By Peter OBIORA InvestAdvocate
Lagos (INVESTADVOCATE)-The International Organization of Securities Commissions (IOSCO) Wednesday said financial return crowd-funding will bridge credit gaps left by banks.
This is contained in an IOSCO’s staff working paper entitled ‘’Crowd-funding: An Infant Industry Growing Fast’’
Other main benefits of FR crowd-funding include providing a boost to economic growth through flows of credit to small and medium-sized enterprises (SMEs) and other users in the real economy, offering lower cost of capital/high returns, leveraging off a lower cost basis and providing a new product for portfolio diversification.
On the risks aspect, IOSCO said there would be risk of default, fraud, illiquidity and risk of investors’ inexperience.
In terms of risk, IOSCO says the FR crowd-funding poses many risks and raises an array of investor protection issues. ‘’The challenge facing regulators and governments around the globe is to strike a balance between encouraging crowd-funding and mitigating the risks associated with its growth, while protecting investor interests,’’ IOSCO said.
According to global securities market regulator, crowd-funding is an umbrella term describing the use of small amounts of money, obtained from a large number of individuals or organisations, to fund a project, a business or personal loan, and other needs through an online web-based platform.
IOSCO says financial return crowd-funding (FR crowd-funding), could also be referred to as peer-to-peer lending and equity crowd-funding.
It said FR crowd-funding is a type of market-based finance that could help stimulate economic recovery by channelling capital to SMEs.
The report affirmed that the FR crowd-funding market has doubled year on year for the last five years to an estimated $6.4 billion in 2013, driven by annual growth of 90% in peer-to-peer lending. ‘’Peer-to-peer lending has spread across the globe, making FR crowd-funding a global phenomenon. The equity crowd-funding market is more modest in size and has grown at a slower pace,’’ the report said.
Also, it concludes that the FR crowd-funding market does not present a systemic risk to the global financial sector at present. However, it indicates that various factors could modify this outlook in the future.
‘’With the next evolution of this industry being in the global nature of funding sources, the challenges ahead will include cross-jurisdictional contractual and legal harmonisation, dispute settlement and resolution issues. IOSCO as a global standard setter for securities market regulators can have a role to play here in aiding regulators in monitoring the development of the industry,’’ the global securities market regulator said.
This is coming on the heels of the outbreak of the current financial crisis, which IOSCO adopted a new strategic direction that emphasised the need for securities regulators to identify, monitor and manage systemic risks.
