This article first appeared in The Edge Malaysia Weekly on June 3, 2019 - June 9, 2019

IT has been more than two years since Malaysia became the first Asean country to regulate the peer-to-peer (P2P) and equity crowdfunding (ECF) financing industry. Since their debut in November 2016, P2P and ECF fundraising activities have grown rapidly, tripling from RM56.74 million in 2017 to RM195.11 million last year.

As at March this year, the financing platforms had collectively raised RM344 million and benefitted close to 900 micro, small and medium enterprises (MSMEs), which are traditionally underserved by the financial system. Even so, the capital raised for local small businesses is still a long way from sufficient, with a massive funding gap of up to RM80 billion, as estimated by the Securities Commission Malaysia (SC).

On a positive note, however, the pie is big enough for more players as there is much more that can be done to help Malaysian SMEs and investors.

On May 17, the SC announced the registration of five new P2P financing platform operators and three new ECF platform operators to add to the existing six P2P and seven ECF players.

There are now 21 licensed financing platform operators (see table) in Malaysia, whose role is to facilitate fundraising activities for businesses or companies from both retail and sophisticated investors through their online platforms.

It is worth noting that the SC has revised the guidelines to facilitate property crowdfunding schemes — an alternative funding source for first-time homebuyers — which is another indication that the regulator sees  digitisation as an important tool in broadening access to financing.

The introduction of P2P and ECF financing has no doubt helped to narrow the massive funding gap by providing an alternative source of capital for MSMEs to fund business expansion, finance working capital and meet other financial requirements.

Almost half of the ECF issuers raised RM500,000 and below for each campaign to fund a particular business, while 67% of P2P financing issuers raised RM50,000 and below.

For perspective, ECF is a mechanism that enables groups of investors to fund startups by taking up stakes in the investee companies and selling the shares later, whereas P2P involves funds being lent at a fixed interest rate over a fixed tenure. According to the regulatory guidelines, P2P funding cannot be termed as loans even though their characteristics are similar.

Funding Societies Malaysia co-founder and CEO Wong Kah Meng opines that the guidelines and regulations introduced by the SC have helped to ensure the sustainability of the P2P financing industry in Malaysia, avoiding the pitfalls that the sector is facing in China.

Last July, Bloomberg reported that the number of lending platforms in China that have halted operations or come under police investigation was the highest in two years. Many investors are reported to have lost their life savings to lending platforms that went bust.

In January, Hangzhou-based Xinhehui said it would default on its RMB860 million debt to investors, days after Shanghai-based Yidai decided to close shop.

It is worth noting that all P2P financing operators in Malaysia are required to have an independent licensed trustee to manage investor and SME funds to mitigate the risk of Ponzi schemes and fraudulent transactions.

“Despite the fact that Malaysia’s P2P financing industry is only two years old, we have witnessed strong and encouraging growth,” Wong tells The Edge.

He notes that last year, a total of RM180 million was raised through the six P2P financing operators in Malaysia. Singapore raised RM650 million via such platforms in 2016, based on available data.

“Across the Asean region, the fastest growing would be Indonesia’s P2P financing industry, which disbursed a total of RM5.8 billion last year, after the industry began in 2016,” says Wong.

Funding Societies, registered as Modalku Ventures Sdn Bhd, is the largest of the six P2P financing platforms registered with the SC, with a market share of more than 50%.

It disbursed more than RM100 million in 2018, a big jump from RM17 million in 2017, and is on track to achieve its target of disbursing RM300 million this year.

Wong says the potential of crowdfunding platforms is not limited to just the digital economy space and start-ups, but can benefit all SMEs across the nation.

“There is a wide variety of SME issuers that have successfully obtained financing through P2P financing platforms. For example, wholesale and retail trading, as well as manufacturing are key sectors that have successfully raised debt financing through Funding Societies,” he says.

In terms of the amounts raised, Funding Societies has enabled micro and large SMEs to raise debt financing ranging from a few thousand to a few million ringgit.

Funding Societies has more than 700 issuers and 20,000 registered investors, and has a default rate of 1%. In the event of default, P2P platforms will help facilitate recovery and collection efforts on behalf of investors.

