Leeds City Council is to use a peer-to-peer lending platform to lend money to local businesses.
The authority has decided to use the rebuildingsociety.com platform — based in the city — to provide money for small and medium sized businesses with an LS postcode.
Leeds’ move is part of the council’s regional economic growth strategy, according to a statement.
Bhupinder Chana, principal finance manager of capital and treasury management at the council, told Room151: “The advantage of funding this way is that we are able to combine our contribution with other crowd-sourced money, increasing the effectiveness of each loan.”
He said that no decision has yet been taken on the total sum the council will lend through the process.
Chana said that council officers will have full control of approval for each individual loan. The portfolio will be reviewed each quarter.
Daniel Rajkumar, rebuildingsociety.com founder and managing director, believes the proposal will provide great financial support to the area. “There is no need to rely on London for local funding needs. By arranging finance online and locally, regions can prosper and go on to further support local communities.”
According to the company’s website, it has already raised and lent £12.3m, providing an average net return of 9.7%, with a default rate of 11.6%.
The Leeds decision comes after the Ministry of Housing, Communities and Local Government (MHCLG) introduced a new category of investments as part of a revised investment code. In addition to specified and non-specified investments, it has added a “loans” category.
The guidance says: “A local authority may choose to make loans to local enterprises as part of a wider strategy for local economic growth even though those loans may not all be seen as prudent if adopting a narrow definition of prioritising security and liquidity.”
In order to make such loans fit with the guidance, councils need to demonstrate that their total financial exposure to lending is proportionate and use an expected loss model to assess the impact on their balanced budget requirements.
They should also demonstrate they have appropriate credit control arrangements in place to recover overdue repayments and a formally agreed cap on the total level of loans by type.
Chana said: “These types of investment don’t fit with our current treasury management strategy, but we have been given some leeway in the guidance to make loans before we get the plan, which is required to go alongside the new powers in place.
“We hope to update the strategy as soon as possible but won’t do it without due consideration.”
A total of 13 local authorities are already loaning £11m through the Funding Circle peer-to-peer lending platform, according to a spokesperson for that company.
