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The opportunity of peer-to-peer lending in Lebanon

Using fintech to unlock SME financing

by Roxana Mohammadian-Molina

Through conversations with Lebanese entrepreneurs, business owners, bankers, and politicians, I have had a number of eye-opening discussions into the challenges and opportunities faced by Lebanon’s SME ecosystem. Given the country’s long-standing tradition in financial services and its large banking sector, I believe fintech—with solutions such as peer-to-peer lending, machine learning to personalize insurance solutions, and the use of artificial intelligence for wealth management—stands as a serious contender to unlock the funding challenges faced by Lebanon’s SMEs. 

Opportunity for Lebanon 

So, what exactly are the factors that could see fintech—in particular peer-to-peer lending—transform Lebanon’s SME and digital ecosystem? Lebanon has several interlocking strengths, namely: its strategic location, its favorable tax system and free-trade zones, its entrepreneurial spirit, a good network of highly successful diaspora around the world, its local talent pool, and an educated and multilingual population.

SMEs, particularly micro-enterprises, are the main economic drivers in Lebanon. They constitute 95 percent of companies and account for 50 percent of employment. Yet, access to finance represents a major constraint; 42 percent of Lebanese SMEs struggle to get finance, according to the 2014 World Bank Enterprise Survey.  

Despite having a relatively large financial and banking sector, credit in Lebanon is mostly channeled to a small number of large firms, while SMEs struggle to access finance. Bank loans represent a modest source of real financing to SMEs with only 17.5 percent having access to this funding channel, often against mortgages and guarantees required by Lebanese financial institutions. Since financing of SMEs via the stock market is nonexistent and informal loans are not commonly used, self-financing is the main source of funding for the short- and medium-term. As a result, a large number of SMEs have disconnected from the banking sector altogether, and by doing so have lost growth opportunities. 

Peer-to-peer lending could be the solution to the financing problems faced by Lebanese SMEs. In the US and the UK—the two largest peer-to-peer markets in the world by volume—the emergence of the peer-to-peer lending sector has been in response to difficulties in accessing finance in the aftermath of the global financial crisis. The model is a way to allow people to invest in small businesses belonging to their friends and peers. By comparison, the Middle East has one of the highest savings rates in the world, yet people do not use a lot of credit, and there are not many investment opportunities. The peer-to-peer model has the potential to place Lebanon at the receiving-end of savings to be channeled into a dynamic and exciting SME and startup ecosystem.

While Lebanon has more than its fair share of complex and long-term challenges, I truly believe that the country holds the potential to become the “Silicon Valley” of the Middle East. Of course, serious work still needs to be done. Lebanon still needs to continuously improve and enhance its business environment (mainly in infrastructures, world-rankings, ease of doing business,  and legal system transparency). 

The government has to play a pivotal role in further advancing the startup industry with measures such as: tax cuts for tech companies, removing bureaucratic obstacles to encourage hi-tech mergers, the creation of public-private partnerships to support homegrown venture capital, and high-tech incubator programs to support the sector. Entrepreneurial education is also an important component, and Lebanon’s top universities need to increasingly focus on running entrepreneurship programs to look internationally for talent and target underrepresented local populations. Other initiatives, such as a visa pilot for foreign entrepreneurs, must also be considered. 

Yet, underpinning it all is the emergence of a peer-to-peer lending sector that represents a serious opportunity to provide much-needed oxygen to Lebanese SMEs and help build a world-leading startup ecosystem. It also represents a practical solution to some of Lebanon’s funding challenges. 

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Roxana Mohammadian-Molina

Roxana Mohammadian-Molina is chief strategy officer and board member at Blend Network. A former banker at Morgan Stanley in London, she now focuses on investing in, growing, and advising fintech companies.

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