The Israel Alternative Lending Market

online alternative finance volume Israel

Alternative lending has had a profound effect on consumer and small business lending around the world. The evolution and success of P2P lending can be gauged from the fact that the market had an exponential growth in 2015, having a value of $26.16 billion. It grew to almost $50 billion in 2016-17. The market is […]

online alternative finance volume Israel

Alternative lending has had a profound effect on consumer and small business lending around the world. The evolution and success of P2P lending can be gauged from the fact that the market had an exponential growth in 2015, having a value of $26.16 billion. It grew to almost $50 billion in 2016-17. The market is estimated to be worth $897.85 billion by the year 2024, and by 2025, the value is anticipated to reach $1 trillion. The alt-lending market is predicted to grow at a compound annual growth rate of 48.2% between 2016 and 2024.

The Middle East and Israel

In 2015, a total of $158.8 million were raised in the online alternative fund market of Middle East. Equity-based crowdfunding dominated the market followed by reward-based crowdfunding and peer-to-peer business lending. Israel is the market leader as far as regional markets are concerned, which, from 2013-2015, accounted for between 75%-80% of total market activity while UAE, Qatar, Jordan, Lebanon, and Palestine accounted for the remaining activity.

Source: Cambridge Centre for Alternative Finance

Israel’s Alternative Lending Market

The Israeli fintech industry is relatively nascent, but the country has an advantage of human capital across various fields. Given Israel’s innovative and well- managed financial sector, it is the market leader in the Middle East as far as alternative lending is concerned. In 2017, transaction value in the Israeli marketplace lending segment amounts to US$88 million.

Source: Cambridge Centre for Alternative Finance

P2P lenders in Israel

  • Blender – Founded by Gal Aviv in 2014, Blender is an online P2P lending platform that provides multi-continental and cross-border lending services in developing, emerging, and western-world countries. It has been established with a view to providing a quick, flexible, and hassle-free credit solution as compared to the expensive loans given by banks and credit card companies. To date, it has raised $5 million in various rounds of funding. As per the company’s claims, within eight months of its launch, it provided loans amounting to NIS10 million (1 NIS=0.29 USD) with an average loan amount of NIS15000 – 20000. The average annual interest rate is 6%.
  • Tarya – Tarya is one of the largest Israeli P2P lending platforms and was started in 2014 by Eyal Elhayany. It has designed a digital platform where people can lend directly to other people, thus avoiding any middleman. The company’s rate of interest for borrowers ranges from 3.5%-8.0% depending upon the borrower’s credit score. Loan origination fees range between 0.9% – 5.5% and depend on both the credit rank and loan term. Lenders pay a fee of 1.0% on returns whereas lenders investing in diversified and micro-financed portfolios averaged between 5%-6% returns after fees. It has raised $2.6 million in funds since its inception.
  • eloan – eloan.co.il is a peer-to-peer lending platform founded in 2012 by Yigal Alkaslasy and Yoram Gavish. It allows private individuals to receive loans of up to NIS 47,500 for a period of up to five years. Each lender is entitled to lend up to NIS 1,000. Almost 84 Million NIS (approx $25 Million) has been financed by an estimated 4000 investors for over 4200 borrowers.

Regulatory reforms

Until recently, P2P lending platforms were not governed or supervised by any regulatory body in Israel. Due to no regulatory oversight, these platforms were able to scale their models. But the absence of regulatory supervision always concerns investors about the delinquencies and overall safety of funds on such platforms. This led Knesset, the unicameral national legislature of Israel, to pass laws regulating the activities of P2P platforms.

The new amendment imposes a licensing obligation on operators of P2P lending platforms and subjects the platforms to supervision by the Supervisor of Regulated Financial Services. The P2P lending segment will also be divided into two licensing categories: A basic license for a limited volume of activity, and an expanded license for a material volume of activity.

Within the scope of the law, and in order to also enable small businesses to obtain loans being offered via P2P lending platforms, the Securities Law was also amended so that companies can seek and obtain a loan of up to NIS 1 million through P2P platforms provided they are not deemed reporting corporations.

A platform licensee constitutes an operating entity that must perform particular actions vis-à-vis borrowers and for the lenders in the system, such as debt collection. With the objectives of ensuring proper management and protection of the lenders’ funds being transferred, the amendment clarifies that a licensee will be required to manage a trust account for the funds of lenders and borrowers being transferred to it. A platform licensee will be allowed to charge commissions from both lenders and borrowers for the service it is providing, out of the funds being managed in the trust account.

The Supervisor is authorized to issue various instructions to platforms relating to their ability to offer loans, considering the potential conflict of interests that might arise between the licensee and the lenders. The Supervisor is also authorized to prescribe rules in relation to various operational concerns.

With the objective of providing optimal environmental conditions for growth to P2P lending platforms, the banks and the credit companies owned by them are prohibited from entering the P2P lending segment for three years after the inception date of the law.

Conclusion

Although the Israeli alternative lending market is in its nascent stage, the country’s tradition of investing in and fostering innovation and technology will certainly make it an important market in the region. The new laws help in pushing the $318 billion dollar economy in to the future of lending.

