Investigating the application of banking regulation to online peer-to-peer lending platforms in South Africa to counter systemic risk Tamarin Angela Floyd Student number 16391871 A research project submitted to the Gordon Institute of Business Science, University of Pretoria, in partial fulfilment of the requirements for the degree of Master of Business Administration. 6 November 2017 i © University of Pretoria ABSTRACT The behaviour and activities of online peer-to-peer lending platforms have evolved in different ways across jurisdictions, not fitting neatly within existing financial regulatory frameworks. Together with the growth momentum of the industry and the cases where losses were suffered, this culminated in a call to regulate peer-to-peer lending platforms adequately. The research presents an analysis of online peer-to-peer lending platforms through the lens of banking theory, questioning whether peer-to-peer platforms are behaving like banks and whether they pose systemic risk. These research questions feed into the ultimate research problem: whether online peer-to-peer lending platforms should be regulated like banks with respect to liquidity and capital requirements. Liquidity and capital requirements were designed to stem systemic risk in financial systems and have been praised as effective tools. Qualitative exploratory research was undertaken with 18 experts in the field. Key findings included that the presence of systemic risk is contingent on the operating structure and legal implications of the peer-to-peer platform. In certain cases, systemic risk could be present and as such liquidity and capital requirements should apply. The scope of the research was restricted to the South African financial system due to the unique nuances of its regulatory framework. ii © University of Pretoria KEYWORDS Online P2P lending platform Systemic risk Banking regulation Liquidity and capital requirements iii © University of Pretoria DECLARATION I declare that this research project is my own work. It is submitted in partial fulfilment of the requirements for the degree of Master of Business Administration at the Gordon Institute of Business Science, University of Pretoria. It has not been submitted before for any degree or examination in any other University. I further declare that I have obtained the necessary authorisation and consent to carry out this research. Tamarin Angela Floyd 6 November 2017 iv © University of Pretoria ACRONYMS AND ABBREVIATIONS B/S Balance sheet (in the context of the code names) Cat(‘s) In the context of the code names, this refers to the categories of P2P operating structure (per section 2.1.4) CEO Chief Executive Officer COO Chief Operations Officer GFC Great Financial Crisis of 2008 Insto’s Institutions (in the context of the code names) MD Managing Director NCA National Credit Act NCR National Credit Regulator P2P Peer-to-peer p. Previous(ly) (in the context of the code names) Req Requirements (in the context of the code names) SEC Securities Exchange Commission SME Small and medium sized enterprise UK United Kingdom US United States of America # Number * Indicates that a code is inductive v © University of Pretoria TABLE OF CONTENTS ABSTRACT ................................................................................................................. ii KEYWORDS ................................................................................................................iii DECLARATION ...........................................................................................................iv ACRONYMS AND ABBREVIATIONS ......................................................................... v LIST OF TABLES ........................................................................................................ x LIST OF FIGURES .......................................................................................................xi 1. CHAPTER 1: INTRODUCTION TO RESEARCH PROBLEM ............................ 1 1.1 Background to the research problem .............................................................. 1 1.1.1 Defining FinTech ..................................................................................... 1 1.1.2 Defining peer-to-peer lending .................................................................. 2 1.1.3 Comparing P2P lenders with traditional banks ........................................ 3 1.2 Research problem, purpose and motivation ................................................... 4 1.2.1 Introduction to the research problem ....................................................... 4 1.2.2 Objectives of the research ....................................................................... 5 1.2.3 Academic motivation ............................................................................... 5 1.2.4 Business motivation ................................................................................ 6 1.3 Research scope ............................................................................................. 7 1.4 Principal findings ............................................................................................ 8 2. CHAPTER 2: LITERATURE REVIEW ............................................................... 9 2.1 Insight into online P2P lending platforms ........................................................ 9 2.1.1 Existing P2P lending platforms and industry statistics ............................. 9 2.1.2 P2P platforms’ functionality and associated risks ...................................12 2.1.3 Online P2P lending platforms consider risks ..........................................14 2.1.4 Categorised P2P operating structures ....................................................15 2.2 Banking theory ..............................................................................................16 2.3 Regulation .....................................................................................................18 2.3.1 What is the role of the bank regulator? ...................................................19 2.3.2 How are online P2P lending platforms currently regulated across jurisdictions? ........................................................................................................19 2.3.3 How are online P2P lending platforms currently regulated in South Africa? 22 2.3.4 Linking banking theory with regulation ....................................................24 vi © University of Pretoria 2.4 Systemic risk .................................................................................................25 2.5 Regulating online P2P lenders like banks......................................................29 3. CHAPTER 3: RESEARCH QUESTIONS .........................................................31 3.1 Research problem .........................................................................................31 3.1.1 Research question one ..........................................................................31 3.1.2 Research question two ...........................................................................31 4. CHAPTER 4: RESEARCH METHODOLOGY ..................................................32 4.1 Choice of methodology..................................................................................32 4.2 Research design elements ............................................................................34 4.2.1 Population ..............................................................................................34 4.2.2 Sampling method ...................................................................................35 4.2.3 Sampling size .........................................................................................36 4.2.4 Unit of analysis .......................................................................................37 4.2.5 Measurement instrument ........................................................................37 4.2.6 Data gathering process: in-depth semi-structured interviews .................37 4.2.7 Pre-test ..................................................................................................40 4.2.8 Data analysis .........................................................................................40 4.2.9 Limitations ..............................................................................................43 4.3 The quality of the research ............................................................................43 4.3.1 Credibility ...............................................................................................44 4.3.2 Transferability ........................................................................................45 4.3.3 Dependability .........................................................................................45 4.3.4 Confirmability .........................................................................................46 5. CHAPTER 5: RESULTS ...................................................................................47 5.1 Description of the sample ..............................................................................47 5.2 Saturation analysis ........................................................................................49 5.3 Addressing the research questions ...............................................................50 5.3.1 Research question one: Are online P2P lending platforms behaving like banks? 51 5.3.2 Research question two: Do online P2P lending platforms pose systemic risk