Crowdfunding in the CEE region through the lens of Fagura

Cristian Pasa, COO at Fagura, shares with us crowdfunding trends in Romania and Moldova

Crowdfunding platforms have witnessed significant growth in Europe over the last few years. Various business models have been initiated starting from philanthropic activities and ending with financing companies and personal needs. All that happened despite the lack of a unified regulation in the European Union. But that has changed recently with the introduction of Regulation 2020/1503 by the European Parliament.

More companies are expected to join the ecosystem with clear and transparent policies for their respective customers. Countries in the CEE will become particularly appealing for crowdfunding due to the development requirements and the higher capital costs when compared to the Western European ones. Fagura is such a company that validated its crowdlending model in Moldova and is currently seeking to enter the Romanian market and the broader CEE region.

Fagura is the first peer-to-peer lending company in Moldova. We connect lenders (aka investors) with borrowers in Moldova on better terms, offering an efficient, paperless, and constantly available service. Our proprietary credit scoring algorithm approves loans in less than 10 seconds, beating the other financial players in the country by a mile. 

We have been in the consumer finance segment for over three years now and are currently expanding into startup and SME lending. The model has been validated by over 1500 clients who either borrowed or invested via our platform since 2019. We are looking to expand into neighbouring Romania and beyond by constantly improving our service and the scoring algorithm.

The CEE region mainly relies on banks and microlenders on the borrowing side and loan marketplaces on the investor side. Fagura is offering a blended solution and controls the whole ecosystem on its platform.

Romania is still a developing financial market. There is a legacy of preference toward traditional debt financing (e.g. bank loans). That is coupled with a highly bureaucratic system and rigid policies that interfere with innovative entrepreneurship.

But the situation is improving: we now have world renowned financial technology providers, crypto and payment enthusiasts, and Open Banking aggregators. We can also see a more active stock exchange that attracts companies into equity financing. This coupled with the proliferation of venture capital funds and angel investor networks led to the creation of a gap in the Romanian capital markets: crowdfunding.

Up until recently, there was no dedicated crowdfunding regulation in Romania. It meant that companies willing to offer such services had to either register in other jurisdictions or find legal alternatives, many times at a higher cost. The EU Regulation 2020/1503 came into force to address this issue.

The European Union did not have a regulatory framework for crowdfunding activity until it issued the 2020/1503 Regulation in 2020. It was therefore down to each company in its respective jurisdiction to identify a way of conducting this type of activity. Various business models have been used from SPVs to investment management licenses to allow for crowdfunding activity. But the lack of regulatory clarity was a significant impediment to allowing for this industry to grow as it did in the UK for instance, where a crowdfunding regulation existed since the 90s. The 2020/1503 Regulation brings along the much-required clarity and standardisation in the authorisation process in the whole of the EU.

The technological challenges arise around the digital identification of the clients, data protection, API availability, and ease of integration and cybersecurity. The level of complexity will differ from country to country, depending on their level of digitalisation. Since crowdfunding deals with both borrowers and lenders/investors, the platforms require an advanced level of user flow and security.

Last but not least, the socio-economic factors will vary to match the national landscapes. Alternative investment has picked up lately and people are more willing to invest in crowdfunding projects be they real estate or startups fundraising. The Covid related lockdown helped since more capital was available on the market due to reduced spending requirements. At the same time, that led to inflated valuations and business capacity issues on the borrowing side. Ultimately market forces will balance the demand and offer on crowdfunding platforms and they will always hold their place in the alternative investment ecosystem.

We launched SME crowd lending in Moldova on July 26th. That is debt co-financing for the companies incorporated in the country. This is an important milestone for us for two reasons: it helps us further diversify the portfolio we are offering to our investors and enhances our business credit scoring algorithm for when we are ready to launch it in Romania and beyond.

In Moldova, business lending is mainly undertaken by the 11 banks currently active on the market. Due to rigid banking standards but also geopolitical tensions these days, strict risk measures are put in place. As a result, young entrepreneurs with great ideas can’t set their businesses off the ground unless they can self-finance their operations.

Fagura offers an alternative in this regard: it allows for the recently founded companies to get some of the funding they require. No collateral or credit history is required. Our credit scoring is trained to put more weight on the founder and his financial capacity when financial reports are not there to support the loan application.

We launched business lending with an interest-free campaign, allowing for the first 50 companies in the programme to benefit from 0% loans. We envision this to help the local entrepreneurs even if a slight bit, but also position Fagura as an alternative lender of choice.

Having a validated business model in Moldova and once authorised under the 2020/1503 Regulation in Romania, Fagura will be able to expand its operations in the CEE region and beyond. Crowdfunding is relatively new in the area and an increasing number of companies are exploring it as an alternative funding option.

An investor should first and foremost decide upon the structure of his portfolio. Every person has a different level of risk tolerance and hence needs to assess every opportunity accordingly. If there is room for alternative investments in someone’s portfolio, crowdfunding could be an interesting proposition. It should however be noted that it represents a risky investment.

Fagura is a crowd lending platform so an investor should join if he is comfortable with investing in consumer and business loans (currently in Moldova only). Our investors earned anywhere between 10-17% on their investments in EUR (our operational currency). These returns take into account the defaulted loans, the non-performing loan rate being kept between 5-6%. Considering the negative rates in Europe and the huge volatility in other risky assets like technology stocks and cryptocurrencies, Fagura’s proposition has been quite compelling.

Having a secondary market module also means that investors can cash out on their positions fairly quickly. And there is also the social element of investing in Fagura: impacting positively the business landscape in Moldova.

Fagura has always stood by the community it gathers around its products. We are on a mission to build the first community digital bank for anyone to borrow, invest, and transfer money instantly.

We are currently raising money in a late seed round to add cash operations to our crowd lending business. More details are available here. We want to be able to offer IBANs and issue cards to our clients in both Europe and Moldova. This will help us strengthen the ecosystem around our platform and the people who have been sharing the journey with us.

*This interview is part of Unchain Fintech Festival, the first fintech and blockchain event of the CEE Region, held in Oradea, Romania, between the 13th and 14th of July.

About Cristian Pasa

Ex-Bloomberg Relationship Manager for financial institutions in the CEE, Cristian Pasa is the COO at Fagura. Passionate about financial markets and technology, he joined Fagura as an angel investor to ultimately become fully involved in running the business and expanding it regionally. When he is not in the office, he is either hiking or riding a mountain bike.