credit unions, their issuance and sale of securities is exempt from SEC registration under section 3(a)(5) of the Securities Act of 1933.  They are exempt from registration and regulation as a “broker” or “dealer” by reason of sections 3(a)(4), (5) and (6) of the Securities Exchange Act of 1934.  Similar exemptions are available at the state level.  In December 2008, Zopa sent an email to its U.S. capital providers, saying that their future relationship would be directly with the credit union that issued their CD.


In Germany, Smava also chose to partner with a bank, to deal with that country’s regulatory framework.  Boober, in the Netherlands, was closed to new loans for a few weeks in 2007, after a Dutch court ordered that it needed a license to operate.  It reopened with restrictions on the size and number of loans.


Australia's iGrin is actually the lender.  Individuals purchase the right to receive payments on the loan.


Among the P2P/Microfinance organizations, Kiva has handled the SEC registration and broker-dealer issues by not paying interest to the lenders.  They are trying to find a way to change that.  Kiva does repay the principal, as it collects loan payments.


Ebay’s MicroPlace is a registered securities broker-dealer.  Its website freely uses the terms "invest" and "investment" for the provider's participation.  It sells interest-bearing notes from a security issuer.  The money then goes to microfinance lenders and they make interest-bearing loans to the stewards.  


MyC4 dealt this way with United States regulation:  “Legally, it has yet not been solved for North Americans to withdraw their money from MyC4.  So if you can agree that you do not withdraw any money at any time from MyC4, you are most welcome on board.” 


Social capital


The direct community finance methods rely on “social capital,” meaning characteristics from the relationship that exists between the steward and the provider, and the community of which they are both a part.  Social capital is very much an “off-balance sheet” asset.  It isn’t measurable through any generally accepted methodology.  There’s no place for it in our accounting system.  Nevertheless, it has always been a critical part of capital transactions.


For thousands of years, financial arrangements have been made directly, within a community.  Someone who needed capital got together with someone who had it and they agreed to terms for a loan or investment.  Payments and other communications were taken care of person-to-person.


Then the world got bigger and more complicated.  Providers of capital had varied needs for when they got their money back, the risk they were willing to take and the amount they would allocate to any one steward.  Projects became too large for one individual to finance.


Long before there were banks or securities brokers, there were structures for bringing together people who needed capital with people who wanted income from the capital they had.  Informal matching and servicing mechanisms were created within communities.  Many of them still operate today, with names like “hooey” in Hawaii, “kou” in Japan, “chit fund” in India, “susu” in Ghana, “njangeh” in Cameroon and “pasanaku” in Bolivia.  Chris Larsen, the founder of P2P lender Prosper, drew upon the experience of his wife’s Vietnamese American family with its “hoi.”  Academics have documented and analyzed them.


Microlending programs rely heavily on social capital, even having a group of about five borrowers be jointly liable for the loans to each member of the group.  If any group member defaults, all members are denied future loans.  This means that new group members will be screened by people in their own community, who know their reputations and character.  It also means the group will be monitoring a borrower’s performance and that default risks ostracism from the group and shame in the community. 


While P2P lending is also called “social lending,” some sites have not yet relied much on social capital.  Most of them mention community but the drive to expand the number of users could overshadow the benefits of community.  Concern about the increasing defaults on P2P sites may have to do with the very loose sense of “community” when the only connection is participation in lending or borrowing.


The most successful direct community offerings have been those made to people who felt they were participants in the mission and character of the business. Investors are usually drawn from customers, suppliers and neighbors.  They all have access to information about the entrepreneur and often have social or business communications with the entrepreneur and employees.  This can raise their comfort level that they’ve screened the people who are going to use their money.  It also raises the cost to the entrepreneur of poor performance—loss of business relationships and embarrassing social encounters.




The essence of direct community finance is the person-to-person relationship between the providers of capital and the stewards of that capital. 


Disintermediation requires something to take the place of the intermediaries.  Bankers and brokers provided the relationships that enabled them to receive funds from providers and to place funds with stewards.  They also took care of the process, the documentation and records.


The relationship in direct community finance is the identification and trust that comes from being part of the same community.  Beyond this bond, however, there needs to be a common goal served by the transfer of money.  Both the provider and steward of capital need to share a belief in the purposes for which the capital will be used.


The process management tasks can now be handled by technology developed for Internet direct marketing.  Service organizations are managing this technology for direct lending and for direct equity investment.


