One of the ironies of life is that those who most need funding often find it the hardest to get it. Micro-enterprises and small and medium enterprises (SMEs) know this feeling the best.
Typically, when a small or early-stage SME goes to the bank for a loan —be it a term loan or a short-term funding option for working capital — the banks want to see some form of collateral or a substantial track record.
Companies that cannot show collaterals or a long-enough track record of being in business will typically be shown the door.
So, what do they do? Some business owners have to tap their personal savings or borrow from friends or family. Some may even have to take out a personal loan or something from the shadow borrowing industry.
This gap is indeed a problem that has been said to inhibit the growth of SMEs in the country.
Securities Commission chairman Tan Sri Ranjit Ajit Singh notes that Malaysian SMEs face a financing gap of a staggering RM80 billion.
This is based on the SC’s internal research and analysis which found that SMEs and micro-enterprises as a whole would need that amount of financing, but found it difficult, if not impossible, to get loans from conventional banks.
“We believe that market-based financing, including equity crowdfunding and peer-to-peer (P2P) lending, may provide alternative solutions to address the financing needs of our SMEs,” Ranjit said in his sppech at the SCxSC Digital Finance Conference in Kuala Lumpur, last Thursday.
Peer-to-peer (P2P) lending has landed in Malaysia with the SC last Thursday announcing the registration of six approved platform operators.
The six operators are B2B FinPAL, Ethis Kapital, FundedByMe Malaysia, Managepay Services, Funding Societies Malaysia and Peoplender. (See sidebar for details.)
The operators have nine months to operationalise their platforms so that businesses can seek a listing for peer-to-peer (P2P) borrowings whilst investors — retail and sophisticated — can participate in this new investment class.
Essentially, anyone can lend money to a business or a company that has been assessed and accepted by a peer-to-peer (P2P) platform operator.
This comes a year after the SC issued licences for six equity crowdfunding (ECF) platforms to operate in Malaysia, making the country the first in Asean to enable this form of digital finance.
Already, equity crowdfunding has raised a total of RM8 million in 11 successful campaigns over the past six months via registered operators. There has been strong interest in both technology and non-technology companies across a wide range of sectors that are interested in equity crowdfunding.
According to Ranjit, peer-to-peer (P2P) as an alternative form of financing is equally promising given that over US$25 billion was raised on P2P lending platforms globally in 2015.That total is projected to grow to about US$96 billion by 2025, Ranjit added.
At this point, the new peer-to-peer (P2P) lending operators have the dual task of balancing between finding the right mix of issuers (businesses and companies in need of funding) and investors willing to loan them money.
As Funding Societies Malaysia chief operating officer Wong Kah Meng puts it, it is a chicken and egg situation.
“If you do not get good issuers, investors will go away. But if you cannot bring in enough investors, then issuers may not want to come in. They are both very important and I don’t think both are easy,” says Wong.
The common sales pitch for P2P lending is that the financing rates listed on P2P lending platforms are much more attractive than current fixed-deposit rates which are at between 2% and 4%, depending on the banks and client relationship.
The six peer-to-peer (P2P) lending operators are all targeting slightly different classes of investors and borrowers.
For example, Ethis Kapital, which intends to operate a peer-to-peer (P2P) lending platform for shariah-compliant businesses, is aiming at Muslim and non-Muslim investors who want to invest in the growth potential of the halal market.
Peoplender, operated by financial technology startup P2P Ventures Sdn Bhd, meanwhile, is setting its sights on younger investors by offering investment notes from as low as RM50 for a single investment note.
“It’s both financial inclusion for SMEs and wealth-creation for the people,” says P2P Ventures chief operating officer Kristine Ng.
On the other hand, B2B FinPAL’s target investor group are the high-net worth individuals so that it can maintain enough liquidity for small businesses to borrow.
“There is definitely a demand for money. So, what we have to ensure is to get enough support to meet that demand,” says TS Lee, the CEO of B2B Commerce (M) Sdn Bhd, which operates B2B FinPAL.
Two of the operators — B2B FinPAL and ManagePay Services — have some links to the SME sector given that their parent companies are B2B service providers.
