Investment is a very hot topic among us Malaysians. If there’s one investment that has been picking up in recent years, it is peer-to-peer financing, or better known as P2P financing.
In a nutshell, P2P financing – a type of digital financing – is an alternative financing raised through crowdfunding that allows businesses to get financing from individuals via a digital platform. Smart Investor speaks to Chai Kien Poon, Country Head of Funding Societies Malaysia, the largest SME digital financing platform in Southeast Asia.
Inflation Is Rising Fast
Investors and businesses alike are facing great challenges due rising inflation. Latest figures show that Malaysia’s inflation has increased by 3.4% to 127.4 in June 2022 from 123.2 in the same month of the preceding year. The Food Index has increased by 6.1% and remained as the main contributor
to the rise in inflation during the month of June 2022. This results in a lower purchasing power and greater pressure to increase one’s income.
Concerns surrounding inflation are coupled with the heightened uncertainties brought forward by geopolitical conflicts and other global issues. Hence, investment diversification is more crucial than ever to maintain a stable portfolio.
“The P2P financing, or SME digital financing portfolios, are not publicly traded and hence, sheltered from daily market fluctuations. SMEs will still be making fixed repayments regardless of short term FTSE Bursa Malaysia KLCI movements or interest rate fluctuations,” Chai says.
With a variety of SME debt investments offered on digital financing platforms, it can cater to investors with different investment objectives and risk
appetites. It is a win-win situation too, as investors will be able to directly support local SMEs needing additional working capital for further growth or meet cash flow requirements, and earn returns.
“Businesses can expect a more challenging period ahead, driven by persistent supply chain disruptions, inflation (rising wage and materials costs) and longer repayment cycle from customers. This has put pressure on margins (as cost increases while consumers lose purchasing power) and
impacted cash flows,” says Chai.
To some extent, a rising rate environment also leads to higher monthly payments (for variable rates financing), adversely impacting SMEs’ overall expenses and pose a threat to their cash flow. Moving forward, lenders such as traditional financial institutions may also tighten their lending criteria.
Subsequently, this will lead to a larger group of creditworthy SMEs to be further underserved, or unserved as the already significant SME financing gap continues to widen during this critical moment as businesses return to their full economic potential.
Why Should Malaysians Invest In Digital Financing?
“Malaysians are more familiar with equity investments: stock market, unit trusts, etc. On Bursa Malaysia, there are about 1,200 publicly listed companies being traded,” shares Chai.
“In contrast, there are 1.2 million micro, small and medium enterprises (MSMEs) in the country, and a huge bulk of these numbers are always looking for financing opportunities to fulfill their business obligations and objectives.”
These underserved, yet creditworthy MSMEs turn to Funding Societies to seek tailored financing solutions for their businesses. They represent a large volume of potential transactions which investors can invest in, and receive the principal invested plus returns upon the maturity or repayment of the financing facilities.
To protect investors, rigorous rounds of background checks are performed based on proprietary evaluation matrices before approval for financing, while simultaneously raising the investment notes for investors.
As we are now in a period of heightened uncertainty, Funding Societies is constantly innovating to offer more investment products to meet the
needs of investors’ investment objectives and risk appetite across business cycles.
Its recently launched Guaranteed Investment Notes (GIN) offer more consistent (albeit lower returns), where the non-repayment or default risk are guaranteed by an appointed guaranteeing entity instead of the investors themselves. This may appeal to investors having a more cautious outlook in the short to medium time horizon.
By having less disposable income, we will be more cautious with our investment – often looking for the diamonds in the rough. So, how well are the businesses being filtered before they are on-boarded onto the digital financing platform?
“When SMEs submit an application through the digital platform, they will be assessed through our Know-Your-Clients (KYC) process that identifies
and validates the SME’s existence and business, and its proprietors or directors,” Chai explains.