There is enough experience with direct community finance to know that it can be effective.  It is still unclear how broadly it can be applied, how large a share it can be of the capital formation market.


Notes and Sidebars


Grameen Bank and its founder, Muhammad Yunus, received the 2006 Nobel Peace Prize.  Their story is told in the 1996 book, Give Us Credit: How Muhammad Yunus’s Micro-Lending Revolution Is Empowering Women from Bangladesh to Chicago, by Alex Counts.  Page 347 has the “Sixteen Decisions” which all the Bank’s employees and borrowers are expected to memorize and practice. 

 Description of Grameencredit written by Muhammad Yunus, September 2007


It promotes credit as a human right.


Its mission is to help the poor families to help themselves to overcome poverty. It is targeted to the poor, particularly poor women.


Most distinctive feature of Grameencredit is that it is not based on any collateral, or legally enforceable contracts. It is based on "trust", not on legal procedures and system.


It is offered for creating self-employment for income-generating activities and housing for the poor, as opposed to consumption.


It was initiated as a challenge to the conventional banking which rejected the poor by classifying them to be "not creditworthy". As a result it rejected the basic methodology of the conventional banking and created its own methodology.


It provides service at the door-step of the poor based on the principle that the people should not go to the bank, bank should go to the people.


In order to obtain loans a borrower must join a group of borrowers.


Loans can be received in a continuous sequence. New loan becomes available to a borrower if her previous loan is repaid.


All loans are to be paid back in installments (weekly, or bi-weekly).


Simultaneously more than one loan can be received by a borrower.


It comes with both obligatory and voluntary savings programmes for the borrowers


Generally these loans are given through non-profit organizations or through institutions owned primarily by the borrowers. If it is done through for-profit institutions not owned by the borrowers, efforts are made to keep the interest rate at a level which is close to a level commensurate with sustainability of the programme rather than bringing attractive return for the investors. Grameencredit's thumb-rule is to keep the interest rate as close to the market rate, prevailing in the commercial banking sector, as possible, without sacrificing sustain-ability. In fixing the interest rate market interest rate is taken as the reference rate, rather than the moneylenders' rate. Reaching the poor is its non-negotiable mission. Reaching sustainability is a directional goal. It must reach sustainability as soon as possible, so that it can expand its outreach without fund constraints.


Grameencredit gives high priority on building social capital. It is promoted through formation of groups and centres, developing leadership quality through annual election of group and centre leaders, electing board members when the institution is owned by the borrowers. To develop a social agenda owned by the borrowers, something similar to the "sixteen decisions", it undertakes a process of intensive discussion among the borrowers, and encourage them to take these decisions seriously and implement them. It gives special emphasis on the formation of human capital and concern for protecting environment. It monitors children's education, provides scholarships and student loans for higher education. For formation of human capital it makes efforts to bring technology, like mobile phones, solar power, and promote mechanical power to replace manual power.

Grameencredit is based on the premise that the poor have skills which remain unutilised or under-utilised. It is definitely not the lack of skills which make poor people poor. Grameen believes that the poverty is not created by the poor, it is created by the institutions and policies which surround them. In order to eliminate poverty all we need to do is to make appropriate changes in the institutions and policies, and/or create new ones. Grameen believes that charity is not an answer to poverty. It only helps poverty to continue. It creates dependency and takes away individual's initiative to break through the wall of poverty. Unleashing of energy and creativity in each human being is the answer to poverty.


P2P lending. You can gather extensive, up-to-date information about P2P lending at www.wiseclerk.com/group-news/, which also hosts a lending discussion forum at www.wiseclerk.com.  There has been a Wikipedia entry for peer-to-peer lending since March 2006.  Business Week, July 3, 2006, had an article by Timothy J. Mullaney, “Lots of Loans, But no Banks:  Finance Co-ops have hit the web, and they look like a good deal for borrowers and lenders.”  News has reached the local U.S. newspapers, with a November 28, 2007 article by Associated Press reporter Jackie Farwell.

Omidyar Network.  According to www.prosper.com/about/management_team.aspx, “Omidyar Network funds for-profits and nonprofits that promote equal access to information, tools and opportunities, openness and transparency, collaboration around shared interests, and a sense of ownership for participants. To date, Omidyar Network has created a diverse portfolio that fosters individual self-empowerment across the economic, political and social realms, with investments in areas such as microfinance, open source, citizen journalism and collaboration in the sciences. Through its work, Omidyar Network  intends to catalyze a new breed of business for which social impact directly drives profitability.”  See www.omidyar.net.

