Funding Sources - P2P Lending

Loan fractionalization

Loan fractionalization in Mambu is a generic term describing the functionality whereby the loan account of one client (borrower) is financed directly from one or many accounts of other clients (investors or funders). This is also called peer-to-peer (P2P) lending or crowdfunding.

If loan fractionalization is enabled, it will facilitate the capture of multiple funding accounts for a single loan account. It will then keep track of each individual funding account that contributes to a loan being disbursed and, as loan repayments are made by the borrower, return the funds to investors together with a fraction of the interest paid by the borrower.

How does it work?

To fully use fractionalised loan functionality, the following setup and actions need to be completed:

1. Create a deposit product of type “Funding Account”.
2. Create a loan product with Funding Sources enabled.
3. Create Funding deposit accounts for each investor.
4. Create a loan account with Funding Sources enabled for the borrower.
5. Disburse the loan account.
6. Post repayments on the loan account.

General workflow

The image below gives you a more detailed overview of the whole cycle from the moment the funds are added to the account until the account is closed.

Funding account

In order to use loan fractionalization, a new deposit product of type Funding Account has to be created:

Funding Accounts are very basic deposit accounts with limited functionality, and intended only for funding fractionalized loans and receiving their repayments. For that reason, the balance cannot go below 0 (overdrafts are not allowed), they do not have maturity periods, and it is not possible to accrue interest on the account.

For more information about creating a deposit product, see here.

Accounting links

Deposit products with funding sources enabled can have the accounting methodology set to either “None” (disabled) or “Cash”. There are a limited number of Cash accounting links available for Funding Accounts, namely Transaction Source (asset), Savings Control (liability) and Fee Income (any GL account).

Mambu will log journal entries on a Funding Account for the following transactions:

1. Deposit / Loan Repaid
   DEBIT Transaction Source
   CREDIT Savings Control

2. Withdrawal / Loan Funded
   DEBIT Savings Control
   CREDIT Transaction Source

3. Fee applied (relating to the Funding Account fees only, not to fees applied on loans it funds):
   DEBIT Savings Control
   CREDIT Fee Income

On disbursement of the Loan Account funded from the investor’s account, a “Loan Funded” transaction is posted that creates the same journal entries as a withdrawal. Each repayment posted on the Loan Account, consisting of both Principal and the Funder Interest Commission, will create the same journal entries as a deposit.

Fractionalized loan product

In order to create fractionalized loans, the loan product must have Funding Sources enabled. This is currently possible for Fixed Term Loans and Dynamic Term Loans. Kindly note, that this functionality is not available for Fixed Term Loan with Payment Plan as Payments Method.

Organization Interest Commision is a part of the overall interest collected by the organization, and the remaining interest is spread across the loan’s investors. This section is where constraints can be set for the Organization Interest Commission rate, which are the organization’s default, minimum, and maximum spread of the total interest rate. The numbers entered here are used to constrain the rate when configured per individual loan account.

Funder Interest Commission is the percentage that each investor receives, and represents the investor’s income based on their interest rate and the total invested amount in the loan account.

Calculations of the Funder Interest Commission can use one of two different allocations methods:
Percentage of loan funding: If the total interest rate on the account is defined, and investor’s interest should be calculated based on their contribution.
Fixed Interest Commissions: If the investor’s and organization’s interest rates are defined, and should be used with the investor’s contribution to calculate the total interest rate of the account.

Percentage of loan funding
With this method, the Funder Interest Commision is calculated based on the Interest Rate defined on the loan account (less the Organization Interest Commission) and each investor’s share in funding the loan. For example, for a loan with these details:

• USD5,000 total amount
• USD3,000 funded by Investor A
• USD2,000 by Investor B
• 10% interest rate per year
• 3% Organization Interest Commission

The client will be charged using the interest rate of 10% per year. Of the total interest, the organization will receive 3%, and the investors will split the remaining 7% (10-3%) based on their contribution in funding the loan. Therefore Investor A, who provided 60% of the loan (USD3,000), will receive 60%*7% interest, and Investor B, who provided 40% of the loan (USD2,000), will receive 40%*7%.

Fixed Interest Commissions
This option defines the Funder Interest Commision (income from investing in the loan) per investor within product-level constraints with default, minimum, and maximum values. Different interest rates can then be set per investor at the loan account level.

The interest rate for the account will be automatically calculated by the system once the loan is 100% funded, and will take into account the Organization Interest Commission, as well as the Funder Interest Commision of each individual investor:

Account interest rate = Organization Interest Rate + (Investor A rate * Investor A contribution percentage) + (Investor B rate * Investor B contribution percentage)...

For example, when opening a loan account with these details:

• USD5,000 total loan amount
• 7% Organization Interest Commission
• 4% Funder Interest Commission for Investor A, who invested 3,000
• 3% Funder Interest Commission for Investor B, who invested 2,000
  The interest rate of the loan account will be:
  7% + (4%*3000/5000) + (3%*2000/5000) = 10.6%

Lock funds on Funding account at Approval enables the funds being contributed by the investor to be locked on the Funding Account as soon as the loan account is approved, ensuring that they do not over-commit to multiple loans before disbursement, or withdraw from the account before the loan is funded. If this option isn’t selected, the funds are free to be pledged to other loans until disbursement of the funded account.

For more information about the Loan Product creation, please go here.

Accounting links

Loan products with Funding Sources enabled can have the accounting methodology either set to “None” (disabled) or “Accrual”.