Credit and risk assessment on an SME is based on a combination of factors which includes financials, nonfinancials, and behavioral data. A risk
rating will then be generated for each SME. Only qualified SMEs will be placed on Funding Societies’ platform for the crowdfunding process.
s for investors, the investments start from as low as RM100 per note. To help investors build a diversified portfolio, investors can limit their exposure to each SME on the platform via the website and mobile application.
Moreover, investors are also provided with a factsheet which they can refer to evaluate the investment opportunities further. These factsheets include information like tenure, paid-up capital, SME credit score, payment behavior, entity type, and number of guarantors.
Digital Financing Is Booming
Launched in 2015, Funding Societies has been doing very well and has since achieved a lot of success. Some of their notable milestones within this
year include crossing the RM1 billion in financing disbursement in Malaysia, its multi-million Series C+ fundraise, its investment in Indonesia’s Bank Index, its expansion into Vietnam as the Group’s latest market entry, as well as its acquisition of regional payment solutions provider, CardUp.
Along with these accomplishments, Funding Societies Malaysia also introduced more new products including the Islamic Trade Financing and BizFund, an enhanced SME-focused term financing product. In terms of businesses, the digital financing platform saw more than 60% increase in MSMEs compared to the same period in 2021. During the same period, total disbursements also grew by more than 60% compared to the same period last year.
As for investors, in the first half of 2022, there was around 10% increase in investors compared to the first half of 2021. Over 60% of its investors comprise Millennials and Gen Zs, with more than 40% of the investors are based in the Klang Valley.
In just seven years, the platform has helped finance over five million business deals, with over RM11 billion in funding. What is even greater, Funding Societies’ default rate remains stable – between 2% to 3% – despite having to navigate the pandemic for the past few years.
Minimising Risks While Maximising Gains
The ‘high risk, high return’ concept rings true when it comes to investment. But with technology on our side, here’s what existing investors have to say about digital financing investment:
“I wanted to diversify into a more convenient asset class, something which I can monitor using a device. After investing through Funding Societies, I
find it to be a platform that empowers users to direct their own funds, minimise risks, while maximising the gains. Returns are predictable and stable, such as with the Guaranteed Investment Notes (GIN). Funding Societies is a great place to start your second stream of income without much
hassle or big capital,” says investor, Rainbow Chan.
Getting The Much-Needed Capital Without Much Hassle
As for the SMEs, digital financing has certainly helped in getting capital in a much easier and faster way.
“We saw an increase in our sales during the pandemic and needed to increase our inventory to cater to these demands. Having been turned down
by traditional financial institutions, we turned to Funding Societies for a term financing. We found the application process to be smooth and seamless and we were able to receive the capital that we needed to replenish our stocks quite fast,” say Abdul Hadi Wisman, Co-Founder & CEO of Sellection Sdn Bhd, a 5-year-old e-Commerce retailer selling imported branded handbags and leather accessories.
Looking For Guaranteed Returns?
Going forward, Funding Societies intends on focusing on providing more Guaranteed Investment Notes (GIN) for investors. GIN is Funding Societies’ first investment product that provides investors with guaranteed principal and interest returns on their investments.
Investors can start with a minimum investment amount of RM100 for a duration of between one to 24 months. GIN investors can enjoy net returns of up to 6% per annum before fees.
The platform is also looking to expand their offerings to include Shariah-compliant financing and investment opportunities. Following the launch of its Islamic trade financing facility in May, there were encouraging responses and high demand on the expansion of Shariah-compliant products, both from the SMEs as well as investors’ sides.
This is in line with the Islamic ECF and financing markets’ performance last year, which saw RM225.9 million being raised. For comparison, only RM1.5 million was raised through this avenue in the previous year.
For those on the lookout to diversify their investments and are considering alternative investment options, it is definitely worth taking a closer look at what digital financing has to offer. Just make sure you do your due diligence and understand the risks involved before diving in. Perhaps start small, just to get your feet wet, and take it from there.