P2P — a growing digital marketplace for lenders and borrowers

P2P financing boasts attractive interest rates for both borrowers and lenders via a simplified, transparent and digital platform

By MARK RAO / Pic By MUHD AMIN NAHARUL

AMID volatile global financial markets and changing risk appetites, are peer-to-peer (P2P) marketplaces an attractive destination for investors today?

P2P platforms grew in prominence after the 2007 to 2008 global financial crisis as tighter lending conditions prompted businesses to look for non-traditional avenues of funding.

As opposed to the stringent and often time-consuming processes involved in securing a conventional banking loan, P2P financing boasts attractive interest rates for both borrowers and lenders via a simplified, transparent and digital platform.

The P2P industry is still in its nascent stage in Malaysia with such service offered only from about two years ago, but has already raised RM377.16 million in funds as of June this year.

This comprised 4,438 successful campaigns and 1,139 successful issuers, according to statistics from the Securities Commission Malaysia (SC).

The risks associated with P2P financing and investing is well-documented as this marketplace is experiencing a number of defaults, write-offs and platform closures.

One only has to look at China, once the world’s largest P2P market, where state authorities are now clamping down on the US$93 billion (RM391.53 billion) worth industry due to widespread reports of illegal fundraising activities.

P2P platforms are well aware of the growing risks and are catering to a wide range of risk appetites, from the high-risk takers to the most cautious of investors.

Choose Your Risk Level
Zopa Ltd became the world’s first P2P lender when it entered the market in 2005. As of June this year, it has facilitated £4.5 billion (RM23.1 billion) in personal loans to over 470,000 consumers in the UK while generating £280 million in interest for over 60,000 active investors.

The platform is a good example of the range of portfolios offered by P2P companies with products offering 2% to 4% interest rates with a projected loss rate (loan defaults) of between 0% and 1%.

Rates of up to 19% to 29% are also available, but these carry a projected loss rate of between 10% and 15%.

On its website, Funding Societies Malaysia — the country’s first and largest P2P player — said investors can get up to a 14% return per annum by providing financing to local small and medium enterprises (SMEs). Based on the latest notes listed on Fundaztic’s website, return rates ranged from 9.28% to 12.19% annually.

In comparison, fixed deposits in Malaysia offer interest rates of 3% to 4% per annum depending on the tenure of the account, while the Employees Provident Fund (EPF) declared a 6.15% and 5.9% dividend rates for its conventional and Shariah savings respectively in 2018.

While fixed deposits are savings or investment accounts that promise investors a fixed rate of interest over a set period of time, EPF — Malaysia’s largest pension fund — targets to declare and pay out a dividend that is at least 2% above the inflation rate.

To meet investors risk appetites, P2P platforms in Malaysia have moved quickly to offer safeguards for prospective investors with different risk-return profiles.

Peoplender Sdn Bhd’s Fundaztic.com, one of the leading P2P players in Malaysia, recently launched “Principal Protect” which ensures investors will not incur any capital losses on their investments by providing an automatic reimbursement of sums lost on a monthly basis of up to RM30,000 against defaults and write-offs.

Funding Societies has launched ‘dealer financing’ — a collateralised P2P investment option which allows used car dealers to raise funds to purchase used automobiles.

For investors or members investing on the P2P platform, the dealer financing product is backed by an additional security, namely ownership claim on the financed used cars.

Funding Societies marketing manager Alvin Wong said these new products are in line with the trend in the P2P financing whereby there is a greater diversity in terms of the risk- return profile for investments.

“Some of the feedback we have received from investors are to introduce a greater variety of investment notes which cater to a broader range of risk-return investment profiles,” he told The Malaysian Reserve.

“Hence, with dealer financing, we are providing an additional investment opportunity to investors who prefer shorter-term investments which are collateralised to further diversify their investment portfolio. Ultimately, as a platform, we want to offer the widest range of products,” he said.

The dealer financing product has successfully funded over 1,000 notes without any default to date, with more than half of the notes fully repaid.

The ownership claim provided by the product prevents used car dealers from transferring the ownership of or selling the car to any third party before full repayment has been made to investors.

The SME Financing Gap
P2P financing platforms, in Malaysia and abroad, offer micro and SMEs access to market-based financing when they lack traditional financing avenues.

Wong said there remains an RM80 billion SME financing gap in Malaysia as cited by the SC.

“The biggest challenges for improving access to financing for SMEs are the high costs and operational complexity in serving SMEs, thereby making many creditworthy SMEs not bankable by traditional financial institutions,” he said.

“This is where we come in with a cost-efficient approach, with the ability to offer alternative financing opportunities to the vast majority of underserved the SME segment using financial technology.”

This includes an easy online application process, faster turnaround time and fewer documentation requirements compared to traditional financial institutions, while leveraging on alternative data and risk scoring algorithms as part of an internal risk assessment process, he said.

To date, Funding Societies has disbursed RM2.45 billion in financing across Malaysia, Singapore and Indonesia with an average default rate of 1.34%.

In Malaysia, the platform disbursed over RM300 million in funds, supporting over 700 SMEs, with a default rate of under 2%.

Wong said the key drivers of delinquencies and defaults among SMEs do not differ between P2P financing and traditional banking platforms as they typically involve slow repayments, high customer concentration risk and delays in executing certain projects.

“In fact, most of the defaults we have observed on our platform have also defaulted on banks, so it’s not unique only to P2P financing,” he said.

“Since commencing operations in Malaysia two years ago, we have always focused on driving greater investor awareness and education on the risk of default and, consequently, the importance of diversifying,” he noted.

This, he said, helped manage investors’ expectations and experience when a default occurs while the loss incurred is not necessarily absolute.

“Defaults may not necessarily be deemed as a total loss for investors as we would still be facilitating collection efforts on behalf of investors,” he said.

“Case in point, investors have been able to recover their principal and interest successfully from previously defaulted or delinquent SMEs.”

P2P platforms in Malaysia are open to all investors but requirements such as minimum age for investors and amount to be raised for borrowers differ from platform to platform.

The SC, meanwhile, encourages retail investors to limit their investment exposure on any conventional or Islamic investment note to a maximum of RM50,000 at any one time to limit their risk.