ManagePay Services — a subsidiary of the ACE-listed ManagePay Systems Bhd — has been in the business of providing payments solutions to companies large and small. It hopes to leverage its existing technological know-how and networks to give its P2P lending platform a head-start.
B2B FinPAL’s parent, B2B Commerce (M), has for the last 17 years provided supply chain management software solutions in the SME space. Its customer base includes companies in retail, fast-moving consumer goods, oil and gas, manufacturing and logistics around the region.
B2B FinPAL aims to provide P2P financing for SME’s micro-invoice factoring and business expansion financing. It already has a pool of about 5,000 businesses that use its system daily that it could potentially tap as issuers on its platform.
“SMEs suffer from cash flow issues. We find that most of them cannot fulfil at least 50% of purchase orders that come in because of cash flow [problems] so there is a loss in profits. The banks don’t provide it because the amounts are very small, a few thousand ringgit,” says Lee.
Funding Societies’ Wong says the platform will target businesses in core sectors of the Malaysian economy, particularly those in manufacturing, wholesale and retail, food and beverage and accommodation.
Funding Societies, which operates in Indonesia and Singapore, offers business term loans and invoice financing, so that SMEs can tap into any collateral that they may have, including invoices which are essentially promises by clients to pay an agreed amount for goods or services received over a period of time.
Funding Societies, Wong says, takes a formulaic approach to assessing the creditworthiness of businesses and companies. They look at both financial and non-financial information, including behavioural information and the key people behind the business.
“We are more flexible than a bank. A bank will say ‘Okay, this is the score card, if a company passes, then it passes.’ That is a one-size-fits-all approach,” says Wong.
What, then, in the event of a default?
Wong says that Funding Societies handles late or missed payments internally by trying to work with the borrower to reschedule or restructure the loan as best as it can.
“You have to bear in mind this is the risk borne by investors; we are here to facilitate the process. We will see what works for the SMEs. We don’t want to say, ‘We are cutting you off, pay back the loan now’. That kills off the relationship and it’s not fair debt collection practices,” says Wong.
According to the Funding Societies website, the default rate stands at under 4% to 5% of total borrowings on its platform. Most peer-to-peer (P2P) lending platforms also register default rates of low single-digit percentages.
Where are the banks?
The emergence of P2P lending in Malaysia raises the question of how this will impact conventional banks. Much has been made about the potentially disruptive impact of financial technologies on banks and the status quo of the financial services industry.
In the immediate term, tech industry people and banking analysts say there are no direct impacts on the banks’ existing business.
After all, these micro-enterprises and SMEs are generally not bank customers.
Some, however, wonder if peer-to-peer (P2P) lending could somewhat affect the banks’ CASA (current account and savings account deposits), which is a cheap source of funds for banks. “But this is only if peer-to-peer (P2P) lending grows substantially over the next three to five years, with more and more retail investors considering this as a viable asset class to park their money,” says a banking source.
There are also those who do not believe that marketplace lenders would pose a significant threat to banks in the mass market. Life.SREDA’s Money of the Future 2016 report notes that peer-to-peer (P2P) lending still only amounts of 0.08% of the US$98 trillion in global corporate and household debt.
Nevertheless, there has been intense interest in obtaining a peer-to-peer (P2P) lending operator’s licence in Malaysia. Those eyeing it see it as akin to a banking licence, leveraging on technology and the openness of regulators in embracing new forms of finance.
SC executive director Chin Wei Min disclosed at a press conference that the commission had received over 50 applications from those keen to be a peer-to-peer (P2P) lending platform operator.
According to Chin, the applications process also saw some financial institutions participating via partnerships and joint ventures. But based on the six approved, it is clear that local banks did not apply directly to be an operator.
Local banks are certainly not staying on the sidelines.
It is learnt that at least two of the six approved operators are finalising partnerships with domestic banks. Sources say that RHB Bank Bhd is among the local banks that will tie up with one of the approved peer-to-peer (P2P) lending operators.
The most obvious route for banks is to partner with peer-to-peer (P2P) lending operators and use them as an incubator of sorts.
An SME that cannot get past banking requirements may be funnelled to a peer-to-peer (P2P) lending operator. When the SME grows to a certain size or establishes an adequate track record, it can then be funnelled back to the bank.
