Peer2Peer Finance News December 2022

Hassan Daher on Shariahcompliant P2P

Calls for EIS shake-up to support P2P growth

THE UK government has been urged to amend Enterprise Investment Scheme (EIS) rules to allow more peer-topeer lending platforms to utilise the scheme.

The EIS is designed to help companies raise money to grow, by offering tax reliefs to individual investors who buy shares.

However, lending is not a permitted activity under the EIS rules, whereas broking is allowed.

This means that P2P platforms are unable to hold loans on their balance sheet if they were funded with EIS capital in the preceding three years, and instead can only act as a broker.

Typically, early-stage P2P platforms are purely funded by the crowd, while more mature firms will want to take on some balance sheet risk alongside their funders, giving them ‘skin in the game’.

Industry stakeholders warn that the EIS rules are holding back more established P2P platforms from growing their business.

“I think the issue is that as businesses grow and mature, they want to expand their sources of funding, including their balance sheet,” Mike Carter, head of platform lending at the 36H Group, told Peer2Peer Finance News.

“If you started your firm with EIS money you can’t

do that, which restricts the platform as it grows.”

Peer2Peer Finance News understands that at least one P2P platform encountered issues due to the EIS exclusion and decided to set up a complicated legal structure to be able to take on balance sheet risk.

Fintech trade body

Innovate Finance submitted a response to the Treasury select committee over the summer, following the committee’s call for evidence on the venture capital market. It recommended that EIS rules be changed to include lending risk as a permitted activity without the threeyear look-back restriction.

“[The exclusion of lending risk] is a material drawback in building a lending or insurance business using EIS funding because most early-stage companies will have raised funding in any threeyear period, and that funding will likely have included EIS investors,” Innovate Finance said.

“In effect it means the business must operate only as a broker and cannot take advantage of the profit on the risks it is originating, and this holds back the growth of the business. This is also relevant given the decline in P2P lending due to the continued tightening of financial promotion rules by the Financial

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Our inaugural awards event finally takes place on Tuesday 6 December, after months of speculation, nominations, judging and preparation. I’m excited to unveil the winners and think the event will be a real credit to the industry’s achievements to date.

It’s undeniable that the peer-to-peer lending sector has had a challenging year, dealing with tougher regulatory requirements and worsening economic conditions. The Peer2Peer Finance Awards will be a chance to shrug off the doom and gloom and celebrate the success of the industry, as it proves its mettle once more in a downturn.

I’m excited to see what next year brings for the P2P lending sector and for Peer2Peer Finance News

Enjoy the Christmas period everyone, and thank you for reading! We couldn’t do it without you.

SUZIE NEUWIRTH EDITOR-IN-CHIEF

We hope you’re enjoying the latest edition of Peer2Peer Finance News! We have now moved to a paid-for subscription model. If you would like to continue reading the magazine, please go to www.p2pfinancenews. co.uk/subscribe/ to find out about subscription options.

Current rules do not permit lending

Conduct Authority which is causing platforms to leave the P2P industry.”

Peer2Peer Finance News understands that the Treasury select committee has not yet responded to the submission.

The Treasury select committee said it does not comment on written evidence submissions.

A government spokesperson said: "Balance sheet lending is not permitted under the EIS as EIS companies could 'on-lend' tax

advantaged investment to other companies who do not qualify for the reliefs and do not match the profile of the schemes’ target company. This would risk diverting capital away from the genuinely high-risk enterprises who struggle to access finance."

Another industry stakeholder, speaking to Peer2Peer Finance News on the condition of anonymity, disagreed that the EIS rules should be amended to incorporate

lending. The stakeholder said that firms should look at why the scheme exists in the first place –to avoid market failure – and should not get a tax break simply for wanting to embark on balance sheet lending.

There is plenty of capital around from other sources at the moment, the stakeholder said, and warned that excessive demands on the scheme could lead to it being reined in, like R&D tax credits for

small and medium-sized enterprises which were cut back in last year’s Autumn Statement.

Under EIS, companies can raise up to £5m each year and a maximum of £12m over the company’s lifetime. This also includes amounts received from other venture capital schemes. The company must not have assets worth more than £15m before any shares are issued and must have less than 250 employees.

Peer2Peer Finance Awards: The wait is nearly over!

THE WINNERS of the inaugural Peer2Peer Finance Awards are set to be announced on the evening of Tuesday 6 December, at a prestigious ceremony at the Hurlingham Club in London.

The 21 awards will commemorate the best peer-to-peer lending platforms, service providers and technology companies supporting the sector. Categories include Innovative Finance ISA Provider of the Year, P2P Lending Platform of the Year and the ‘Investor’s Choice’ award.

Sasha Qadri is presenting the awards. She is an experienced

TV news presenter who has reported for Bloomberg, CNN, CNBC and Channel 4 News

“After months of

anticipation, I’m delighted that the Peer2Peer Finance Awards take place this month and we will

finally be able to reveal the winners,” said Peer2Peer Finance News founder and editor-inchief Suzie Neuwirth.

