Thursday, March 10, 2005
Either a borrower or a lender be
Way overdue but finally here, is a website where lenders can get in touch with borrowers and choose commonly agreeable rates. Since financial intermediaries typically take a significant margin on such activites, it was only a matter of time before someone used an internet business model that removes the need for intermediaries (think ebay) in this context. ZOPA, named after 'Zone of Possible Agreement', attempts to address most issues that spring to mind - from concerns of getting ripped off to pricing. Head over to the website to get answers but here is something to note:
An individual lender doesn't lend to an individual borrower because that’s too risky. Instead a lender lends their money across at least fifty Zopa borrowers, and similarly a borrower borrows from a group of Zopa lenders. So the risk is well and truly spread.
This is common practice in collaterized markets where, for example, different high risk loans are put together in a basket. The basket is then organized in several layers (tranches) that are typically organized in terms of seniority (who gets paid first). Each layer is then sold separately.
The reason I highlight this aspect is because of its potential application in reducing the interest rates that many poor people, especially in India, have to pay when they borrow money (Reuben has probably said something on this earlier?). For example, in India, a physical version of ZOPA can cut the profits of individual money lending sharks.
An individual lender doesn't lend to an individual borrower because that’s too risky. Instead a lender lends their money across at least fifty Zopa borrowers, and similarly a borrower borrows from a group of Zopa lenders. So the risk is well and truly spread.
This is common practice in collaterized markets where, for example, different high risk loans are put together in a basket. The basket is then organized in several layers (tranches) that are typically organized in terms of seniority (who gets paid first). Each layer is then sold separately.
The reason I highlight this aspect is because of its potential application in reducing the interest rates that many poor people, especially in India, have to pay when they borrow money (Reuben has probably said something on this earlier?). For example, in India, a physical version of ZOPA can cut the profits of individual money lending sharks.