For example, Funding Societies works with DBS Bank in Singapore and Sinarmas Bank in Indonesia. Funding Societies Malaysia’s Wong says that they are in talks with a few banks and will soon announce a partnership.
FAQ on peer-to-peer (P2P) Lending in Malaysia
How does peer-to-peer (P2P) lending work?
A P2P lending platform is merely just that: an online platform to connect two parties. So, businesses and companies needing a loan can apply to be listed on a platform for investors to consider. The investment process is dependent on the rules set by the respective platform operators. But in general, the platform operator performs credit scoring and due diligence before listing it on the platform so potential investors can consider lending money to these businesses or companies by bidding for investment notes. Investors can use registered P2P lending platforms to look at available investment notes or an Islamic investment note issued by businesses or companies.
Can individuals borrow money on peer-to-peer (P2P) lending platforms?
The short answer is no. In Malaysia, P2P lending operators are only allowed to facilitate loans for businesses and cannot offer personal financing to individuals, unlike in other jurisdictions like in the US or China.
Who can invest in peer-to-peer (P2P) loans?
Technically, anyone can invest. The peer-to-peer (P2P) investment opportunities are open to all investors, both retail and sophisticated. There are no investment limits enforced on investors. However, the SC reminds that retail investors should limit their investment exposure to a maximum of RM50,000 at any one time in order to manage their risk exposure.
Is peer-to-peer (P2P) lending a safe investment?
As with all investments, peer-to-peer (P2P) lending has risks attached. Investors are advised to analyse and understand disclosed information on the issuer’s business, financial information, credit assessment, repayment schedule, risk information and other relevant details.
What if I change my mind on an investment?
There is no mandatory cooling-off period for investments made on peer-to-peer (P2P) lending platforms. But platform operators have the discretion to offer such a cooling-off period if it sees fit.
What kind of companies or businesses can raise funds?
The target group for P2P financing is generally the micro-enterprises and SMEs. peer-to-peer (P2P) lending platforms can only host the following types of companies: locally-registered sole proprietorships, partnerships, incorporated limited liability partnerships, private limited and unlisted public companies. Platforms are not allowed to raise funds for entities that are public listed or subsidiaries of listed companies, companies with no specific business plans as well as companies that plan to merge with or acquire an unidentified entity. A business or company cannot be hosted concurrently for the same purpose on more than one peer-to-peer (P2P) lending platform. However, a business or company may be allowed to list on a P2P lending platform and ECF platform at the same time subject to disclosure requirements.
How much money can a business or company raise via peer-to-peer (P2P) lending platforms?
The SC does not impose a limit on how much a business or company can raise money. The peer-to-peer (P2P) lending operator will have to decide on how much an issuer can raise as well as the financing rate, based on the issuer’s risk score. An issuer is allowed to keep the funds raised on a peer-to-peer (P2P) platform provided that the take-up rate is at least 80% of the target amount. If it does not reach the 80% take-up rate, it will not be able to receive any amount. In the event that an issuer gets bids that exceeds its target amount, the issuer will only be able to retain the full amount it was intending to raise and not the additional portions.
What are the obligations of a peer-to-peer (P2P) lending operator?
Among other things, the platform operator must be able to determine the suitability of issuers that are to be hosted on their respective platforms. This means that the platform operators have to do things, including conducting background checks, assessing the creditworthiness of a company or businesses, ensuring compliance with rules and ensuring that funds received are placed in a third party trust account until the appropriate disbursements are required to be made.
What information will be disclosed to investors?
The platform operators must make available relevant information on the issuers. This includes the issuers’ key characteristics, business plan, purpose of fundraising and financial information. Additionally, the platform operator also has to disclose information on general risk warnings, appropriate risk disclosure of issuers, risk scoring mechanism, criteria for determining a default, processes to manage a default, and information on late payment and default rate of issuers hosted.
What is the interest rate for peer-to-peer (P2P) lending?
When an issuer applies for funding, the peer-to-peer (P2P) lending operator will evaluate the issuer’s creditworthiness by looking at available data, including its capacity to repay via credit history checks and analysis of any alternative data. The interest rates for a particular issuer will be determined by the peer-to-peer (P2P) lending operator on a transparent risk scoring mechanism and methodology.