“It should be a great event, attracting the brightest stars from the industry with plenty of opportunities for networking as well as celebrating.”

The winners will be announced on the night and then published on the Peer2Peer Finance News website (www. p2pfinancenews. co.uk) on Wednesday 7 December. Look out for the full photo coverage from the awards in the January issue of the print magazine.

P2P can help UK meet net zero homes target

PEER-TO-PEER lenders can help the UK meet its net zero homes target by championing the use of modern construction methods and financing more property developments.

Following the COP27 conference on climate change earlier this year, renewed focus has been placed on helping global economies reach net zero. The UK has set out a strategy to decarbonise all sectors of the economy to reach net zero by 2050.

According to UK Finance data, 28 million households in the UK account for 14 per cent of the country’s total carbon emissions, with buildings representing the second largest source of emissions in the UK. When lenders make net zero a key requirement for property developers,

they can help to reduce carbon emissions from the very beginning of a new housing project.

Several P2P property lenders have already been working hard to facilitate the transition to net zero homes. Assetz Capital aims that 95 per cent of all the new homes it funds will have an energy performance certificate (EPC) of B or higher by the end of this year, and the platform has been a vocal supporter of factorybuilt eco homes to address the housing crisis.

Meanwhile, Blend Network has launched a ‘Green Is Good’ initiative, which aims to promote net zero housing developments, and Relendex has been working on reducing the emissions on the property developments that it funds.

“Relendex has a proven record of financing sustainable housing,” says Paul Sonabend, executive chairman of Relendex.

“We believe that our modern methods of finance such as P2P are perfect for housebuilders using modern methods of construction.

“In 2021 30 per cent of all loans on our

platform were sustainable with this percentage hopefully doubling by the end of 2023.”

P2P lenders have the first mover advantage when it comes to creating net zero housing. They tend to be much more hands-on with borrowers than traditional lenders, and can set stricter eco targets for developers, while also choosing to fund ambitious projects.

For Sonabend, there is another benefit. “Our investors love our ‘green’ loans and rush to invest on them upon listing,” he adds.

“They value the fact that P2P gives them a large percentage of the interest pot, providing excellent returns whilst allowing them to feel good about the fact that they know they are investing ethically.”

New EU rules could see lenders expand to UK

THE NEW European Crowdfunding Service

Provider Regulation (ECSPR) could make the UK peer-to-peer lending market more competitive, as it allows EU lenders to raise funds and finance loans in non-EU countries.

This means that European lenders could vie for some of the UK’s P2P market share, once the regulations are more

widely implemented.

The ECSPR came into effect in November 2021 and allows any European P2P and crowdfunding firms to operate across the EU without restriction. To date, just six platforms have been licensed under the new regulatory regime, including crowdfunding site Crowdcube and Netherlands-based P2P

lender Lendahand Ethex. However, Oliver Gajda, executive director of EuroCrowd, believes that many more platforms will become licensed in the coming months.

There are no restrictions on raising or delivering funds to non-EU countries such as the UK. Furthermore, special purpose vehicles can be used to finance illiquid

assets with securities investments, such as bonds. This would allow EU crowdfunding and mini-bond platforms to market their products in the UK and to back UK funding projects.

“This a wanted side effect of ECSPR and will happen sooner or later,” Gajda says.

For more on the ECSPR, see page 15.

P2P investing doesn’t have to be taxing

IT’S NEVER too soon to think about your taxes, and in the aftermath of Jeremy Hunt’s debut Budget, higher taxation is on many peer-topeer investors’ minds.

So what do you need to know about taxes and P2P?

First and foremost, where possible all P2P investments should be held within an Innovative Finance ISA (IFISA) wrapper. Up to £20,000 can be shielded from tax in an ISA per tax year, although currently only one new IFISA can be opened per tax year. However,

transfers from existing IFISAs are allowed.

Without IFISA protection, returns earned from P2P investing will be taxed at the usual capital gains tax rates. P2P lending is included in the personal savings allowance, which means that basic rate taxpayers can earn up to £1,000 from their P2P investments before paying taxes, while higher-rate taxpayers can earn £500. Bad debts – meaning defaulted loans or investments in defunct platforms – are tax deductible.

In his Budget statement,

Hunt confirmed that he would be overhauling the way capital gains taxes are collected from next year. At present, investors can earn a whopping £12,300 each year from their investments before paying tax. From next year this allowance will be cut to £6,000. In 2024, it will be cut again to £3,000.

This means that the average P2P investor is soon likely to face higher taxation on their earnings, especially if P2P platforms continue their track record of delivering between seven and nine per cent in average annual returns.

However, there is still time to plan. As well as making use of the IFISA allowance, some P2P platforms allow investors to include their investments in a self-invested personal pension (SIPP). Earlier this year, Kuflink launched a SIPP pool and other lenders have indicated that they might follow suit.

