Any kind of a organized financial model of borrowing and lending essentially has to keep three factors in mind; (i) efficient but low-cost running of the institution, (ii) a healthy balance of depositors and borrowers with lower chances of maturity mismatch and (iii) addressing the issues of faith (perceptions of risk, trust, timely repayment etc) of the targeted clientele to ensure steady business over time.

Historically, community based financial institutions have always been successful. Business communities across the world have always maintained a trust based financial transaction model; and the early money lending community of the trading base of Venice gave the world the rudimentary structure of banking itself. The business communities in India are no exception and the unofficial lending market of business communities like Gujrati’s and Marwari’s in India have been case studies for many management studies.

However, community lending goes beyond just the trading community, and this has been well accepted by experts even in modern times. Many of the modern microfinance businesses follow community based lending, self help groups in poorer regions are often intentionally based on communities, co-operative banking identifies communities as the basic building block, etc. Many Development agencies like The World Bank identify Community Based Financial Organizations (CBFOs) as an important tool in alleviating poverty.

Thus, be it the rich or the poor, community based lending is always a formula for success. There are many reasons for that as well. Community identities have a subjective factor where both the borrower and lender trust the other members simply because they share a similar identity. In a culturally and ethnically diverse country like India, such familiarities play a big role in ensuring and enforcing trust. A lender will more readily accept a potential borrower and a borrower has better record of loan repayment to a lender when both belong to the same community.

There are strong objective conditions as well behind community lending which underlies this trust. Communal familiarity helps risk assessment as the parties have a better understanding of how each other works. This extends not only to ethnic communities but to professional communities as well. A doctor, for instance, would understand the economic standing of a member of his profession better compared to some other profession. A farmer understands the business cycle of a fellow farmer much better and hence can best judge repayment periods, chances of failure, etc.

Thus informal and formal credit institutions more readily bank on community based lending structures as it helps fulfill the three above mentioned conditions most successfully. Even modern lending models like P2P lending recognize this model and Faircent, a pioneer in P2P lending India has adopted community based lending as its business model. Community based lending can help lower risk perception which in turn will help both borrower and lender achieve most equitable interest rates for their transactions. Moreover, the element of trust will also ensure lower operational costs of risk mitigation by the institution which will help keep overhead costs low for the entire operation. This offers the best possible means of achieving the dynamism that P2P lending schemes excel in. The tried and tested community based lending in this new avatar can well be a roadmap for the future of modern micro level financial organizations that innovations like P2P  promise to usher in.