Lending ClubFrom P2P-Banking.com, August 23, 2007: “Lendingclub has received a 10.26 million US$ venture capital investment from Norwest Venture Partners and Canaan Partners. The CEO Renaud Laplanche announced that the money will be used to expand Lending Club beyond the Facebook platform.”               

PeLeMaPeLeMa also incorporated in the United States.  It described itself as “a system that real people use to lend and borrow from each other.  Lenders post lending offers and borrowers post borrowing offers, the system then matches these offers together and creates loans.  The monthly repayments are then either placed in the lenders account or put automatically back on the market.” PeLeMa was founded by Einar Agustsson.  In December 2007,  www.pelema.com was “down for maintenance” or "under beta testing."                     

IreloansFrom its website:  "Mission  Ireloans.com will allow YOU to loan money to and from other irish people. Yes, no banks. It’s all about community.  How it works  Anybody can post a request for a loan online. Ireloans will check the credit report and validate the identity of the borrower. Then the request will be published and lenders can bid to invest. Once the requested amount is funded, Ireloans pays the amount to the borrower and collects the monthly repayments."

Nexx According to its website:  “We are not a finance company. We’re an online money matchmaking service that allows borrowers to list their financial projects online and lenders to pledge funds at an interest rate acceptable to them - just like an online auction. With no bank or finance company in the middle, the interest rate paid by borrowers is the same as the rate that lenders receive.”

MyC4.  Its stated purpose is to: “Eradicate poverty through business:  MyC4 is an online platform connecting people and capital into growing sustainable businesses in Africa in support of the United Nations 2015 Millennium Development Goals and Global Compact.” Rates were initially over 20%.  After a feature on Danish television, the number of providers doubled, to nearly 1,000, and the interest rates went down to  under 3 percent.  Minimum investment is $200.  The first loan in Kenya was in November 2007, following Uganda and the Ivory Coast.

GlobeFunder From MicroCapital:  “The company is working on building partnerships with leading financial institutions and microfinance institutions. Thus far, GlobeFunder has partnered with over 40 MFIs around the world.  MFIs that partner with GlobeFunder select and input their borrowers to be posted on GlobeFunder's website. MFI partners are screened by GlobeFunder to ensure reliability, and these MFI partners also screen their borrower clients to assess the likelihood of loan repayment.  The seed round of equity financing at USD 1.5 million for GlobeFunder was just closed (October 2007).”

Loanio.  This website, www.loanio.com, says it is "Coming January 2008". 

China Private Capital Website  is described in "Private Banking, Chinese-Style," by Dexter Roberts and Chi-Chu Tschang, Business Week, December 10, 2007.

Community and social capital  Studies show the importance of “community” in direct community finance: “Social Capital and Finance for the Poor,” beginning on page 4, from Imperfect Information, Social Capital and the Poor’s Access to Credit, by Thierry van Bastelear, 2000.  (The author is Director, Integrated Financial Services Team, Center for Institutional Reform and the Informal Sector (IRIS) at the University of Maryland.  Major support for the paper was provided by the World Bank’s Social Capital Initiative, funded by the Government of Denmark.)  Many other sources for studies of direct community finance are in the paper’s bibliography. 


Chapter One, “The Historical Origins of Social Lending,”  pages 13-16, from Internet Based Social Lending: Past, Present and Future, by Michael Hulme and Colette Wright, October 2006.  (Professor Hulme is Director of the Social Futures Observatory, at Lancaster University.)  The study concluded “that the individual must be inspired to believe that their participation in the Social Lending community is socially beneficial yet also serves their own interests. However, the concept of social capital is an academic ideology, which is to a large extent divorced from the everyday reality of ordinary people. The problems to overcome, then, appear to be the extent to which people can connect financial matters with community formation.”

According to a July 2007 report by Deutsche Bank Research, “Some P2P platforms use the power of their communities to screen and assess borrowers and to pressure for repayment.   . . . default rates are typically much lower if borrowers have joined (and were accepted by) a group of borrowers.” 

In the Netherlands lenders have formed the 'Peer-to-peer Investeeders Vereiniging Nederland' PIVN.nl, which is an association of lenders of peer-to-peer loans.  The goals of the PIVN are: periodic consultation with the p2p lending platforms, publishing information of interest to lenders, offering discussion forums and conducting comparisons between p2p lending services.  Several Prosper groups have their own blogs.