As the tax squeeze continues, it is likely that P2P platforms will look at other ways to protect their investors’ returns and make it easier to manage their portfolios.

North American investors back alternative credit

US INVESTMENT behemoth Neuberger Berman and a Canadian pension fund have both given their backing to the alternative credit space in the last month, in a promising sign for the industry as we enter a global downturn.

US peer-to-peer lending platform Prosper raised $75m (£63.1m) from a fund managed by Neuberger Berman, which it said will enable it to meet strong consumer demand for its personal loan, credit card, home equity and investment products.

And UK-based alternative asset manager Fasanara Capital –which has invested in P2P platforms such as FundOurselves – unveiled a strategic $200m deal with an unnamed

Canadian pension fund.

The proceeds will be used to fund alternative finance products including working capital facilities and receivables.

“This capital will help bolster our portfolio

companies, by providing them with the certainty that they can access a range of financial products, should they need them,” said chief executive Francesco Filia at the time of the announcement.

“At a time when the wider capital market is experiencing such uncertainty, Fasanara’s portfolio companies know that they belong to an ecosystem which is strongly supported by some of the largest institutional investors in Europe and North America.”

P2P sector “better informed” after rule changes

THE PEER-TO-PEER lending sector has become a “better informed” space after years of regulatory change, industry experts claim.

Geoff Bouchier and Mark Turner of financial consultancy Kroll, which has worked with a range of P2P platforms on restructuring, financing and regulatory issues, said the industry is well placed to support borrowers.

“The market continues to mature,” said Bouchier, managing director, restructuring advisory at Kroll.

“It is becoming a betterinformed space. There are numerous participants so it is rather competitive for lenders. There is greater regulation and expectation on platforms.”

Bouchier predicted that there will be “huge demand” for P2P lending

due to macro events.

“The challenge for P2P lenders will be to make sure they select and fund the right businesses rather than those teetering that have gone too far,” he said.

Bouchier said there has been a transition of what P2P lending means, with a shift to institutional investment as it is seen as

easier to coordinate amid increased regulations.

He noted that the P2P lending sector had participated in state emergency funding schemes and predicted that platforms will attract interest from borrowers who need to refinance debt from those schemes.

“The government-

supported lending schemes will need to be replaced by either retail or institutional lenders,” Bouchier said.

“The platforms will have that business for refinancing, it will keep them in healthy trade.”

Turner, managing director, financial services compliance and regulation at Kroll, said that a growing area of work for the business is regulatory horizon scanning.

“It is not as dull as it sounds,” he said. “We don’t just say, ‘here is a list of 100 regulations that are coming’, we are looking at the direction of travel and reading between the lines.

“Our work looks at the challenges for different business models and products, and engages with company boards on what this could mean for them.”

Qardus targets £2m from seed funding round

QARDUS, the Shariahcompliant peer-to-peer lending platform, is looking to raise more than £2m from a seed round to expand its business and develop its technology.

Founder Hassan Daher told Peer2Peer Finance News that the fundraise is “in process” and the team is “optimistic about getting it over the line”.

“We are looking to raise more than £2m to expand our presence in the UK, carry on building our technology, growing our team and becoming a dominant player when it comes to Shariah finance,” Daher said.

Qardus is currently focused on the UK market but is looking to expand overseas in the future.

Daher noted the sizeable Muslim population in Europe as an opportunity, as well as the Middle East and South Asia regions.

The platform is attracting increasing numbers of investors and has seen growth in the average investment size.

“We are not only bringing in more investors, but different

types are coming through,” Daher added. “We have sophisticated, high-net-worth and retail investors.”

Qardus is open to both Muslim and non-Muslim investors, who receive profit rates of around 11 per cent per year.

Go to page 18 to read the full profile with Daher.

Kuflink sees silver linings amidst property storm clouds

PROPERTY PRICES ARE

falling, as the UK enters into an economic recession. Rising interest rates, supply chain issues and a cost-of-living crisis have inspired countless articles and think pieces about the imminent collapse of the housing market. But behind the headlines, property market experts are not exactly panicking.

In fact, Paul Auger, head of products at Kuflink, believes that there are some silver linings to be found in the emerging property market storm, and the property lending platform is ready to take advantage of these opportunities, while continuing to minimise the risks to investors and borrowers.

“Along with the general market chatter, we believe there will be a softening and correction of property prices over the next 18 months or so,” Auger suggests.

“But unlike previous corrections in property prices, unemployment is relatively low as in previous times when rising interest rates were also mirrored by rising unemployment.”

In anticipation of this softening market, Kuflink’s leadership team meets following each meeting of the Bank of England’s Monetary Policy Committee. They discuss the decisions being made by the central bank and decide whether or not to make any changes to the platform’s lending criteria as a result. This may include raising borrower rates or reducing the average loan-to-value (LTV) on the platform’s properties.

