Malaysia’s peer-to-peer (P2P) financing space has grown by leaps and bounds over the past few years. From 418 campaigns that ran across six licensed players in the space in 2017, 2018 saw a whopping 300% increase in campaigns to 2,000. Even more impressive is the fact that funding raised also increased by 900% to RM159.56 mil versus RM17 mil in 2017.
The prospects for the rapid growth of P2P financing in the country are bright especially against the backdrop of the Budget 2019 announcement, which suggested a more proactive role for P2P financing in alleviating the financial gap encountered by small and medium enterprises (SMEs) in the country.
A Fast-Growing Market
Be it traditional or alternative vehicles, investors in general would be open to risks if they consider the returns to commensurate with the risks they are taking, and this is one of the reasons behind the immense growth of P2P models worldwide, according to Fundaztic CEO Kristine Ng.
“Most platforms – and Fundaztic is no different – practice risk-based pricing of which translates to the return of investments for the investors,” she tells Smart Investor. “The difference would be in the degree or speed of growth and this is then dependent on many factors such as the level of trust built, ease of use, entry barrier to investments, deal flows, as well as fees charged.”
Since day one, Fundaztic’s emphasis has been on a high degree of transparency (they are the only platform in the country to openly display their growth statistics on their homepage) and low-entry barrier as well as ease.
Fundaztic’s aim, Ng points out, is to be able to use technology to drive financial inclusion with the final outcome being to enhance financial well-being for everyone.
Financing for MSMEs
As one of the six P2P financing platforms licensed as a Recognised Market Operator (P2P Financing) by the Securities Commission Malaysia (SC), Fundaztic currently offers only term financing of between 8% and 13.38% per annum for all types of micro, small and medium enterprises (MSMEs).
The company’s target segments are the micro, small and new businesses that form 90% of the 98.5% of the MSMEs in the country. These segments are primarily underserved by traditional lenders due to the high acquisition costs as well as perceived high risks.
Exhibit 1: Fundaztic’s live statistics (as of 11 April 2019)
“We tackled the issue of the former by being a 100% online platform,” Ng explains. “As for the latter, we charge higher interest rates (which are passed back to the investors) but still well within the ceiling rates set by the SC so that we could prevent ‘predatory lending’. As the portfolio seasons better, we would be coming up with more product offerings.”
But what is it that makes Fundaztic different from other P2P financing platforms in Malaysia?
Ng opines, “Fundaztic has many unique propositions that are the first in the market and even perhaps the world because in developing our processes and strategies for growth we did not choose to just learn from the success within the industry and fintech per se but looked into all sorts of digital-based industries to be differentiated.”
As such, Fundaztic is 100% online and is capable of performing end-to-end processes anytime and anywhere and across virtually any device with internet connectivity. As Ng is quick to point out, there is no need to print any documents or even have them signed, scanned or delivered back to the platform operator.
All legal documents, meanwhile, are signed and sealed digitally.
In addition, Ng believes that Fundaztic is perhaps the only platform in the world that does not impose any deposits for investors to be able to start investing.
“If a member joined us during a promotional period, they might even be given monies upfront in the form of our ‘Fundaztic Bonus’ to add value to their investments,” she enthuses. “What our investors like the most is that they immediately get back their first month’s principal plus interest upon us disbursing the funds to successful issuers (the MSMEs).
“This allows investors to be able to quickly reinvest in any other investment notes available and therefore, make their capital work harder,” according to Ng.
While the P2P financing industry has been growing steadily since the SC issued licenses back in 2016, not all has been smooth sailing for the industry, given several platform operators having already seen defaults in their investment notes.
Peer-to-Peer (P2P) Financing Key Statistics
Source: Securities Commission Malaysia
“All platforms have clearly stated that the risk for investors would be in the defaults, and this is why it is called ‘investing’ rather than ‘savings’,” Ng cautions. “Furthermore, the interest rates that platforms pass back to investors are what they believe to commensurate with risks involved in the particular investment, and therefore, defaults are expected and bound to happen.”
As a matter of fact, there is no lending that does not come without defaults. What is important is not whether defaults occurred but whether they are occurring in tandem with the platform’s projections.
“Currently, although still a bit premature, the defaults that we have seen reported are still less than the projections. This means that investors should still be in the making if they had diversified enough,” says Ng.
As such, the only successful method of managing defaults is to stay invested and to build a portfolio that is as diversified as possible.
“When defaults happen, many investors ‘jump’ and start pointing fingers that the platform has not done enough to prevent the defaults when in reality, the platforms can only evaluate the credit health aspects of the business properly,” Ng laments.
From political changes to the world’s economic environment, there are many factors governing the overall health of the MSMEs that platforms are unable to see or predict at the point of on-boarding issuers (the MSMEs).
Therefore, there is no way that the platform can prevent defaults from happening, and investors should never expect for defaults to not occur, especially when they are ‘rewarded’ with high interest rates.
“For Fundaztic, we have always been upfront in managing defaults by stating that our estimated defaults would be between 5% and 8% per annum and that if such default rates do occur, investors will still be earning at least double the fixed deposit (FD) rates if they had built a diversified portfolio,” reckons Ng.
“We just did a ‘stress test’ on all our investors who have a portfolio of 100 investment notes and above with a default rate of 5% and the worst performing of these portfolios is still netting in about 10% returns which, while lower than expected, is still profitable in current investment conditions where yields in general are merely between 6% and 7%.”
Dealing with Defaults
Similar to traditional lenders, Fundaztic has a set of fixed processes and procedures to follow when it comes to handling defaults, hence, enabling the P2P operator to pursue all legal actions permissible by laws of which the final and last resort may be bankrupting the individuals and/or guarantors.
“What is important is that Fundaztic decides to take in the first cost of recoveries insofar that when a default occurs and investors are no longer getting back repayments from the particular investment note, Fundaztic would fork out or pay all legal fees involved in trying to get back the unpaid sum first. Only if we are successful in recovering this would we be able to deduct the sums paid,” Ng insists.
The fact that the platform has indirect interest to ensure the quality of the investment notes hosted week on week is something that is very much emphasised on Fundaztic’s end.
“If we are not careful and defaults are higher than projected, we will end up losing more than the fees we earn and therefore, the company would ‘bleed’ in the long run. This is why we have always taken a high degree of due diligence in better ensuring the quality of the investment notes we host, and this is why approval rates remain at just 30%,” Ng reveals.
Peer-to-Peer (P2P) Financing Key Statistics
While they can be as careful as ever, Ng admits that they need to also strike a balance of being overly conservative to the extent that they are behaving in the same manner as traditional lenders and therefore, not fulfilling their role as an alternative platform to drive access to financing for MSMEs.
“There are just too many factors that we cannot see and should not try to ‘crystal ball’,” Ng rationalises. “Therefore, the most important thing for both the platform and investors to manage and mitigate risks would be to build or disburse a portfolio that is large in number and is as diverse as possible.”
For investors, Ng suggests that they should build big and quick while spreading risk thinly and evenly by investing in as many investment notes as possible in similar amounts across each note. In this case, many investors are learning slowly but surely about the importance of investing in nearly equal amounts due to the unpredictable factors governing their ability to repay.
“I would strongly encourage investors to have a portfolio of at least 100 active investment notes at any point of time because this appears – at least for now – to be the ‘magic number’ on portfolio health,” she concludes.