In fractionalized loans, there is no principal control account as the principal is directly disbursed from, and repaid to, investor accounts. Therefore, no journal entries will be posted on the loan account for the disbursement of the loan or repayment of principal, but will be posted directly on the funding account.

Journal entries will be created for the following transactions only:

1. Interest applied (the amount of the Organization Interest Commission):
   DEBIT Interest receivable
   CREDIT Interest income

2. Fee applied:
   DEBIT Fee receivable
   CREDIT Fee income

3. Penalty applied:
   DEBIT Penalty receivable
   CREDIT Penalty income

4. Repayment entered:
   DEBIT Transaction Source
   CREDIT Interest/Fee/Penalty receivable

More information on repayments can be found under “Repaying a fractionalized loan account”, below.

5. Interest reduced/written-off (Organization Interest Commission only):
   DEBIT Write-off expense
   CREDIT Interest receivable

For more information, please see our article on product rules under accrual accounting.

Funding accounts for investors

Once a Funding Account is used to fund a loan, an additional “Funding” tab will be enabled. This will provide an overview of all loans funded by the account with the breakdown for each, indicating the original invested amounts, the remaining funds to be collected and interest earned on that account. This view also provides quick access to the associated loan accounts.

For more information please see our article about creating deposit accounts.

Fractionalized loan account

When creating or editing a loan account, the investors and their respective contributions can be added to the “Funding Sources” section. Any number of funding sources (investors and their accounts) can be added, with the only constraint that the total investment amount cannot exceed the loan amount.

It is possible to add a Funding Source to a loan account, even if the investor’s account balance is less than their pledged investment amount. This allows them to deposit the required amount at a later date. Please note, however, that a loan cannot be disbursed until it is 100% funded.

Once the account is created, an additional “Funding” tab will be enabled, providing an overview of all investors and their funding accounts, along with the total amounts that were used to fund the loan. From here it’s also possible to access details of each investor and their respective accounts.

For more information, see Creating a new loan.

Disbursing fractionalized loan accounts

At disbursement, a regular “Disbursement” transaction will be posted on the loan account and a “Loan funded” transaction will be posted in the corresponding funding accounts.

Please note that a loan can only be disbursed once it has been completely funded and the corresponding funding accounts have had the required amounts deposited in them.

For more information, see Disbursing a loan.

Repaying fractionalized loan accounts

A “Repayment Entered” transaction is posted when a payment is made on the loan account. From the repayment amount, the returned principal is transferred to the investors’ funding accounts together with their part of the interest, as determined by the percentage of their investment and the Funder Interest Commission. This transaction will be reflected on the investments accounts as a “Loan Repaid” transaction.

Let's take as an example a loan with the following details:

• USD1000 principal
• Funded by 2 investors with the Percentage of loan funding Funder Interest Commission Allocation method
• Investor A funded USD300 (30%)
• Investor B funded USD700 (70%)
• 10% interest rate per year
• 3% Organization Interest Commission

Once the client pays the first instalment of USD108.33 (USD100 principal and USD8.33 interest):

• The organization receives 3% interest spread from the collected interest, USD2.50 (=USD8.33 * 3% * 10%)
• Investor A funded 30% of the loan and will collect USD30 principal (30% * USD100 collected) and USD1.74 interest (30% * (USD8.33 - USD2.50, collected by the organization)
• Investor B funded 70% of the loan and will collect USD70 principal (30% * USD100 collected) and USD4.08 interest (70% * (USD8.33 - USD2.50, collected by the organization)

Please note that any fees and penalties paid by the client will be recognised as the organization’s income.

To give another example, again using 2 investors but this time using the Fixed Interest Commissions allocation method:

• USD1000 principal
• 4% Organization Interest Commission
• Investor A funding USD300 with 5% Funder Interest Commission
• Investor B funding USD700 with 6% Funder Interest Commission
• 9.7% interest rate per year (automatically calculated)

When the client pays the first installment of USD171.41 (USD163.33 principal and USD8.08 interest):

• The organization receives 4% interest spread from the collected interest, USD3.33 (=USD8.08*4%/9.7%)
• Investor A, who funded 30% of the loan, will receive USD50.23, of which USD48.99 is principal (=30%163.33) and USD1.24 is interest (=USD8.0830%*5%/9.7%)
• Investor B, who funded 70% of the loan, will receive USD117.82, of which USD114.33 is principal (=70%163.33) and USD3.49 is interest (=USD8.0870%*6%/9.7%)

If there are amounts of principal and interest that can’t be returned to the investors due to allocation rounding, these amounts will be returned to the investors when the last payment is made by the borrower (when the principal balance is USD0). This guarantees that full amount of principal contributed by each investor will be returned to the funding the account, along with the correct percentage of interest.

After the last payment allocation, the remaining interest (likely to be a very small amount) that cannot be equally spread across investors will be booked as organization income.

If a “Repayment Entered” transaction is reversed, a “Loan Repaid Adjustment” transaction will then be created on the investor’s Funding Account.

Rescheduling fractionalized loans

Fractionalized loans can be rescheduled by selecting Close > Reschedule on the right-hand side of the loan account's overview page.

As 100% of the funded amount is required, the outstanding interest, fee and penalty balances cannot be capitalized and will be written-off entirely. For the same reason, the principal balance cannot be partially or wholly written-off. The funding sources and their respective contributions cannot be changed, either.

It is possible, however, to reschedule using a different loan product, provided that it also allows investor funding. Adjustments may also then be made to certain account terms such as the Organization Interest Commission and number of installments (with respect to the new product’s constraints), and the first repayment date can be set.