“Property fluctuations always affect people’s attitude,” explains Auger.

“We have a prudent approach to every deal that we offer to investors via our platform. We are always conscious not only of the LTV but other factors, including but not limited to type of property, location, and borrower’s experience. This enables us to produce an accurate summary of the deal to be displayed on our investor’s platform.”

As part of its credit process, Kuflink favours developers that take a “pragmatic approach” towards the development, with Kuflink taking the same approach. This means that the platform can maintain its loan volumes regardless of the impact of the wider macro-economic environment.

It is this pragmatic attitude that has allowed Kuflink to deliver returns of more than seven per cent over the past few years, while maintaining its record of zero investor losses.

Auger is now looking at the opportunities in the current property market.

“As a growing society, the need for homes is always there,” he says.

“The challenge at the present time is the rising cost of materials and labour. It highlights that lenders need to remain prudent in their vetting of applicants to ensure, to the best of their ability, that the costings are accurate, and the appropriate contingencies have been factored into the costings.”

Over the coming months, Auger expects to see a rise in borrower enquiries, as traditional lenders pull away from the market. This means that the platform will be busy sorting through reams of new funding applications and sorting the wheat from the chaff.

“We at Kuflink are confident that our process for underwriting new applications puts us in a good position,” Auger says.

“There is always a silver lining for specific cohorts of people in every situation, we are continually reviewing our product range to investors to align it with market conditions and ensure that we offer an alternative proposition to traditional deposit takers.”

P2P’s global evolution

Peer-to-peer lending started in the UK but has since expanded and evolved internationally. Hannah Ganage-Stewart explores how P2P is maturing across the world

PEER-TO-PEER LENDING platforms have proliferated across the world since the launch of Zopa in the UK in 2005. For example, Europe and the US now have alternative finance offerings that, while not

necessarily P2P in its purest form, take their lead from those early UK initiatives.

In the UK, some of the early platforms have either left the market entirely or moved away from pure P2P. Zopa, for

example, transformed from a P2P lender into a fully-fledged bank after it received a UK banking licence in June 2020.

This is a familiar story across Europe and the US, where major platforms have tended to move

towards institutional investment models and exit the retail investment side of the business.

For market analyst Neil Faulkner from 4th Way, this gradual drift towards institutional investment is a sign of the market maturing.

“You expect there to be a lot of institutional investment in any high-quality investment,” he says.

“Europe's still catching up but it's still got a reasonable amount.

“If you talk about the actual size

of these platforms, the US, for example, is the most consolidated with larger platforms, and it has a greater total investment, for two reasons. One reason is that investors have a domestic bias, so the US market is internal whereas Europe is separate countries, and obviously people prefer to invest in their own countries.

The second is wealth, and the US and Europe, including the UK, have roughly similar sized

economies but personal wealth in America is far higher compared to Europe, so each person has more wealth to invest.”

Tighter regulation across all jurisdictions has also led to a maturing of the market. Many platform leaders would argue this has stifled innovation on the retail investor side, but on the other hand it enables them to operate with greater clarity of what the regulatory expectations are.

And it’s clear that while the market may have matured and consolidated into a few major

players in the biggest markets, there are still P2P platforms out there looking to fill the gap in the market for alternative credit for those who are unable to access finance from banks or traditional lenders.

These businesses are closer to the origins of P2P but are not necessarily the major players in the industry. Elsewhere, the largest platforms have been moving toward a model more akin to traditional lenders, enabling them to secure licences and expand their offerings.

“If you look at the old capital lending space, then this notion of an applied P2P approach in funding has very much subsided,”

“ Personal wealth in America is far higher compared to Europe, so each person has more wealth to invest”

explains Martins Sulte, chief executive of Latvia-based P2P lending marketplace Mintos.

“It is very hard to run the business when you have to cater to both investors and the borrowers. The margins are super slim, and there's always an imbalance of funding availability on one side and the borrowers on the other side. It is very hard to balance.”

Mintos recently received an investment firm licence and electronic money institution licence from the Latvian regulator, the Financial and Capital Market Commission (FCMC). It enables the firm to offer more products and to operate across the EU and the European Economic Area. In particular, it has been developing its own exchange traded funds (ETFs).

“We are basically a brokerage house with a European brokerage licence and in future we’re going to passport that licence across Europe and will officially launch in some of the markets where we haven't been before, and we will be much more present and active in the markets where we already have some operations,” Sulte explains. “The first few markets will be the bigger markets, so Germany, France, Italy and Spain.”

Europe has one of the highest individual savings rates in the world, according to a regulatory

update by think tank Eurofi in February. It states that Eurozone members save around 12.4 per cent of their gross disposable income each year, compared to just 7.2 per cent in the US.

