India’s first Sharia-compliant P2P platform (Digital technology)

For the first time, Indians seeking vehicle financing have the option to do so in consonance with Sharia. In peer-to-peer (P2P) platform offered by Bengaluru-based fintech start-up ECW Consultants uses the ijara rent-to-own model.
“Since our business model is Sharia-compliant, it works well for those who want to stay away from interest-based financing. Such people do not have many such options in India,” Arshad Mirza, ECW Consultants chief technology officer, told Salaam Gateway.
“Most of the existing companies are currently using the P2P model purely for interest-based lending,” Mirza adds.
It was launched in July 2017 in a market of around 50 P2P platforms that include Faircent, I-Lend, India Money Mart, Rupaiya Exchange and LenDenClub.
ECW has been certified Sharia-compliant by TASIS, a Mumbai-based Sharia advisory, auditing and screening firm that has provided similar services for a number of financial companies and their products, including Tata Mutual Fund, Bajaj Allianz and General Insurance Corporation of India.
Sharia compliance does not mean ECW will target only Muslims. “Our offering is just as suitable for the rest of the population in India,” said Iftekhar Rahi, the company’s head of sales and marketing.
“The model gives much better returns than bank fixed deposits, with lower risk and unpredictability compared to equity investments,” Rahi says.
ECW claims the platform has facilitated financing for 20 vehicles for a total value of 10 million Indian rupees ($143,000) since March, and it currently has more than 1,000 registered users, including investors and borrowers.
“Most of our buyers are those who have knowledge of P2P platform funding rates or prefer partnership or risk-sharing funding for religious reasons,” Rahi said.
The company doesn’t offer other forms of Islamic vehicle financing such as murabaha (cost-plus profit) as it is not in the business of buying and selling vehicles.
Vehicle financing companies like ECW are buoyed by India’s growing automotive market.
With over four million units sold, India overtook Germany to become the world’s fourth largest automobile market last year, registering 9.5 per cent growth in passenger and commercial vehicle sales compared to 2016, according to data released in January by the Society of Indian Automobile Manufacturers (SIAM), the apex industry body of India’s vehicle and vehicular engine manufacturers.
In the second quarter of 2018, sales of passenger vehicles grew by 13.32 per cent over the same period last year, according to data released by SIAM.
“India’s vehicle segment has been witnessing continuous growth due to the growing needs of the urban and rural populations. We feel the P2P model is the best option to cater to this large vehicle financing segment,” says Rahi.
Global consultants Ernst & Young (EY) estimated the country’s automotive market to grow at a CAGR of 13 per cent by value from 2016 to reach $300 billion by 2026.
Being a relatively new option, P2P financing platforms in general face tough competition from major banks and other financing companies.
Rahi said’s funding rates are better than other P2P platforms and it does not have any “hidden costs”.
“Although banks offer cheaper rates than our platform, the customers eventually end up paying more as bank loans are longer in tenure, typically five to seven years, and have many hidden charges,” he said.
Unlike other financiers that earn interest on a loan, Rahi said passes on the entire benefit to the participants. “We charge only 2 per cent platform fee from investors and 2 to 3 per cent from buyers. So in that sense, it is not really a processing fee,” he said.
Since the rates are market-driven and determined by a demand and supply matrix, ECW expects to be able to reduce the rates further as more investors join the platform.
P2P financing has gained momentum in India in the last couple of years, with the 50 or so platforms carrying outstanding loans estimated at 500-600 million rupees in 2017, according to Indian credit rating agency CARE Ratings.
The country’s P2P market is expected to grow to $4 billion by 2022 as the model matures, according to a July 2017 report by PricewaterhouseCoopers. This is 160 times the P2P lending size in 2017.
The Reserve Bank of India (RBI), the country’s central bank, announced new guidelines in October 2017 to regulate the P2P sector, bringing the platforms under the regulatory ambit of non-banking financial corporations (NBFCs). This created a new category, NBFC-P2P.
NBFC-P2Ps are not allowed to take more than 50,000 Indian rupees from a single lender for any single deal.
As opposed to conventional banks, which follow the more stringent banking regulations, NBFCs work as money management firms without having to acquire a fully-fledged banking licence. They have the freedom to formulate their own business models in line with RBI guidelines.
While India doesn’t permit financial institutions to offer Islamic products under the conventional banking or insurance regulations, NBFCs often use alternative routes to develop financial products based on the principles of Sharia that don’t violate regulations.
The biggest risk in the P2P financing business is of a default by borrowers, Mirza says. To mitigate this, ECW claims to have adopted a stringent due diligence process for every financing application.
“We do physical verification of the buyer’s residence; obtain address proof, identification proof and income proof. We also have stringent approval criteria where we reject cases that have very low credit score (CIBIL below 600) or where the EMI (equated monthly installment) to monthly income is greater than 50 per cent,” he said.
Based on the various inputs, the company arrives at an ECW credit score and categorizes the deal as low, medium or high risk. Only medium and low risk deals are listed on its platform.
Since ECW is responsible for collecting EMIs every month or recovering the money in the case of default, the company is trying to build the requisite expertise in-house or planning to outsource the job to recovery agencies/legal firms where necessary.
“We are also in the process of setting up e-NACH (auto-debit) on our portal, with the help of Razor pay, our payments partner. This would help speed up the process and also eliminate a lot of the administrative work involved in setting up the auto-debit,” says Rahi.
The P2P lending firm feels that India’s vehicle finance market is so big that it cannot be catered to in a single phase of business growth.
ECW, which began operations by focusing on the salaried class of passenger vehicle users, will add financing of commercial vehicles in the next phase.
The company is boot-strapped and has not taken funding from venture capitalists or other institutional investors. “For a new concept like ours, raising funds at a good valuation, without over-diluting the promoters’ stake, is not easy. And without raising funds, attracting the right talent and growing aggressively could become a challenge. Hence we have to strike the right balance while going for fundraising,” says Mirza.
In the next five years, ECW said it expects to disburse around 2.5 billion rupees in vehicle financing, and have 5 billion rupees worth of assets under management.
“Even then, we would only have tapped 0.1 per cent of the vehicle finance market in India,” Mirza says.

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