Read more about the alternative finance market in Africa and the Middle East, including Israel, here.

Author:

Written by Heena Dhir.

P2P lending platform in Israel

P2P lending platform in Israel

Israel is famous for its startup ecosystem. With the rise of fintech giants in the United States, Israeli entrepreneurs developing their own p2p lending companies was a given. The p2p lending ecosystem has seen many American clones. Tarya is different because it offers both a true P2P general market but also a white-labeled community-focused sub-P2P […]

P2P lending platform in Israel

Israel is famous for its startup ecosystem. With the rise of fintech giants in the United States, Israeli entrepreneurs developing their own p2p lending companies was a given.

The p2p lending ecosystem has seen many American clones. Tarya is different because it offers both a true P2P general market but also a white-labeled community-focused sub-P2P markets.

Communities focused

Tarya is interested in offering loans by leveraging communities. For example, an organization that is interested in offering loans to its employees through Tarya, need to go online and sign up as an organization, confirm personal details of the employee, along with the underwriting process, and permit taking out monthly loan repayments from the employee’s salary. The organization’s involvement is merely technical – it is not obligated to finance the loans and does not have any liability to either the employee or Tarya. The borrower can apply directly via the website of the community or the community manager can fill in the details. It usually takes 1 hour to set up. Currently, Tarya deals with 4 types of communities.

  1. Smart Underwriting
  2. Community of Lender or Borrowers
  3. Labelled Community
  4. Full White Label

The platform’s architecture is built to enable community structures for lending and borrowing. The community, in this example, is structured around an organization and its employees. So you often have both lender and borrower origination from the same community. Each organization-community set their loan parameters, depending upon the type of organization and sector, security level, other parameters such as seniority, salary level etc. The platform also provides a sophisticated credit-scoring model relying on the usual banking-inspired large-data underwriting algorithms.

P2P

Lenders can be of any community, they see all the borrowers from all the communities under one big pool. Tarya does not manually choose who the lenders for each loan should be. Anyone who wants to be a lender can go to the website, set up the risk parameters like loan purposes, interest rate, risk level etc. So the lenders can either lend manually or can use the “smart agent” developed by the start-up which will invest in the loans on the basis of lending parameters decided by the lender. The parameters can be the duration of the loan, salary levels, interest rates etc. Smart agent automatically allocates the fund to the loans that match the parameters and thus enabling maximum diversification.

Secured fund

Another interesting innovation in Tarya is the company’s semi-secured fund. In order to limit the risk exposure, once a lender has chosen his investment criteria, Tarya puts a lender into at least 200 loans, if possible. This ensures that no single loan will affect more than 0.5% of the portfolio.  Any risk above 0.5% is compensated through the secured fund. The lender can also choose a higher security level, for example, he wants to be diversified into at least 500 loans. This will reduce his risk to any particular loan to 0.2%. The investor will pay a premium for such a diversification, creating another revenue stream for the company.

Key numbers

The company has about 1000 lenders and on average they have invested $50,000 USD per lender through the platform. The minimum investment is 5,000ILS or $1,000 USD, another option is to start a monthly saving whereby anyone can start with as low as 500 ILS. Few of their premium lenders have invested over $6 million ILS. So far the start-up has originated loans worth 80million ILS, on average they are doing 14m ILS per month and are aiming to cross 200million ILS by the end of 2016.

Smart underwriting is the general pool, and white label is a SaaS service for companies looking to launch a p2p lender without reinventing the p2p technology. Tarya extensively deals with community #2 and #3, because in the community of lenders or borrowers there is more accountability and connection, and one can choose his/her community and apply accordingly.

Underwriting and key numbers

Depending on the borrower’s credit score, the interest rate for borrowers ranges from 3.5%-8.0%. The origination fee is between 0.9-5.5 % of the loan amount. Lenders pay a fee of 1.0% on returns.   Credit Cards charge an average of 11% and lenders investing in diversified and micro-financed portfolios average between 5%-6% returns after fees. Thus lending and borrowing through Tarya are beneficial for all the stakeholders. The typical length of the loan ranges from 3 to 60 months and so far, they have not witnessed any defaults.

Company background

Tarya is one of the largest Israeli P2P lending platforms and was launched in January 2014 but started doing business in May 2014. Its aim is to provide a community led profitable financial experience for both borrowers and lenders.

Tarya was founded by Eyal Elhayany, who has founded numerous internet ventures, and held various management roles in leading companies in Israel. The founding team has Assaf Shlush, VP R&D and Verde Losthoiz, head of regulatory and legal and the former legal head of Bank of Israel.  They entered the Israeli crowd funding industry to help in the financial transformation of the existing banking credit system. They are tackling regulatory, business and cultural challenges and they believe Tarya has the potential to change Israel’s credit market structure. Israeli banking sector is concentrated and not competitive, especially when it comes to household and SME sectors. Hence they felt developing an option for these sectors is the need of the hour and also for the development of the nation. The founding team feels the effects of P2P and crowd funding will be significant and profound.