Despite this, Eurofi cites data from the Organisation for Economic Co-operation and Development, which says the rate of retail investor participation in capital markets is on average lower in the EU than in the US. Around 32 per cent of EU households’ financial assets are held in securities, compared

“

It is very hard to run the business when you have to cater to both investors and the borrowers”

to 54 per cent in the US.

This may present an opportunity for European P2P platforms, at a time when new EU-wide regulations are being introduced to harmonise the industry.

This month was supposed to close a year-long transition period to introduce the European Markets and Securities Authority’s European crowdfunding service providers regulation (ECSPR), which aims to bring nationally regulated P2P and

by president Rodney Williams in 2018. The platform enables investors to lend small sums to borrowers who borrow on a short-term basis and have the choice of repaying the loan with a voluntary tip to the lender.

“We didn't decide to do P2P,” Williams explains. “It was more about us trying to find the solution. We wanted the community to benefit from the lending activity. And that's what happened.

“My favourite stat is 82 per

organic. There has been very little fundraising. Williams believes that SoLo, while true to the P2P ethos of democratising access to credit, has benefited from focusing on the sub-prime market in the US.

“Our predecessors tended to focus on much larger loans with the higher quality borrower,” he comments. “So there were loans for over $1,000, or a few thousand dollars to tens of thousands. And one of the differences that we made is that we went to the subprime markets, we went to pretty much the lowest credit market in the US and focused on providing them with short-term loans.”

crowdfunding platforms in Europe under one framework.

The rules will enable platforms to operate in all 27 European member states and carry out cross-border transactions. The burden of moving to the new regime has proven difficult for some, so the transition deadline now ends in November 2023.

A harmonised regulatory framework should boost Europe’s P2P market, as it is currently very fragmented. It is harder to manage the regulatory requirements across jurisdictions and the platforms tend to be smaller, making that regulatory burden expensive.

In contrast, the US benefits from being one homogenous market. There are anomalies in the US where some state laws make regulation across all states complicated, but overall, large platforms operate across more than 40 states.

One US platform that is booming and sticking close to the original P2P model is SoLo Funds, which was co-founded

cent of our lenders also live in underserved neighbourhoods. Okay. So they understand it. As a company we've distributed over $12m (£10.2m) in tips back to our lending members, and that's what community finance is about.”

And while the model may sound too altruistic to work, SoLo is growing and now has around 800,000 users. Williams says, unlike his predecessors, 80 per cent of that growth has been

Williams’ success with SoLo shows that there is still a massive need for the core ethos of P2P – connecting individual investors with individuals underserved by the traditional credit markets. As recessions roll out across the world, it is likely this demand will only grow.

With promising new regulations in Europe and the continued growth of P2P in the US, the industry is set to prosper and cement its place in the global alternative finance landscape.

“ We wanted the community to benefit from the lending activity”

Europe prepares for influx of newly licensed P2P and crowdfunding firms

ANEW MARKET FOR peer-to-peer lending and equity crowdfunding is about to launch. The new European Crowdfunding Service Provider Regulation (ECSPR) has been effective since November 2021, with six crowdfunding platforms already licensed, and a number of applications still pending.

Oliver Gajda, executive director of EuroCrowd, has been on the frontlines of this regulation for the past few years, and he knows better than most how transformative it promises to be. In fact, Gajda has predicted that there will be an influx of newly licensed crowdfunding and P2P lending platforms across Europe, leading to the development of new fintech hubs across the continent.

“It’s still early days, and the market is wide open to new entrants and old ones,” says Gajda. “But I believe that within the first six months of 2023, the number of active licences will increase significantly.

“Since ECSPR allows to choose the licensing member state freely, there is also increasing competition amongst European regulators, giving rise to hopes of new fintech capitals across the Union.”

The deadline for all nationally licensed platforms to convert to an ECSPR licence is November 2023. But at a recent networking event organised by EuroCrowd and the law firm Dentons, the European Securities Markets Authority (ESMA) said that it believed that the transition to ECSPR could be finalised well before this date.

The entire authorisation process is believed to take between five and nine months. During this time, the quality of the internal processes, legal business plans and operational systems would be tested in detail. Once licensed, the platform can operate in any EU market.

“Of the first six platforms which have obtained the ECSPR licence, the largest three have shared their expertise with the new licensees,” says Gajda.

“While obtaining it was not as straightforward as they had hoped, once obtained it provided significant benefits.”

UK-based Crowdcube became the first EU licence holder via its Spanish subsidiary Crowdcube Europe. Since obtaining the licence, the company has already expanded into France, the Netherlands, Belgium and Scandinavia, and it

has funded more than 20 deals under the new permissions.

Meanwhile, Dutch platform Lendahand Ethex – which funds clean energy projects in Africa – has used its licence to further expand its business model by using a clause in the law allowing it to finance businesses outside of the EU. This is a legal detail which has not gone unnoticed by UK platforms.

