P2P financing kicks off in Malaysia

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The peer-to-peer (P2P) lending industry is off to an encouraging start. Funding Societies Malaysia, the first platform to launch, successfully raised RM320,000 for two term loan financing programmes within three weeks in March.

The loans will be used to fund the working capital of two companies - an electronics business and an automobile parts distribution business. Meanwhile, the platform aims to provide investors with an effective return of 22% and 24.91% respectively over a year.

"Most of the investors are in the 20 to 40 age group. We are quite happy with the fundraising and hope it will help us attract more borrowers and issuers," says Funding Societies CEO Wong Kah Meng.

The platform will continue to focus on raising funds for small and medium enterprises (SMEs) in the food and beverage, trading, manufacturing and construction sectors, says Wong. That is because these are the main sectors in the economy and have huge demand in terms of fundraising.

Wong says the platform aims to seal another 80 to 100 deals in the next 12 months and raise RM10 million to RM20 million. This means investors can expect more deal flows, which will allow them to invest in a variety of companies.

This month, Funding Societies established a strategic collaboration with RHB Banking Group - the first between a P2P financing platform and a Malaysian bank. Under the partnership, RHB will provide the platform with transaction banking, trustee and Know Your Customer services.

According to Wong, investors who are interested to participate in the platform should note that the credit ratings of these companies, which are derived from information collected internally, are not published on the website.

Thus, investors who register with the platform and have access to the companies' information have to evaluate the risks of the loan based on the interest rate provided by comparing it against the market rate. Investors are also provided with the financial statements of the issuers, allowing them to make an informed decision.

The platform does not publish the credit ratings because the proprietary rating system is not publicly recognised, says Wong. "Other rating agencies or platforms can have their own rates and can be different from ours. That is why we have decided not to put it online.

"Investors are able to look at the financial statements and other information of the companies, including the business nature, paid-up capital, litigation cases and payment default history, if any, and make their investment decisions based on these."

Investors should take into account the default rate of the platform, which is 2%. This is based on its 1½-year track record operating in Singapore and Indonesia, says Wong. That means investors have to deduct another 2% from their returns, in addition to the 2% fee charged by the platform.

"The 2% default rate is a historical number and can vary in the future, depending on whether defaults happen or not. Investors should definitely take into account the default rate when calculating expected returns," he says.

Wong also reminds investors to diversify their investments. "Lending Club and Prospers, which are the two largest P2P platforms globally, have conducted studies that show investors who diversify into different loans have better returns."

While the minimum investment for each loan is RM100, investors are required to deposit RM1,000 with the platform when opening an account. However, investors can withdraw the full amount at any time after that.

There are five other P2P financing platforms licensed by the Securities Commission Malaysia (SC) - Fundaztic.com, FundedbyMe Malaysia, ManagePay, B2B FinPal and EthisKapital.com. Two are expected to be launched by the middle of this year.

Kristine Ng, CEO of Peoplender Sdn Bhd, which operates Fundaztic.com, says the platform will be launched in June. "Our site's functionality development has been completed and we are doing system integration tests now. We are also working on some preliminary deals."

According to Umar Munshi, CEO of EthisKapital.com, the only shariah-compliant P2P platform in the country has the same target launch date as Peoplender. "We have just concluded the shariah pronouncements for the contracts, which will be reviewed by the SC," he says.