Regulation

Tarya is regulated under nonbanking loans, but soon they will be applying for the regulation for the p2p platform. They are hoping in next couple of years p2p will be regulated in Israel by treasury office and central bank. Another USP of the company is a secured fund. In order to limit the risk exposure,

Company future

Tarya is aggressively building one of the largest p2p companies in Israel. But its secret sauce is not its size or speed of growth, but its business model of communities and loan diversification model which will be a huge barrier for any newcomer looking to grow in Israel.

Author:

George Popescu

P2P investment fund in Israel

P2P investment fund in Israel

Fintech Partners (FP) has brought the concept of P2P investing to Israel by launching a managed p2p investment fund. It was formed in early 2015 by two entrepreneurs. Instead of raising outside capital, they started by investing their own money in 2013. The CEO and co-founder Yonatan Brand is an LLB and MBA graduate of […]

P2P investment fund in Israel

Fintech Partners (FP) has brought the concept of P2P investing to Israel by launching a managed p2p investment fund. It was formed in early 2015 by two entrepreneurs. Instead of raising outside capital, they started by investing their own money in 2013. The CEO and co-founder Yonatan Brand is an LLB and MBA graduate of the Hebrew University of Jerusalem. He practiced Cooperative law with experience in the private and public sectors. CFO and co-founder, Tzahi Ben Hanoch holds a Bachelor’s degree in Accounting and Economics from the Hebrew University of Jerusalem. His field of expertise includes M&A deals, auditing and he has worked as a consultant in PWC Israel.

Fintech Partners provide their clients with a variety of investment opportunities characterized by basic advantages of economy to scale and discretionary management. They list their unique selling proposition as:

– Portfolio diversification including a variety of platforms, markets, currencies, and products.
– Preferred terms in each platform.
– Gateway to unique platforms, inaccessible to the private investor.
– High liquidity options.
– Due Diligence from experienced professionals

The company is always looking for new evolving platforms to add to the company portfolio. It only seeks to partner new originators after thorough evaluation and due diligence. This is a particularly rewarding value add as a first-movers advantage with a young platform can reap long-term dividends in being able to cherry pick the best investments for the fund. To maintain this advantage, the company signs long-term contracts with the partner marketplace lenders. Such a preference cannot be achieved by a private investor or an unprofessional entity.

Fund history

FP launched their first fund in May 2015; a limited partnership in partner’s management funds and they started offering it to the private investors. Funds were invested in ILS (Shekel). They are planning to launch 3 more single currency (USD, EUR, and GBP) funds in their bid to provide more sophisticated products to the market. For now, they are not hedging the currency exchange rate fluctuations. It is looking to launch a single currency fund in the future to manage the currency risks. Considering Israel is a relatively fresh P2P market and people are not well aware or educated about this new investment avenue, they were still able to bring $1.5 million worth of assets under management. The idea behind the fund was simple, they wanted to keep it as safe as possible so that they can build trust among people; hence targeted return on investment was kept at a moderate 5%. They have been able to achieve the 5% target, net of fees. This helps them provide a proof of concept and they can now venture into different funds as per the risk appetite of the investors. They will also employ leverage in future to extract aggressive returns, but they will have to partner foreign banks as Israeli banks are not yet proficient in handling the new sector.

Investment targets and fees

Like other investment management companies, Fintech Partners also runs their own risk and return evaluation algorithms before investing. To invest in Israel they use Tarya, eLoan and Credit Place while Lending Club, Funding Circle, and Market Invoice are used to invest outside Israel. Unlike other investment funds, they don’t charge any management fees but only a success fee or performance fees on expected returns. This provides comfort to the investors in the nascent market that the managers’ interests are aligned with them and their focus is on performance and not simply AUM growth. Usually, the company charges around 20% performance fees on the expected returns.

The company is looking to expand but does not need significant money to scale up. The founders want a strategic partner who can help in marketing and fund raising from clients. It has only one significant competitor in Israel, but that fund is open to only sophisticated investors and only invests in two lending platforms. Fintech Partners is open to all due to the legal structuring accomplished by the founders. According to Israeli law, 35 private investors are allowed per year, since they are not public yet. That allows them to introduce their product to non-accredited investors who are looking to lend on p2p platforms but are more comfortable in a professional setup managing their money on these sites. Because of the limit on a number of investors and small size of funds, they don’t accept everyone and choose their clients very carefully.

Future steps

The company is focused on being an Israeli company and is not looking to shift to the US or the UK for growth. Just like any other new product or service launched in the market, people have a lot of questions and doubts on whether it is genuine or safe and whether the manager is experienced enough to handle their money. The founders have already proven with their first fund that they are here to stay. And according to the research, default rates on average are lower in marketplace lending than the traditional banks. A P2P platform collects a lot more information than the banks and they have been able to leverage this big data to provide a better service with lower defaults.
Fintech investments reached $21.6 billion in 2015 according to Dow Jones Venture Source and PWC estimates that P2P market size will cross $150 billion by 2025. The first movers’ advantage for Fintech Partners will create a moat around its business. As more and more people get comfortable with the p2p market, the size and profit of Fintech Partners is bound to increase exponentially in the coming future.

Author:

George Popescu