The term collaborative finance is used to describe a specific category of financial transaction which occurs directly between individuals without the intermediation of a traditional financial institution. It is a category of financial transaction that occurs directly between individuals without the intermediation of a traditional financial institution. This new way to manage informal financial transactions has been enabled by advances in social media and peer-to-peer online platforms. Collaborative finance services currently exist in fundraising, lending, insurance, currency exchange, and transfers.
Collaborative finance is an exciting new concept that allows individuals to be funded without a financial institution such as a bank being involved in the traditional way. The wide variety of collaborative finance resources may vary not only in their organizational and operational aspects but also by geographical region, the share of the financial market, etc. This new way to proceed to informal financial transactions is now possible due to the latest advances in and peer-to-peer on line platforms. It is precisely this heterogeneity that enables the informal savings and credit activity to profitably reach those income-groups not served by commercial banks and other financial institutions.
Collaborative Finance is characterized by highly personalized loan transactions entailing face-to-face dealings with borrowers and flexibility in respect of loan purpose, interest rates, collateral requirements, maturity periods, and debt rescheduling. It leads to the possibility of informal financial transactions to be able to take place. Following are the features of collaborative finance that make it attractive to low-income households:
- It does not require a license – most informal suppliers work without an operating license to supply money.
- It is non-profit motivated – profit, if any, is plowed back into the community and its members.
- It has multiple proprietorships – proprietorship lies not with one or two persons, but the group as a whole.
- It does not need collateral – collateral and guarantees of repayment is ensured by, for example, peer pressure.
- It has specific borrowers identified – most of whom are members of the community.
- It has close informational links – between members that ensure repayment.
- It is not regulated by the central bank – with respect to limits and restrictions, reporting requirements, etc.
Collaborative Finance is characterized by highly personalized loan transactions entailing peer-to-peer dealings with borrowers and flexibility in respect of loan purpose, interest rates, collateral requirements, maturity periods, and debt rescheduling. The goal of a financial cooperative is to act on behalf of a unified group to offer traditional banking services.
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