“Expansion into the EU can help increase capital inflow into the UK market,” says Gajda. “This is also possible for non-UK platforms, as it will allow European platforms to finance transactions in the UK under the new rules. This will likely not be their first move, as there are more opportunities at present in the European market, but it is likely a question of time.”

At a recent EuroCrowd conference in Brussels, Gajda noted that representatives from the banking sector see the new law as an opportunity for their sector.

“There is a clear interest from European banks to seek deeper engagement with P2P and crowdfunding platforms,” he says. “At the same time, some bankers are looking to this new market as a way to close the gap between earlystage finance and pre-IPO funding, hinting that there might be a ceiling where crowdfunding and stock exchanges will meet in the future.”

The European crowdfunding revolution is already underway and it is just a matter of time before a slew of new entrants win licences of their own. When that happens, the sky is the limit.

What does next year hold for P2P?

WE ARE IN CHALLENGING times, amid a deepening recession, cost-of-living

crisis and soaring energy bills. What does this mean for the investment climate and, more specifically,

peer-to-peer lending? We grill the industry’s leaders to find out their outlook for 2023...

Stuart Law Chief executive, Assetz Capital Property-backed P2P lending in 2023 remains, in our view, the strongest sector of the P2P industry. In uncertain times property security, particularly when residential in nature, gives great comfort to investors.

We can see that first time buyer property will be under the most pressure due to the cost-of-living squeeze on affordability likely affecting that market segment the most, unfortunately, but other segments will be quite resilient in prices. This will likely lead to a slowdown in delivery of new homes for first time buyers but in turn that will lead to support for prices. Overall, we do not expect material price falls in the context of the last year or two of strong growth.

Jatin Ondhia Chief executive, Shojin

In strong locations, demand still far outstrips supply, and this will support house prices. A more stable economic environment (at least compared to the past six months) should see more mortgages coming back into the market at sensible rates.

Times of uncertainty bring opportunity. In theory therefore, investors should go into 2023 looking to invest in P2P loans in real estate. As we have seen in the past, real estate does very well coming out of a downturn, so investors should still include a property allocation within their portfolio.

There will be headwinds, but most real estate projects are around 24 months, so the market should have recovered by the time the investments mature, and we expect to see good exits from projects started next year. The key thing is to remain diversified across projects, and this is best done through P2P platforms.

Brian Bartaby

Chief executive, Proplend Commercial property is dealing with a combination of a rapid rise in the costs of debt and high inflation, together with the ongoing longterm structural shifts in demand precipitated by the pandemic. A recent RICS survey saw occupier enquiries fall for retail and grow modestly for offices, whilst demand for industrial remained strong. The lack of new stock being developed and softening yields is helping to create a floor on pricing.

Investments are taking longer to transact but significant buying opportunities are presenting themselves, especially for cash and overseas buyers.

Cormac Leech Chief executive, AxiaFunder

In 2023 I would expect to see inflation almost as high as this year but with much lower growth – a bad case of stagflation, last seen in the 1970s. The misery index defined as ‘inflation rate plus unemployment rate’ will increase further with a jump in unemployment more than offsetting any drop in inflation.

If history is any guide, equity markets will have another significant decline. By the end of 2023, I'd expect to see the Bank of England cutting rates. If this outlook is correct, property markets will see double digit declines. In this scenario, uncorrelated asset classes like litigation finance seem well positioned to outperform.

Paul Sonabend Executive chairman, Relendex

The fundamentals of the UK housing market are unchanged. The country has a chronic housing shortage. As we also have a growing population this problem will persist given the fact that our housebuilders are unable to keep up with demand.

Assuming the Treasury estimate of a nine per cent decline on house prices over the next two years is correct, then prices will return to 2021 levels which are more than sufficient to support housebuilding projects.

At Relendex, we remain confident that the sustainable housing developers we finance will see their new homes sell for a premium. It is logical that a new home with a clean environment and all modern comforts with negligible energy costs is highly desirable compared with an older draughty one facing an annual £3,000 or greater energy bill.

Mike Carter

Head of platform lending, the 36H Group

The outlook for 2023 is of course dominated by the recession, with inflation and base rates forecast to peak over the next 12 months. For P2P platforms, the Covid crisis was a full dress rehearsal for managing their business through a downturn, although this time there has been some lead time to allow tightening of credit criteria and risk plans to be in place ahead of the downturn.

But this is also an opportunity for the sector to demonstrate its commitment to customers, both in terms of continuing to provide credit sensibly when others have pulled back (as we saw during Covid), and to help customers manage their loan commitments where the recession causes small- and mediumsized enterprises and consumers to have cash flow problems.

An ethical approach

Qardus founder Hassan Daher tells Marc Shoffman how his Shariahcompliant peer-to-peer lending platform is filling a gap in the market

SHARIAH-COMPLIANT

peer-to-peer lender Qardus launched during the pandemic in 2020 but two years later the platform is still going strong. Its founder Hassan Daher explains why the timing turned out to be a good thing and how Shariah-compliant finance appeals to all types of investors, not solely Muslims.

