The Future of Finance: Trends in Online Lending in Sri Lanka

The financial landscape in Sri Lanka is rapidly evolving. With increasing internet and smartphone penetration, more people are turning to online services for their banking and financial needs. One area that is seeing massive growth is online lending.

The Rise of Online Lending

Online lending, also known as peer-to-peer (P2P) lending or social lending, allows individuals and businesses to borrow and lend money without going through traditional banks. Instead, borrowers get loans directly from retail investors who are looking to earn higher returns on their capital.

Some key stats on the rise of online lending in Sri Lanka:

• Market size expected to reach LKR 15 billion by 2024, up from just LKR 381 million in 2021
• Over 50,000 loans disbursed via online platforms in 2021
• Top 5 P2P lending platforms had over 200,000 registered users as of 2022

The main drivers behind this rapid growth are:

• Increasing internet and smartphone penetration - Sri Lanka now has over 30 million mobile connections and nearly a third of the population has access to smartphones. This has allowed online lending platforms to reach more customers.
• High traditional lending rates - Banks and financial institutions charge very high interest rates for personal, business and agricultural loans in Sri Lanka, ranging from 12% to 28%. Online lending offers more reasonable rates.
• Faster and more convenient - Borrowers can apply for and receive funds within days without extensive paperwork. Everything can be done via laptops and smartphones.
• Wider eligibility - P2P lenders use more data for assessing creditworthiness compared to traditional metrics used by banks. This allows more individuals and small business owners to qualify for loans.

Loanplus is one of the leading P2P lending platforms in Sri Lanka that is leveraging technology to provide quick, convenient and affordable loans for personal and business needs.

Key Online Lending Trends in Sri Lanka

Based on the growth momentum in the past few years, here are some of the key trends shaping online lending in Sri Lanka:

Short Term Loans Dominate

Most of the loans disbursed via P2P lending platforms are for short tenures ranging from 3 months to 1 year. The typical loan amounts range from LKR 25,000 to 500,000, used for purposes such as:

• Funding working capital needs of small businesses
• Personal consumption needs like medical bills, home repairs etc.
• Agricultural input costs by farmers

Longer duration loans above 1 year tenure are slowly catching up as people gain more confidence in online lending.

Increasing Smartphone Usage

By 2024, Sri Lanka’s smartphone connections could cross 85% of all mobile connections. Most people now prefer applications over websites to apply for loans using their mobile phones.

The usage of data from smartphones for credit risk modeling has also allowed lenders to verify identity and creditworthiness faster. This results in quicker loan approvals.

Spread to Semi-Urban and Rural Areas

A majority of online borrowers and lenders so far were tech savvy urban residents. However, online lending is now gradually spreading to semi-urban towns and villages as mobile internet gets cheaper.

Fintechs like Loanplus are investing heavily in vernacular languages and into credit models tailored for rural populations. Partnerships with agri input retailers, farming co-operatives etc. helps reach more rural borrowers.

Alternative Credit Scoring

Sri Lanka still does not have a strong credit bureau system equivalent to a FICO score in the US. Less than 20% people have their financial records tracked by credit bureaus like CRIB.

In the absence of reliable credit records, online lenders are using alternative credit scoring methods:

• Usage of smartphone/social media data - Behavioral data from smartphones and social media accounts indicates repayment capacity and reliability of potential borrowers in villages.
• Supply chain data - Tie-ups with agri input companies provides data on cashflows of farmer borrowers based on their input purchases and crop volumes, reducing defaults.
• Small initial loans - First-time borrowers are given very small loan amounts (LKR 5000 to 10000), which if repaid helps establish their creditworthiness for larger future loans.

Emergence of Digital Banks

Recognizing the potential of online lending, traditional banks in the country are also investing heavily in building their own digital lending channels outside of brick-and-mortar branches.

For instance, banks like Commercial Bank of Ceylon and Seylan Bank have set up their own P2P lending platforms which are completely digital without paperwork. Regional banks are also entering partnerships with fintech startups to penetrate rural areas.

We can thus expect even faster growth in digital loans as trust in such platforms improves. As per one estimate, Sri Lanka's digital lending market alone could be worth $1.6 billion by 2030.

Opportunities and Challenges

Rapid growth over the past decade along with favorable demographic and internet penetration trends makes online lending in Sri Lanka a promising avenue for both borrowers and retail investors. However, some key challenges need to be addressed:

Opportunities

• Large unserved population - Only 34% Sri Lankans above 15 years have access to formal bank accounts indicating massive scope for financial services growth
• Government support - Initiatives like LANKAQR national QR code payment system provides infrastructure required for growth of digital payments connected to lending
• Increased financial inclusion - Online loans reduce inequality by providing affordable credit access to rural communities with lower income

Challenges

• Low financial literacy - Many first-time borrowers do not clearly understand loan terms or how interest rates impact EMIs
• Limitations of digital records - Most borrower records still have to be validated physically before disbursing amount slowing down processes
• Poor internet connectivity - Mobile internet speeds are inconsistent especially in semi-urban areas hampering application experience

The Sri Lankan government is addressing many of these challenges under its 2024 Digital Economy blueprint, which should provide a boost to lending platforms like Loanplus at the frontlines of financial inclusion.

The entry of commercial banks and stricter guidelines by Central Bank on lending practices is also expected to drive more transparency and awareness.

Conclusion

Driven by smartphone adoption and support from stakeholders including regulators and incumbents banks, Sri Lanka’s digital lending industry seems poised for robust growth despite some teething issues.

The consumer lending space is likely to get crowded over next 5 years. However, agile fintechs like Loanplus targeting value-added offerings for rural small businesses and agricultural segment could emerge stronger.

Partnerships between banks & fintech lenders leveraging respective strengths in capital and technology also hold promise to deepen financial access meeting socio-economic goals for an aspiring middle-income economy.

Exciting times ahead as Sri Lanka aims to become a South Asian leader in financial inclusion!

Frequently Asked Questions

Q: What are the most popular online loans in Sri Lanka?

A: Short duration personal loans for medical emergencies, home repairs, etc. dominate followed by loans to small businesses for working capital needs and purchase of agricultural inputs like seeds, fertilizers etc.

Q: What is the average interest rate charged on online loans?

A: Online lending rates vary from 12% per annum to 24% per annum based on tenure, amount and credit score of the borrower. These are still cheaper compared to some microfinance companies that charge 30-40% interest rates.

Q: Are online loans safe in Sri Lanka?

A: Yes, licensed fintech lenders adhere to strict guidelines issued by CBSL (Central Bank of Sri Lanka) around data privacy, loan recovery practices etc. Moreover, most loans are also insured providing protection against defaults.

Q: What is the loan approval process like?

A: If all eKYC, KYC documentation is submitted, eligible borrowers get in-principle approval within a few hours after application. The amount gets credited within 1-2 working days after completing verification processes.