Guide to peer-2-peer lending for businesses in Malaysia

Updated 04 Oct 2017 – By Loanstreet


Peer-to-peer (P2P) lending is a fintech product that possesses a huge potential to address the Small and Medium Enterprise (SME) business loan financing gap in Malaysia. Together with Equity Crowdfunding (ECF), they represent a need for more alternatives in an industry that has so long been dominated by banks. Since Securities Commission (SC) opened the P2P lending license for bidding in May, it received more than 50 applications.

Six of them stood out as eventual winners. As the licensed platforms are expected to be up and running in 2017, in this article we aim to help businesses and potential investors to understand the potential value of the P2P lending. We will look at the P2P functions from borrowers and retail investors’ perspectives. Then, we will give you a brief description of each of the six P2P lending platform operators which you probably want to follow closely starting from today.

How does it work? 

P2P lending platform connects companies seeking for fund with investors who have available cash for investment. In essence, it works like a normal business loan. Borrowers will issue “investment notes” (hence they are also called “issuers”) and make monthly instalments that include principal repayment and interest charges to investors. Charges for the services provided by P2P operators may vary across different platforms.

Contrary to how overseas P2P lending platform is operated, if you are an individual seeking for funds for personal causes, the P2P lending platform in Malaysia will not be a place that serves your purpose.

A.Borrower/ issuer

Is your company eligible to borrow money on the platform?

Your company (local company only) can be hosted on the P2P platform if it is one of the following company types:

Sole Proprietorship, partnership, incorporated limited liability partnership, private limited and unlisted public company. 

How much money can a company raise?

There is no limit on how much a company can raise on the platform. However, a company will fail to obtain any fund from the platform if less than 80% of its target amount is subscribed by investors. On the other hand, it will not obtain anything more than its target amount even if the fundraising is oversubscribed.

Can your company raise funds concurrently from multiple P2P platforms?

The short answer is no. However, your company is allowed to raise funds for different purposes concurrently from multiple P2P platforms.

What is the interest rate?

Interest rate of the investment notes is determined through credit assessment of your company. Before that, your company has to disclose its key characteristics of the company, financial information, business plan, target amount of fund, purpose of fundraising to P2P operator. Upon obtaining the relevant information, P2P operators will conduct credit assessment using its in-house credit scoring system. Depending on the risk profile of the company, P2P operator will then determine the interest rate of the loan. Nonetheless, SC has declared that the loan interest rates are to be capped at 18% per annum and that credit scoring methodologies should be made transparent to both investors and borrowers.

Benefits and drawbacks of P2P lending

P2P lending offers an easy application process which shortens greatly the time needed to obtain funding. Compared to traditional bank loans, a borrower can possibly obtain the fund within 2 weeks while bank loan approval process often takes more than 2 months. Besides that, collateral will not be involved in the lending agreement.

However, borrowing funds from P2P platforms means disclosing information to a pool of unknown outsiders. This represents a risk where your information might be accessible by competitors.

B.Retail Investor

Who is eligible to invest?

Anyone can invest in investment notes and Islamic investment notes issued by borrowers.

How much can I invest?

The amount of investment for each retail investor depends on policies set out by P2P operators. Regarding the minimum amount of investment, some operators are planning to accept as low as RM50, whereas some others recruit only high net worth investors with high amount of investment. On the other hand, SC is encouraging P2P operators to impose a maximum limit of investment as high as RM50,000 for each retail investor at any period of time. 

How much return can I expect?

It depends on the risk you can afford to take. For example, on a more established overseas P2P lending platform, the return can range from 3% to as high as 20%. At the same time, many P2P operators are offering diversified portfolio whereby investors get to spread its investments across several investment notes to minimize the risk of individual companies defaulting on payments. By doing so, investors will get a slightly lower return at a lower risk.    

Do I obtain the access to risk profile and financial information of the borrowers?

Yes. You will have access to key characteristics of the company, financial information, business plan and purpose of fundraising. In addition to that, you will obtain the results of credit assessment of the borrowers conducted by P2P operators. 

What if the company defaults on payment?

In case of default, P2P operators are obliged to act in the best interest of investors in dealing with defaulted borrowers to maximize recoveries from the investment notes. 

Benefits of P2P lending

By investing in investment notes on P2P lending platform, you can potentially get higher return, albeit at a higher risk. In terms of absolute return, it gives you a more exciting return than fixed deposit investment. Compared to volatile returns from stock or fund shares investment, you are getting a fixed monthly payment with more certainty of return.

C.Licensed P2P lending platform operators

As mentioned in the introduction, a total of six companies have successfully won the license to operate P2P lending platforms in Malaysia. Although the platforms are not ready yet, you can still study some of the platform operators who already have P2P lending platforms being operated in other countries. For example, Ethis Kapital, FundedByMe and Modalku Ventures (Funding Societies) are all fast-growing P2P platform operators in other locations.

1.B2BFinPAL

B2BFinPal is a subsidiary of B2B Commerce (M) Sdn Bhd. The parent company develops and distributes cloud-based solutions for supply chain management. According to its website, some of its customers include Giant, Tesco and Aeon. On the P2P lending business, B2B FinPal is aiming to attract high net worth individuals as investors in the platform.

2.Ethis Kapital

Operated by Singapore-based Ethis Ventures, Ethis Kapital aims to target the Islamic market. Its sister companies, such as Ethis Crowd, Kapital Boost, Global Waqaf platform and Muslim Women Tech platform, are serious social enterprise players in the Islamic crowdfunding platform. Although the platform will be used to fund SMEs which are Islamic, it is open to all investors looking to take part in sustainable investing.

3.FundedByMe Malaysia

FundedByMe, based in Sweden, is the largest equity crowdfunding platform in Scandinavia. Looking to fill in the financing void in Malaysia, the company is also a registered equity crowdfunding operator since this year. Having obtained its P2P license, FundedByMe Malaysia seems poised to end this year with a positive note as its second equity campaign involving a homegrown startup – iTalent – was overfunded by 323%.

4.ManagePay Services

ManagePay is a homegrown company listed in the ACE market of Bursa Malaysia Stock Exchange. Currently, it derives its majority of its revenue from payment solutions and services.

5.Modalku Ventures

Modalku Ventures operates under Funding Societies which is an already established Singapore based P2P platform. Tapping on its growing momentum in Singapore, Modalku Ventures was also launched in Indonesia in the beginning of 2016. According to crowdfundinsider.com, the platform has thus far provided more than 200 business loans worth S$16 million to SMEs in Singapore and Indonesia.

6.Peoplender

Peoplender is a newly incorporated company. Upon securing the license to operate P2P lending platform, it is looking to specialize in microfinancing in which investors may only need to contribute a minimum of RM50 to kick start his/ her investment.  

Conclusion

The P2P lending platforms will soon be operational in 2017. Being one of the trending fintech ideas in the world today, many are expecting the P2P lending to make a huge statement in the financial service industry in Malaysia as banks nowadays tend to live prudently in light of increasing regulatory pressure and gloomy economic outlook. In the face of tightening credit condition, P2P lending does help fill the financing void in SME sector and satiate investor appetite. 

Continue reading...