Marc Shoffman (MS): What is your career background?

Hassan Daher (HD): Prior to establishing Qardus, my background was in providing corporate finance and mergers and acquisitions solutions to small- and medium-sized enterprises at Deloitte.

From working in the Middle East, I came across Shariah-compliant business finance. Essentially, Muslims cannot pay or receive interest, what we do is create alternative structures to offer small businesses, individuals and anyone looking for financing.

MS: Why did you decide to set up a P2P lending platform?

HD: Upon my return to the UK, I went into incubator accelerator programmes in London and found that no one was providing Shariah-compliant business finance. We set up Qardus to solve

that problem and offer business owners, and Muslim business owners especially, growth finance that is in line with religious requirements not to pay interest.

This is a problem on both sides of the marketplace. Investors need opportunities that are Shariahcompliant and need to receive profit as they cannot earn interest.

What we do is technically classified as investing rather than

lending. We have a trade-based mechanism that transfers liquidity from the investor to the business owner. The business owner ends up paying the principal and the profit over the term of the facility.

However, our investors are not only Muslim – we have a diversified pool. They tend to invest as they like the business opportunities we are providing on the platform. Investors receive profit rates, which are around 11 per cent per year.

MS: Who are your typical borrowers?

HD: The platform launched in July

“ This is a problem on both sides of the marketplace”

2020 during the first lockdown so we needed to reassess our credit and eligibility criteria. It primarily financed recession-proof sectors such as healthcare and pharmacies, but as the economy opened up we started financing more cyclical businesses.

We now have a diversified group of companies as borrowers. We were lucky to launch in the pandemic rather than beforehand, otherwise we would have been financing those who were struggling.

MS: Is there an ESG angle to investing with Qardus?

HD: The screening criteria we apply is identical to ESG investing. We don’t finance businesses that aren’t environmentally friendly or those that are involved in alcohol, weapons or pornography.

MS: How do you assess borrowers?

HD: We assess borrowers first on business activity. If we don’t have clear picture we will learn what they do to see if it is Shariah-

compliant and in an ethical sector we want to invest in.

The next stage is to see two years of financial accounts and six months of bank statements to check if the business is creditworthy. Once that is done we prepare an investment memorandum that we pass on to our compliance team, they review it and we then list it on the platform as a funding opportunity.

We are currently focused on the UK but are looking to expand further down the line. There is a sizeable Muslim population in Europe, and obviously the Middle East and South Asia are no brainers.

MS: How is the platform growing?

HD: It has been growing in terms of average investment as well as total number of investors. We are not only bringing in more investors, but different types are coming through. We have sophisticated, high-networth and retail investors.

MS: Were there any regulatory challenges?

HD: When we were getting a

Shariah-compliant structure in place we were focused on Financial Conduct Authority (FCA) regulations at the same time as we wanted to make sure we were in line with the rules as opposed to building something first and then checking afterwards. We constantly review FCA papers and make sure we understand how requirements may change.

MS: Tell us about your equity round.

HD: We have an equity round in process and are optimistic about getting it over the line. It is a seed round so we are looking to raise more than £2m to expand our presence in the UK, carry on building our technology, growing our team and becoming a dominant player when it comes to Shariah finance.

MS: Are you worried about rising inflation and interest rates?

HD: We are not immune to what goes on in the economy just because we are a Shariahcompliant platform. Our rates and investor expectations will change. It also impacts the creditworthiness of businesses that we are willing to bring on.

MS: What is your outlook for the sector?

HD: It depends on the P2P and crowdfunding models as well as track records. Some players in this space care about track records so investors can trust them, others are just interested in arrangement fees and will dump anything on their platforms.

It depends to what extent platforms can build trust with investors especially as interest rates and the cost of money goes up.

“

The screening criteria we apply is identical to ESG investing”

Macro-economic risk underlines value of good quality collateral

COLLATERAL IS A VITAL part of any peer-to-peer lending platform’s business model. But for Lande, recent macro-economic events have truly underlined how valuable good collateral can really be.

When Russia invaded Ukraine in February 2022, many European lenders scrambled to reduce their exposure to these markets, with varying degrees of success. With an investor base in Germany, Spain, France and Italy, and borrowers based in Latvia and Lithuania, Lande’s business was not directly affected by the war. But its collateral was.

Lande has traditionally accepted land, machinery and grain stock as collateral. A worldwide shortage of grain has actually meant that many Lande borrowers have seen the value of their collateral rise. Some have even opted to refinance their loans to take advantage of this opportunity.

But borrower collateral has been negatively impacted as well. Lande’s agricultural borrowers have been particularly affected by the availability of fertiliser, which is largely produced in Ukraine and Belarus.

“The chemicals used have become harder to get and the price has grown ten times because Ukraine and Belarus are the main suppliers of fertiliser,” says Ričards Maļecs, account manager at Lande. “This is mostly impacting the smaller farmers.”