Becoming your own bank

André Betker, chief investment officer of FBM CrowdTech Sdn Bhd, is surprised by the increase in traction, applications and number of investors this year compared with the previous two years.

“For investors, this is almost like becoming your own bank. You can decide which businesses you want to provide financing to — either on a fixed interest basis or by taking up an equity stake. This huge opportunity was previously only accessible to millionaire investors. Nowadays, you can invest with a few hundred ringgit on basically the same terms as institutional investors,” he tells The Edge.

As for companies seeking funds, Betker says this is an unprecedented opportunity to raise funds from the public and increase awareness about themselves.

“P2P and ECF have also helped to close the funding gap here in Malaysia. Hundreds of startups and SMEs have gained access to financing through P2P financing, which would have otherwise been very difficult to obtain,” he says.

FBM CrowdTech, better known as FundedByMe Malaysia, is a joint venture between digital marketing firm Alix Global Sdn Bhd and FundedByMe, a Sweden-based company that operates the fast-growing crowdfunding platform in Europe.

Interestingly, FundedByMe Malaysia is the only registered market operator in the country with licences to operate both P2P and ECF financing platforms, namely Alixco and FundedByMe.

“We focus primarily on quality instead of quantity for Alixco and FundedByMe. On both platforms, we have raised single-digit million-ringgit amounts in Malaysia. FundedByMe Malaysia will hit more than RM10 million soon. FundedByMe as a whole — together with our European counterpart — has raised more than RM250 million,” says Betker.

The beauty of P2P and ECF is that almost any solid business can receive at least one of these two types of financing.

Generally, ECF platforms tend to focus on fundraising for fast-growing startups and SMEs. The founders of these businesses usually have ambitions to grow the business to several times the current size and often plan to list the company or sell the business in the future.

P2P tends to focus more on slowly-growing businesses, or businesses with steady cash flow to bridge a short-term financing gap.

Expanding in a controlled manner

B2B Finpal Sdn Bhd chief technology officer Chua Chin Hang acknowledges that the P2P financing industry in Malaysia is still in its infancy, compared with the US and the UK. Hence, it is important that the industry expands in a controlled manner as it forms part of the foundation for the fintech industry to build on.

“Looking at our nearest neighbour, Indonesia, the latest report from their regulator shows a worrying sign in P2P NPLs (non-performing loans). This is common because when the market is saturated with platform operators, everyone will be trying to expand as fast as possible,” he tells The Edge.

“We do not hope to see a similar situation in Malaysia as it will destroy the confidence that the public has in P2P financing,” Chua warns.

He adds that the only drawback from regulating the P2P industry is that there is no accessible central database on P2P issuers at the moment.

“This (database) is to prevent cross-borrowing. There is also no common standard for the calculation of the default rate. This is something we hope the industry players and the SC could work together to improve,” says Chua.

It is learnt that a majority of B2B Finpal’s over 100 issuers are from the fast-moving consumer goods industry. Since its inception, it has raised about RM85 million as at April this year.

“We foresee there will be another big leap in terms of total disbursed funds by the end of this year as there is still a lot of potential in the markets that has not been addressed, yet,” says Chua.

Successful examples

Start-ups that have received investments via ECF platforms include WOBB, a Malaysian mobile job search platform, as well as Revolution Fitness, which provides high-intensity class-based training programme.

Another notable example of a start-up funded by P2P financing is CHRISZEN, a beauty and skincare brand whose business is expanding fast, but which faced the challenges of limited working capital and in obtaining financing from traditional financial institutions.

“Eventually, CHRISZEN opted for Funding Societies. It successfully raised RM500,000 and has since significantly expanded its business across Malaysia as well as regionally, to Indonesia,” says Wong.

Going forward, says FBM CrowdTech’s Betker, there are many promising businesses in the digital space in Malaysia, given the monumental shift in user behaviour of people managing their life, consumption and investments through their mobile phones or laptops.

“When it comes to successful digital businesses, I would like to draw attention to ECF. We have financed rapidly growing software-as-a-service (SaaS) businesses, IT solution providers and traditional businesses seeking to digitalise their businesses via apps,” he says.

However, he stresses that it is important to keep in mind that some of Malaysia’s best and most reputable businesses are still traditional bricks-and-mortar businesses.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.