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Investing In P2P Financing: Is It Worth It?

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Malaysia became the first country in the ASEAN region to regulate P2P financing with the registration of six P2P operators with the Securities Commission Malaysia (SC) in 2016 – B2B FinPAL, Ethis Kapital, FundedByMe Malaysia, ManagePay Services, Modalku Ventures and Peoplender (Fundaztic)–which were fully operational by 2017. Since then, a few more operators launched their platforms including Cofundr in July 2020 and microLEAP in October 2019.

The question in our minds, it it worth investing in P2P financing?

What Is P2P Financing?

The Peer-to-peer (P2P) financing aims to address funding needs of SMEs to raise working capital or capital for growth. It is also recognised as one of the alternative investments that one can consider which come with different risks and rewards. Nevertheless, an investment still serves the same
purpose; to gain profit and to hedge against inflation.

Number of campaigns and amount raised by year. Source: SC

Based on the data from 2017 until 31 March 2022 by the SC, the total amount raised from P2P financing was RM2.62 billion, with 35,499 campaigns
and 32,925 investors. Thus, P2P financing has been a major contributor in helping SMEs to fund their current operation and expand their businesses.

Of the investors, mostly (86.7%) are retail investors, with 7.9% angel investors while high-net-worth (HNW) individuals and HNW entities made up
the balance.

Type of P2P Financing investors. Source: SC

Smart Investor talks to several industry experts to find out more about P2P financing and investing in P2P financing.

Alternative Financing Through Crowdfunding

Paul Kuan, chief executive officer of Cofundr says that P2P financing is a platform to finance SMEs by raising funds via the internet. The investors
will invest in a portion of the financing known as investment notes for a risk-rated return.

Paul Kuan, chief executive officer of Cofundr

He informs that in every P2P financing, there are three parties involved; the issuer (SMEs), investors and facilitator (the P2P platform such as Cofundr) to facilitate the entire P2P ecosystem.

“In layman terms, P2P financing is a form of alternative financing through crowdfunding which enables businesses to obtain loans directly from individuals, facilitated through a P2P financing platform, cutting out financial institution as the middleman,” adds Jeff Tan, acting chief executive officer of Peoplelender Sdn Bhd that manages the P2P financing platform known as Fundaztic.

Jeff Tan, acting chief executive officer, Fundaztic

“P2P operator facilitates businesses to raise funds from both retail and sophisticated investors through an online platform. Through the SC’s registered platform, an investor may invest in an investment note issued by businesses for a specified tenure with the expectation of a predetermined financial return,” Er Chiang Chuan, head of business development and operations for B2B Finpal, explains.

Er Chiang Chuan, head of business development and operations for B2B Finpal

He adds that with a sophisticated risk algorithm and extensive SME experience, B2B Finpal ecosystem helps to connect those underserved SMEs with investors for quick and easy financing access.

Percentage of issuers who have successfully and unsuccessfully raised funds. Source: SC

From 2017 until Q1 2022, 99.4% of issuers have successfully fundraised. It shows that the chance of getting successful financing through P2P financing is very high.

How can someone raise funds for their businesses through the P2P platforms? Will it be difficult with stacks of documents needed to be
provided?

Tan briefly shares that for businesses, the general procedure is to ensure that they meet the required criteria in place by the P2P platform. When an issuer applies for funding, the P2P operator will evaluate the issuer’s eligibility, among others, by assessing its capacity to repay through credit
history checks and analysis of any alternative data.

“As a fintech P2P platform, all onboarding procedures are being done via our website or mobile app. This applies to both issuers looking for
financing as well as investors looking for investment opportunities,” Kuan responds.

“microLEAP also provides value-added services, such as Free Personal-Accident (PA) Insurance on the business Key-Person, online video
tutorial on basic debt management and accounting in both Malay and English, as well as absorbing all Shariah-related fees,” adds Marzuki Musa, chief marketing officer of microLEAP.

Marzuki Musa, chief marketing officer of microLEAP

Each P2P financing platform may have different registration and application process. Er provides us the general overview of how they work:

1. Sign up on the P2P platform
The issuers are required to provide business information and documents such as the nature of their business, contact details, financial information, directors and shareholders information, etc.

2. Verification and approval by the P2P financing platform
The P2P operator will evaluate the issuer’s suitability, among others by assessing its capacity to repay through credit history checks and
analysis of any alternative data.