“However, they had already

predicted this, so we were able to step in and help them before any problems occurred.

“We have helped them by extending the loan terms, and giving them more time to pay. If they have any issue we will connect with them and try to find a solution that works for everyone.”

Soon after the Russian invasion, Lande decided to enhance its collateral requirements to make its loans even more secure. The platform’s diligent credit process has ensured that they have developed a strategy to quickly recover defaulted loans from borrowers who avoid communication and payments, while delivering average returns of up to 13 per cent to investors.

“We put larger restrictions in place for our loans,” he explains.

“Short term loans will now be limited to different amounts and we have also requested more collateral from our borrowers, and higher quality collateral.”

Lande’s most popular collateral includes machinery, grain and

land, but it recently added livestock and EU subsidies.

All of the platform’s loans are guaranteed against collateral. This has helped the platform to grow a loyal following across Europe, where returns can surpass 14 per cent, particularly when investors make use of various cashback deals and referral rates.

For Malecs, the current priority is protecting investor assets by ensuring that only the highest quality collateral is used to guarantee their financing.

“The only risk to the platform is that grain exports stop or the price of grain drops critically,” he says. “And that isn’t going to happen any time soon.

“Agricultural loans are stable and growing field. And they will always be a necessity for people because these farmers are growing the food that we eat.

“When agricultural loans are guaranteed with good collateral, that results in higher returns and happier investors.”

INVESTMENT PLATFORMS

Assetz Exchange is a property investment platform delivering long term stable income for investors, primarily through the purchase and leasing of housing for social good. Regulated by the FCA, it provides the opportunity for investors to create a diversified property portfolio and alternative funding options for the housing sector. www.assetzexchange.co.uk

T: 03330 119830

E: info@assetzexchange.co.uk

Folk2Folk is a profitable UK lending and investment platform. More than half a billion pounds has been invested via the platform with no investor losses to date. Loans are a maximum of five years, secured against land/property at a maximum 60 per cent LTV, with a fixed rate of typically 6.5 per cent, per annum. www.folk2folk.com

T: 01566 773296

E: enquiries@folk2folk.com

Invest & Fund is an established alternative finance platform that has deployed over £190m on clients' behalf and has repaid over £115m to lenders with zero per cent bad debts written off. Lenders can achieve a diversified, asset-backed portfolio with gross yields averaging from 6.75 per cent per annum with an option to lend through an ISA or a SIPP for tax-free returns. www.investandfund.com

T: 01424 717564

E: lending@investandfund.com

JustUs is an innovative peer-to-peer lender that provides a range of consumer and property-backed loans. It has lent out more than £20m and paid more than £1.4m in interest to lenders to date. Investors can enjoy returns of up to 10.69 per cent, with all products eligible to be held in an Innovative Finance ISA for tax-free earnings. www.justus.co

T: 01625 750034

E: support@justus.co

Kuflink is an award-winning lender and online investment platform. With over £220m invested through the platform, investors can customise their own portfolio investing in specific loans or in a pool of loans diversified across a number of opportunities. Earn up to 7.44 per cent (compounded) per annum, with an IFISA available.

www.kuflink.com

T: 01474 33 44 88

E: hello@kuflink.com

LANDE is a crowdfunding platform that gives investors access to secured agricultural loans. It has created a unique scoring model, accessible infrastructure, and a variety of products so that farmers are able to access financing quickly and easily. With LANDE and its investors as partners, farmers can become more independent and sustainable, while improving their yield, efficiency and profitability. Projects offer interest rates of up to 13 per cent per annum.

https://lande.finance

T: +371 20381802

E: info@lande.finance

Lendwise is the UK’s only peer-to-peer lender that is dedicated to impact investing in education finance. Investors finance education for borrowers at universities and business schools across the UK and globally. Investors define their own risk appetite and use Lendwise’s AutoLend feature to diversify their strategy across a pool of loans, which can be invested in an IFISA wrapper earning average returns of up to nine per cent per annum. www.lendwise.com T: 0203 890 7270 E: lenders@lendwise.com

SERVICE PROVIDERS AND INDUSTRY ORGANISATIONS

The European Crowdfunding Network (EuroCrowd) is an independent, professional business network promoting adequate transparency, regulation and governance in digital finance while offering a combined voice in policy discussion and public opinion building. It executes initiatives aimed at innovating, representing, promoting and protecting the European crowdfunding industry. www.eurocrowd.org E: info@eurocrowd.org

Q2 creates simple, smart, end-to-end lending experiences that make you an indispensable partner on your customers' financial journeys. Its modular platform gives you the ability to manage lending simply throughout the entire loan lifecycle, from application, onboarding, servicing to collections. The result is a better experience for both borrowers and lenders. https://eu.q2.com T: 020 3823 2300 E: info@Q2.com

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