What happens if a peer-to-peer (P2P) lending operator goes bust?
The SC guidelines stipulate that the operator cannot cease business or operations without prior engagement with the SC. In the event that an operator has to wind up, there will be an orderly plan put in place to minimise disruptions.
The six P2P lending operators in Malaysia
The Securities Commission Malaysia (SC) last Thursday announced the six registered peer-to-peer (P2P) financing platform operators in Malaysia.The six were chosen from over 50 applicants that had submitted their bids to the capital markets regulator to be considered for registration.
SC chairman Tan Sri Ranjit Ajit Singh says the successful P2P lending operators comprise existing P2P players from other markets, local technopreneurs and financial services professionals.
“These operators each draw on their unique strengths either through partnership with local banks, facilitating foreign direct investment, offering Islamic financing, micro-financing and invoice financing or leveraging data analytics to generate unique insight into small and medium enterprises (SMEs),” he adds.
The six peer-to-peer (P2P) lending operators have nine months to operationalise their respective platforms, with some targeting to launch as early as 1Q2017.
1. B2B FinPAL
B2B FinPAL aims to provide peer-to-peer (P2P) financing for SMEs through business expansion financing and micro-invoice factoring. For the last 17 years, B2B FinPAL’s parent, B2B Commerce (M) Sdn Bhd, has been providing supply chain management software solutions in the SME space. It already has a customer base that includes companies in retail, fast-moving consumer goods, oil and gas, manufacturing and logistics around the region. Apart from its home base of Malaysia, B2B Commerce has clients in Cambodia, Indonesia, Vietnam and China. B2B FinPAL is targeting high-net worth individuals as investors.
2. Ethis Kapital
Ethis Kapital aims to create a sustainable Islamic funding marketplace, building on Malaysia’s strength as a global Islamic finance hub. It wants to grow Islamic crowdfunding by focusing on projects that are both commercially viable and socially responsible for its crowd of ethical and Islamic investors. Ethis Kapital intends to work with shariah-compliant businesses looking for financing but it welcomes all investors – Muslims as well as those looking for ethical investment options.It is planning to host loans of between RM50,000 and RM500,000.
FundedByMe Malaysia is one of the six equity crowdfunding operators registered by the SC last year. It is a joint venture between Sweden-headquarted FundedByMe and local digital marketing agency Alix Global. FundedByMe is one of the fastest-growing crowdfunding platforms in Europe, with more than 72,000 investors across 178 countries. It has raised more than 28 million euros (RM130 million) for over 500 companies.
4.ManagePay Services Sdn Bhd
ManagePay Services Sdn Bhd is the managed payment services arm of the ACE Market-listed ManagePay Systems Bhd. The parent has already been in the business of providing payment solutions for companies large and small. ManagePay Services, through its platform QuicKash, aims to make credit more affordable for SMEs and investing more rewarding for investors. The focus is to provide short-term loans for SMEs that need working capital. Loan sizes can be as small as RM10,000 or RM20,000 with tenures of three, six, nine or 12 months.
5.Funding Societies Malaysia
Funding Societies Malaysia, incorporated as Modalku Ventures, is the latest branch of regional P2P lending platform Funding Societies, which has been operating in Indonesia and Singapore. In 2015, the platform operator originated almost S$13.8 million (RM42 million) in invoice financing and business term loans for over 100 SMEs to grow their businesses. Investors include global and regional venture capital firms Sequoia Capital India and Alpha JWC. In Malaysia, Funding Societies is looking at providing loans of RM50,000 to RM500,000 on tenures of one to 24 months.
Peoplender is a financial technology startup by P2P Venture Sdn Bhd, a new company backed by former banking professionals and a lawyer. It aims to facilitate greater access to financing, focusing on viable SMEs and micro-entrepreneurs that are still unserved by banks. It is looking at offering loans of between RM20,000 and RM200,000. But investors can participate in a loan for as little as RM50 per investment note.
*This article first appeared in The Edge Malaysia Weekly, on November 7 - 13, 2016~
Photo: Holand Fintech