TOKYO -- Peer-to-peer lending has become an increasing source of trouble in Japan, where some lenders have gotten into hot water by extending money to borrowers they know little about.
The practice, which lets retail and institutional investors fund loans directly to individual borrowers, has been spreading in Japan. Peer-lending platforms such as SBI Social Lending serve as intermediaries between individuals and lenders. Investors earn income through principal and interest payments as borrowers repay their loans.
SBI Social said on July 9 that it is unable to pay part of July distributions to investors in seven of its funds because two borrowers, both real estate companies, failed to pay interest on time. The SBI Holdings group member seeks to auction off collateral properties to recover the money, but it could take about a year before investors receive the funds.
Another peer-lending platform, Crowdcredit, has also fallen into arrears on distributions to investors. The Tokyo-based company has not received interest and principal payments from some borrowers -- specifically small businesses in Cameroon.
Japan's crowd-funding market surged 50% in fiscal 2017 to an estimated 109 billion yen ($973 million), according to the Yano Research Institute. The growth was driven by peer-to-peer financing, where fund operators presenting information online such as conditions and projected returns match borrowers with individuals lending relatively small amounts of money.
Many peer-to-peer loans are provided by investors in their 30s and 40s, with 20-somethings and people in their 60s joining the market of late, according to Loadstar Capital, a peer-lending platform focused on real estate.
Returns generally average around 6% per year, but some loans offer returns as high as 10%. It is no wonder individual investors are jumping at the opportunity to earn such high returns given Japan's notoriously rock-bottom interest rates. But they may be neglecting the fact that information on borrowers is thin compared with other types of investment vehicles such as stocks.
Late payments of distributions are not a violation of the law or rules. But many aspects of arrears payments remain unclear, as with the case of SBI Social -- details such as a concrete reason for the nonpayment of interest and the total amount affected remain unknown.
Because peer-lending platforms are treated as lenders under Japanese law governing the moneylending business, they do not make borrower information public in order to protect debtors. This strips investors of access to sufficient information to scrutinize loan cases, and gives borrowers the upper hand.
Regulators are starting to crack down on lending platforms. Last week, the Securities and Exchange Surveillance Commission recommended that the Financial Services Agency impose administrative penalties on Maneo Market, the top industry player, for overlooking the misuse of funds by borrowers. In March 2017, another company that had given misleading information was slapped with an order to suspend operations.
Seeking to give investors some access to borrower information, the FSA said it will make it legal for lending platforms to disclose basic facts such as the names of debtors. Peer-lending platforms are regulated by the Financial Instruments and Exchange Act, but borrowers are not. "Allowing the disclosure of borrower information means investors are expected to assess risk levels on their own," said a senior official at the financial watchdog.
"Many funds promise high returns such as 10% a year, but I never invest in a borrower that I don't know," said a veteran real estate investor.
Concerns about online financing are also growing with regard to initial coin offerings, a fundraising method whereby companies issue digital tokens in exchange for virtual currencies like bitcoin. Over half, or 56%, of startups that raise funds through ICOs apparently fail within about four months, according to a study by Leonard Kostovetsky at Boston College that examined roughly 2,400 token sales completed by May.
Unlike traditional fundraising such as bank loans and initial public offerings, peer lending and ICOs tend to be loosely regulated and thus offer a relatively easy way to procure funds. Many startups conducting ICOs have been criticized for having white papers with no concrete business plans, with some accused of perpetrating fraud. Experts say that a better information disclosure framework is needed to enable investors to assess borrowers properly.