Investments

Investments may also involve ribbis even in the absence of a “loan.” Whenever the recipient guarantees principal, even if the investment suffers a loss, the investment is halachically a loan and prohibited. This is true even though the recipient does not guarantee any profits. This is a very common occurrence when the managing partner guarantees even part of the principal. 

Peer-To-Peer Lending

Peer-to-peer finance, also called Marketplace lending, has been all the rage over the past few years and is at the forefront of the new Fintech. Investment in the space has skyrocketed as its proponents tout it as the future of finance. It certainly does have its appeals. For a borrower, it offers fast access to loans at lower cost than their available alternatives. For the individual investor, it gives them the potential to earn a significantly higher return than what banks or high quality fixed income instruments offer. The peer finance company itself earns a fee on every loan that it brokers and services, which is a clear incentive to increase the volume of loans.

Of course, in finance, there is no such thing as a free lunch. The model is predicated on the assumption that traditional underwriting standards can be replaced with algorithms, and that the elevated default risk can be diversified away by spreading the investment across large numbers of loans. These premises remain largely untested, and in fact have begun to exhibit strains of late. Various regulatory risks have also shed some uncertainty on the sector. Nevertheless, it is safe to assume that in some form or another, peer to peer finance is here to stay .Read More