3. Execute the issuer agreement
Once the issuers have accepted the offer and executed the issuer agreement, their funding request will be published on the P2P financing platform and investors can choose whether or not to fund their business.

4. Receive funds
The funds will be credited to the issuer’s bank account once it has reached the target amount set earlier during the application.

Investing In P2P Financing, Knowing Your Risk Appetite

Generally, for those interested in investing in P2P financing platform’s investment notes, they will first have to open an account with the respective platform and provide information such as their name, address and contact information for the operator to carry out identity verification and undergoes the Know Your Customer (KYC) process.

According to Er, the process is important to protect the investors and P2P operators from misuse of data and it is also required by the law. But what are the criteria or guidelines that an individual need to consider before investing in P2P?

Marzuki shares that there is always an element of default risk when it comes to investing in P2P financing market.

“Hence, microLEAP encourages all investors to diversify their risk by investing in as many investment notes as possible for a given amount of
funds,” he says.

microLEAP is a Shariah-compliant and conventional P2P financing platform that provides alternative financing for MSMEs, that is funded by both investors who are looking for a Shariah-compliant yield as well as impact investment.

“P2P financing indeed provides higher returns than traditional investments, but investors take on higher risks as well,” Er concurs.

He adds that investors need to be aware that the returns from investing in P2P financing are not guaranteed. “The issuers may default on their P2P financing and might not be able to repay their monthly dues to investors. In the event of a default, some platforms may take legal action against defaulted issuers or work with them to propose alternative repayment solutions.”

Furthermore, risk appetite is different for every investor. It is tempting to go for higher-risk businesses that provide higher returns, but Er emphasizes the need to ask yourself on what you can stand to lose if they default on their payments.

“To further help investors, Cofundr uses Factsheet that contains the company background, years established, business sector, litigation status of the company and if the company has been blacklisted before.

However, at Cofundr, we practice a “noname” basis where we do not reveal the issuer’s name. This is to protect the Issuer’s confidentiality,” Kuan shares.

Compared to conventional investments such as equities, unit trust or fixed deposit, is there a safety net for investors that are investing in P2P Financing? Or is there a potential to suffer a total loss from capital? As such, how would an investor mitigate the risks?

“Diversifying your portfolio is by far the best strategy to minimise any risks or losses you may encounter in the long run. To diversify means to spread your investment across as many notes as possible in terms of number as well as type of issuers,” Tan says.

The biggest risk in investing in P2P financing is repayment or default risk where the issuer might not be able to repay the fund in full.

“To mitigate the risk for our investors, our credit assessment team is very selective with the issuers we onboard and we often make an arrangement such as guarantor arrangement, assignment of proceeds, post-dated cheques and others to rotect our investors. Investors can suffer losses when investing in P2P financing. Hence, we always advise investors to diversify their investment into several investment notes rather than focusing on just one,” Kuan further adds.

Going Forward

On what are the future plans for the P2P financing industry players, here are what they share.

“We aim to elevate the financial well-being of the communities through P2P financing. We also plan to offer more dynamic products for both the
issuer and the investor. Recently, we launched our Shariah-compliant products, Takaful Contribution Financing and Islamic Invoice Financing to serve the Islamic market in the P2P ecosystem,” Kuan shares on the plans for Cofundr.

“We will also continue to educate the public about P2P investment and how it can become an alternative investment asset class for them to consider when building their wealth,” he adds.

“After establishing ourselves in several states in Malaysia, we will look to expand regionally. microLEAP’s plans to branch beyond Klang Valley
and increase our presence in other states such as Negeri Sembilan, Johor, Sarawak and Sabah,” Marzuki informs.

B2B Finpal expects to see a V-shaped recovery as consumers start to spend again after the recent COVID-19 pandemic that has hit businesses very hard. “B2B Finpal will be ready to support the recovery of Malaysian SMEs,” Er says.

As for Fundaztic, Tan informs that they will expand their sales force to other states to make Fundaztic accessible to all MSMEs across Malaysia. Fundaztic has also expanded to Singapore since last year and they are now exploring further expansion to other countries as well.

Now that you know more about the P2P financing and have heard from the industry players, do you think that investing in P2P financing should be considered as one of your alternative investments?

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