Yang Yanxia and her husband built their potato farm in Dingxi city, Gansu province, with micro-credit from the P2P lending website Yinongdai.com. Yang Farong / for China Daily

Farmers looking for small loans and lacking collateral are turning to P2P platforms, a source of micro-credit, to change their fortunes around. Zhao Ying of China Features reports.

Borrowing money from strangers may sound like an odd proposition to some. But China's farmers are taking advantage of online peer-to-peer (P2P) lending in order to build better futures. Yang Yanxia, 32, mother of two from Dingxi city in Northwest China's Gansu province, borrowed 3,500 yuan ($540) via Yinongdai.com, a P2P lending website, at the end of 2009 to help build her farming business.

Dingxi is one of the nation's most impoverished regions, owing to low agricultural yields caused by chronic drought.

Yang's lenders were from first- and second-tier cities in China, who charged her a fixed interest rate of approximately 2 percent - much lower than the rates typically charged by Chinese banks.

Before 2009, Yang's family earned only 10,000 yuan annually from their potato farm, and even that was subject to the whims of Mother Nature.

With the loan, Yang and her husband were able to rent a plot of fertile land that effectively doubled the size of cultivable land available to them. The family's new farms brought in 35,000 yuan in just six months.

Yang then used the profits to construct a barn to raise cattle, which she believes will provide a more reliable source of income.

The world's first P2P lending service was launched in the United Kingdom in 2005 and has since become popular worldwide.

Most of China's State-owned commercial banks are unlikely to lend to people like Yang, either because the loans sought are too small or because they have nothing to offer as collateral. China's P2P lending platforms give people like Yang an alternative.

Prospective borrowers must provide identification as well as proof of personal assets for a credit rating from the P2P platforms.

Lenders can pick who they want to lend to based on the borrower's objectives, the terms of repayment and the interest rates offered by borrowers.

Since Yang was unfamiliar with computers, she contacted a local micro-credit service center to help her with the online portion of the lending procedure.

"We submitted her information to the P2P website after examining her credit and family situation carefully," says Yang Farong, director of the Minfuxinrong Micro-credit Service Center. The center has been helping the people of Dingxi acquire loans for the past five years.

Since 2009, when Yinongdai.com started offering P2P services, 217 farming households in Dingxi have benefited to the tune of 770,000 yuan in low-interest loans, Yang Farong says.

Yang Yanxia only had to pay an extra 68 yuan to the local micro-credit service center, in addition to her 3,500 yuan principal.

"I never expected to borrow money from strangers. It's so exciting to know that personal credit still has value," she says.

Canadian-Chinese Robert Li, 15, who studies at the Shanghai American School, became a P2P lender two years ago.

"The amount of money spent on a single meal in the city can be enough to change the life of a family," says Li, who has lent 28,450 yuan in loans so far with the help of his family.

Li believes that direct online lending is more transparent than charitable donations, and allows lenders greater discretion in providing loans.

"Families with school-age children, particularly girls, are our primary targets, because the education of these girls will have a significant influence on the upbringing of the next generation," Li's mother Vivian says.

The fact that there have been no delays in the repayment of loans offered through Yinongdai.com has also impressed her.

"This proves that disadvantaged people can still have credit," she says.

So far, Yinongdai.com has disbursed 2.8 million yuan in loans to nearly 1,000 rural families across China.

As a new form of micro-financing, P2P lending "not only fills in gaps left by the banking system, but also offers convenience to rural borrowers", says Bai Chengyu, secretary-general of the China Association of Microfinance.

However, P2P services that are designed to help people in need won't always be able to count on a steady supply of funds, as investors invariably seek higher profits amid inflation risks, Bai says.

Ma Guangheng, 25, runs a clothing store in the city of Qujing in Yunnan province.

He borrowed 16,000 yuan via Renrendai.com, a lending platform, in 2010 when his store's capital supply ran into trouble.

Ma's shop, which stocks stylish watches, handbags, sunglasses and other accessories, brings in about 50,000 yuan in profits every month. His high sales prompted him to open a second outlet.

Ma borrowed another 25,000 yuan via Renrendai.com in April, 2011 at an interest rate of 20 percent.

"I completed all the application procedures within three days and the money arrived immediately. It's so convenient and efficient," Ma says.

"I offered high returns to thank those who gave me a hand when my business was in critical condition."

Loans with interest rates that are lower than 10 percent usually receive little attention from investors on the website.

"High interest rates mean potential risks while low returns are usually secure. Investors must make their choices carefully," says Li Xinhe, founder of the Beijing-based website.

Li and his two business partners established the P2P lending service in May 2010 after finding out about Bangladesh's Muhammad Yunus.

Yunus, a micro-credit pioneer, won the 2006 Nobel Peace Prize for extending very small loans to millions of individuals living in poverty.

"We also studied the cases of Prosper and Zopa - two popular overseas lending websites - to try to develop a transparent and stable online lending platform for ordinary Chinese people," Li says.

The website has more than 30,000 registered members and has processed about 4 million yuan in transactions so far, according to Li.

The company weeds out deceptive and unreliable borrowers during their screening process, says Yang Yifu, one of the co-founders of Renrendai.com.

"So far, there have been only two cases of delayed repayments. We have tracked the debtors with the help of debt-recovery firms and they have promised to pay," Li says.

Zhang Nian, 36, a white-collar employee in Beijing, says she is seriously considering investing in P2P loans.

Returns on short-term financial products offered by some of China's commercial banks have ranged from 3 to 4 percent in recent times, but China's consumer price index - a key indicator of inflation - has stayed above 5 percent for more than two years.

"(Investing in these companies) seems to be a good way to stop my earnings from eroding," Zhang says.

While acknowledging the advantages of P2P lending, Bai points out that it still operates in a legal gray area.

Although Chinese law recognizes the legal status of financial services and encourages investment, "there are still no rules concerning P2P loans, nor have these businesses been placed under the supervision of State authorities", Bai says.

If fraudulent P2P firms and low-quality loans start to take hold, investors might suffer serious losses, Bai says.

He wants P2P companies to set up a working committee to regulate the sector until the government steps in.

"We need to be administered. Legal market status and government supervision will only attract more investors to our businesses," Li says.

A farmer in Jimo, Shandong province opens a chicken farm by using micro-credit from a local lending company. Liang Xiaopeng / China Daily