When Dany El Eid, a Lebanese-born entrepreneur, needed quick cash to fund his Dubai-based digital technology business Pixelbug he found the banks were offering him enormous rates of interest and a mountain of paperwork to get it.
By chance, he says, a financier he knew told him about an online company that links those who needed loans with investors, reducing the rate of interest for the borrower and increasing it for the lender. To boot, the company, Beehive, could get him the Dh200,000 he needed much quicker than the bank.
Instead of the weeks and months it can take to get a loan from a bank, Mr El Eid, said he got the loan in under 24 hours for the much needed cash to fund his company as it searches for longer term funding from venture capitalists – businessmen who take risky bets on start-ups.
“I was very fortunate, especially since Beehive had recently launched,” says Mr El Eid, 32, who founded the business in 2012 . “It came at the right time because we didn’t want to go to the banks. There is a lot of red tape and interest rates are through the roof and Beehive just allows us to have extra breathing space to manage cash flow as we close our funding round.”
Mr El Eid says that when he approached the banks, he was offered interest rates between 20 per cent and 26 per cent for a 12-month loan and would incur a penalty for early repayment. Instead, with Beehive, he was able to get a two year-loan at a rate of 14 per cent interest a year. And there would be no penalty for early repayment.
More and more small and medium sized businesses such as Pixelbug are cutting out banks in favour of cheaper online middlemen. These lenders are called peer-to-peer marketplace lenders, online companies that pair up those in need of debt with investors seeking to get a higher rate of interest than by leaving their money in the bank.
While peer-to-peer lending is not yet established in this part of the world, it is gaining traction in developed countries.
Late last year, the Lending Club, a San Francisco-based online lender, sold shares to the public in the biggest IPO for the industry, valuing the company at the time at more than US$5 billion. The global peer-to-peer lending market was valued at more than $9bn in 2014 and is forecast to grow to in excess of $1 trillion by 2025.
At stake is the monopoly banks have over financial services. Analysts say peer-to-peer lenders may create a more even playing field for consumers and businesses that need financing, especially at a time when interest rates across the developed world, including the UK, are near zero as central banks desperately try to stoke economic growth by keeping rates low.
While banks argue their clients want the kind of value-added services they can offer, such as a branch network and loyalty perks on credit cards, increasingly, no-frills banking is starting to proliferate in another blow to the big lenders that have been dogged by allegations of wrongdoing since the crash of 2008.
In the UAE, the peer-to-peer lending industry is still in its infancy – and faces huge challenges. The banking industry in this country is huge, where more than 50 lenders service a population of about 9 million.
Analysts say it will be a tough challenge for them to break the mould of the big lenders here – the country is overbanked and short on investors who may find peer-to-peer investment appealing.
“In theory it should make it easier for SMEs but I am not so sure it will work here because this market is so far behind,” says Vishnu Deuskar, the managing director at Salvus Advisors, a Dubai-base firm that advises SMEs.
“We don’t even have angel investors on the equity side. There are hardly any early stage funds.
“My feeling is that it’s not taking off very well in the sense that in the ‘S’ part of the SME is where this really applies and they are struggling to get any meaningful funding. It’s a great idea but its probably early stages here,” Mr Deuskar says.
Beehive, whose chairman is the former chief executive of Emirates NBD Rick Pudner, who joined the firm in 2013, begs to differ and has ambitious plans to expand regionally .
Since it began its operations in November, it has attracted 800 investors and disbursed about Dh3 million in loans of about Dh100,000 to Dh500,000 to 10 SMEs for up to three years, says the Beehive founder and chief executive Craig Moore.
Typically at a bank, an SME will get financed at rates ranging between 16 and 25 per cent per year and will usually have to pay hefty early repayment penalties of between 2 and 5 per cent, Mr Moore says. At Beehive someone getting offered an 18 per cent loan at the bank would get it for about 13 per cent, he says.
“The important thing for this region is to make sure that the SME community starts to make more of the GDP numbers within the region and there’s more diversification from oil, real estate and some of the usual areas because it’s not just the UAE but the whole Mena region,” he says.
“The real challenge is around growth and employment. And it’s the SMEs that drive most of the employment.”
This country has been striving to bolster support for SMEs. Even though small businesses represent almost 92 per cent of the total number of companies here and provide more than 86 per cent of jobs in the private sector, they account for only about 4 per cent of total lending.
Banks typically do not give a breakdown for lending to SMEs, but almost every other type of lending has grown and anecdotal evidence suggests it is the same for SMEs.
Peer-to-peer lending does not yet overly concern them as the amounts involved are a drop in the ocean of total loans banks give out. As of the end of the fourth quarter of last year, outstanding UAE bank loans stood at Dh1.4tn, according to the central bank. Lenders also bet thetheir value-added serviceswill keep clients loyal.
“It’s a good thing start-ups and SMEs have greater and more diverse access to capital,” says Mahdi Kilani, the head of business banking at Abu Dhabi Islamic Bank [ADIB], the largest Shariah-compliant lender in the emirate. “But banks such as ADIB still have a strong role to play in the SME sector.
“We not only provide growth capital but most importantly, we are long-term partners, and can give advice on business plans as well as providing transactional banking services and, as companies mature, we can help provide access to capital markets funding.”
Vikas Thapar, the chief executive of Emirates Money, the consumer financing arm of Emirates NBD, echoes Mr Kilani’s sentiments, adding that he sees peer-to-peer lending as complimentary to the financial services industry.
But he says there are still issues surrounding the legal framework in the UAE for such types of lending to ensure lender s’ rights are protected.
All these claims by the banks leave Mr El Eid unmoved.
“Having quick access to capital in our stage of the business at rates much lower than what banks offer is crucial for small businesses and start ups, crucial to our survival.”