Investors must realize high-return social lending involves sizable risk

The Yomiuri Shimbun

16:13 JST, June 7, 2021

There have been a series of problems involving social lending, or peer-to-peer lending, an online investment platform that collects small sums from individual investors to provide loans to businesses.

SBI Social Lending Co., a subsidiary of major online financing company SBI Holdings, Inc. and which engages in social lending operations, has been found to have inappropriately solicited investors.

Social lending is a type of crowdfunding that collects investments and donations for new businesses; it is also called crowdlending.

According to a report released by SBI Social Lending, loans totaling about ¥38 billion were given to a solar power operator for construction work, but the money was actually used for purposes other than those initially conveyed to investors, such as repaying funding from other businesses. The construction work was also behind schedule, the report said.

In addition to careless screening of the solar power operator, the person in charge of financing did not regularly check the progress of the construction work. This is a breach of trust against those who believed in SBI’s name value and invested money in the project.

“I can’t check the details of more than 300 companies [in the SBI group],” SBI Holdings President Yoshitaka Kitao said at a press conference. It is only natural for his remarks to be seen as lacking awareness as a company that holds and looks after clients’ money.

SBI Social Lending has announced its withdrawal from the social lending business. The firm also plans to go out of business and reimburse the investors for an amount equivalent to the principal, but it cannot avoid taking responsibility for causing anxiety to its clients.

The Financial Services Agency is seeking reports from SBI Social Lending under the Financial Instruments and Exchange Law. The agency is also considering imposing administrative penalties, giving serious weight to the fact that the company raised funds through false explanations.

The FSA has jurisdiction over the registration of social lending operators and is responsible for supervising them. In the wake of the latest misconduct, the FSA must identify problems to prevent a recurrence. Regulations to protect investors should be considered.

In recent years, there have been a number of cases in which other social lending operators have also been subjected to administrative penalties mainly due to flaws in their management systems. In many cases, the loans were not used as initially intended, and operators did not sufficiently check businesses receiving investments.

Social lending is becoming popular among investors, especially those from younger generations, because they can invest in small amounts and yields are relatively high, ranging from several percent to 10%. The domestic market is said to be expanding rapidly.

However, there is no framework for social lending, like the Banking Law that protects deposits. Unlike banks, social lending investors must accept losses caused by uncollectible loans, and this is believed to make loan screenings lax. There is also no standardized information disclosure system.

Investors should fully understand that there are risks involved in getting high yields.

— The original Japanese article appeared in The Yomiuri Shimbun on June 7, 2021.