Peer-to-Peer Lending Development in Latvia, Risks and Opportunities

Investment opportunities have become limited due to low interest rates; therefore, investors are searching for alternative investment sources. Peer-to-peer (P2P) platforms act as mediators between investors and borrowers and provide an opportunity for mutually beneficial interaction. The aim of the research is to study the P2P lending process and to identify risks and opportunities related to this area. The research is focused on the investors' side due to the specifics of Latvian P2P lending platforms, i.e., they do not grant loans directly but use loan originators. Mixed research methods were performed as follows: a field experiment (trial investments through P2P lending platforms), a survey, structured interviews, and a focus group discussion. The study shows that rapid development of P2P lending in Latvia is driven by providing relatively lower risks to investors. The main investors' risk mitigation tools are critical originator selection, when a due diligence procedure is executed for each prospective loan originator, buyback guarantees, and payment guarantees, when marketplaces compensate the invested principal and earned interest if the borrower is late with the repayment. Most Latvian marketplaces offer to diversify investors' risk by investing in fractions of loans across different borrowers, originators, loan types, and geographies. Some marketplaces offer loan ratings based on the internal evaluation of the risks. Secondary loan market provides liquidity to investors. However, some specific risks still exist such as the P2P lending operating model's sensitivity to adverse economic development scenarios.