Finance: More liquidity for P2P investments

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on January 15, 2018 - January 21, 2018.

Of the notes hosted on our platform, the shorter-term notes — which are mainly invoice financing notes — were snapped up faster than the longer-term ones > Wong

Some investors are worried that longer-term investment notes are exposed to higher risk of defaults, even though this is not necessarily the case. > Ng

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There is a growing demand from investors for more liquidity on peer-to-peer (P2P) financing platforms. This has prompted platform operators to look at hosting offerings that allow investors to receive their principal and returns within a shorter time frame. 

For one, Wong Kah Meng, CEO of Funding Societies Malaysia, aims to host more short-term investment notes in the future. These are typically invoice financing notes with a repayment period of three to six months, compared with term financing notes of 12 to 36 months. 

“We have received a lot of feedback from investors, demanding more liquidity. The demand is also reflected in their investment behaviour. Of the notes hosted on our platform, the shorter-term notes — which are mainly invoice financing notes — were snapped up faster than the longer-term ones,” says Wong.

Invoice financing is a way for businesses to borrow funds based on the amount owed them by their debtors. In the case of P2P financing, a platform operator conducts the necessary assessment of the repayment ability of the borrower and its debtors before deciding whether to provide the loan or not. 

Kristine Ng, CEO of fundaztic.com, concurs with Wong. “Some investors are worried that longer-term investment notes are exposed to higher risk of defaults, even though this is not necessarily the case. 

“We explained to them that a longer-term investment note [with a lower interest rate] will allow borrowers to repay on time and with a lower probability of default too. But some investors have been requesting shorter-term notes so that they can get back their principal and returns faster. We are trying to cater for the demand while remaining prudent in our risk assessment,” says Ng.

While she is considering hosting some shorter-term investment notes on fundaztic.com, she is also looking to introduce a secondary market for investors to trade their notes. She plans to begin working on it this year or next. “We need to grow our base first for the secondary market to work more efficiently.”

Angelld Quah, chief operating officer at FundedByMe Malaysia, is also looking at hosting shorter-term investment notes. “The returns are attractive and the repayment period is short,” she points out. 

Be prepared for defaults this year

The P2P industry had a good year in 2017. As at last November, it raised RM17 million and provided funding for 52 small and medium enterprises (SMEs). 

Some 8,248 investors have registered with the six licensed platforms to date. According to the Securities Commission Malaysia’s data, the P2P industry aims to raise RM230 million this year. 

The platforms contacted by Personal Wealth — Funding Societies, fundaztic.com and FundedByMe — did not see any defaults last year. This is good news as it means investors have been consistently receiving their returns. 

However, Wong says the zero-default environment is not sustainable. He sees a higher probability of defaults this year and investors should be prepared for such an eventuality.

“Investors have to brace themselves for defaults. We will be engaging our investors to prepare them for this to make sure their expectations are well managed,” says Wong.

This issue of defaults is even more relevant to Funding Societies because it was the first P2P financing platform to be launched back in February 2016. As at last November, it had raised about RM10 million from investors, which accounted for more than half of the total funds raised by the industry.

As the size of the platform’s investment portfolio grows, the chances of default get higher, says Wong. “For instance, if you have 100 loans and your default rate is 1%, it means that one loan defaulted. However, if you have 200 loans and your default rate is 1%, it means that two loans defaulted.”

He adds that defaults happen across all platforms sooner or later as they are part and parcel of the SME financing business. He expects the default rate (the rate of borrowers defaulting on their repayments) to be between 3% and 5% across the industry over the long term. 

Ng, who concurs with Wong, points out that the non-performing loan rate of local banks, in general, is nearly 3%. So, P2P financing platforms, which take on higher risks than banks, are projected to have a default rate of 3% to 5%. 

That is why diversification into different notes is important, says Ng. “We actually did a spreadsheet for our investors to show that as long as they remain diversified and constantly reinvest their returns, they can get a net return of about 8%, given our projected default rate. Many of our investors were satisfied with our presentation and have followed our advice.”