As the Malaysian government pushed to enhance access to financing for entrepreneurs and small and medium enterprises (SMEs), Securities Commission Malaysia started to grant more peer-to-peer (P2P) financing platform licences last year. But the COVID-19 pandemic has thrown the industry off course.
As a result of the restrictions on businesses and other economic activity, hundreds of thousands of people have lost their jobs, and economists are warning of more headwinds to come.
Some P2P lenders report a decline in the number of financing deals. Others have been forced to postpone the launching of new investment notes, while yet others are tightening their credit assessment process. And with the issuers of the investment notes mostly SMEs, P2P lending platforms may see more debt restructuring, or even defaults, ahead.
The P2P financing space in Malaysia had been gaining momentum, with five more operators entering the market last year to bring the total number of platforms to 11. In 2019, the industry saw a 131.1% jump in total financing to RM418.63 million, from RM181.16 million a year ago.
Even before the coronavirus crisis took hold, however, there were already developments that portended a slowdown.
“We have already been observing signs of a slowing economy for certain pockets and sectors of the economy,” Wong Kah Meng, co-founder and CEO of Funding Societies Malaysia, told DealStreetAsia.
Wong heads the Malaysian arm of Singapore-based, Southeast Asia-focused P2P financing platform operator, backed by Golden Gate Ventures, Sequoia Capital, and Softbank Ventures Asia, among others.
He had noticed a general lengthening of payment terms across industries, and also SMEs withholding expansion plans, resulting from the economic uncertainty driven by the trade war and disruptions to global supply chains. As such, disbursements are expected to slow this year, against the platform’s forecast of RM500 million.
“We anticipate that [the pandemic] would have a negative impact on businesses across most industries in the short term, particularly businesses that operate predominantly offline or rely on physical reach, and hence the P2P industry by extension. Hence, we do expect total disbursement in the P2P financing industry to fall below the January estimates [of RM500 million],” he said.
Wong said Funding Societies has reviewed its risk assessment measures and shifted its focus towards SMEs with growth opportunities, particularly those within the defensive and counter-cyclical industries. Meanwhile, there are more SMEs requesting deferment in repayments.
“We have since started offering deferment or restructuring programs to qualified SMEs as a means to assist them during this trying time,” he said.
Still, Funding Societies, which has more than 60% of market share in the industry, foresees an uptick in defaults in the coming months. “We have always maintained, since our launch in February 2017, a long-term default rate range of between 3% and 5%,” Wong added.
Separately, Crowd Sense Sdn Bhd, which focuses on insurance premium financing, has postponed the launching of its platform, which was scheduled for April. The company runs Cofundr, which obtained its license last year, and plans to launch investment notes offering returns up to 12% per annum.
“Due to the [Malaysia’s Movement Control Order], we have to postpone it. We hope to launch our first investment note this month, subject to approval from the SC,” its CFO Bryan Leong told DealStreetAsia.
Another platform operator, microLEAP, which provides both Islamic and conventional micro-financing, said the pandemic outbreak has affected its credit assessment against potential issuers.
“We have tightened our credit risk requirements with a preferential bias towards businesses that have e-commerce or online presence. The last thing we want is to host an investment note from an issuer that may not exist in two months’ time. This would be bad for our investors and increase our default rate,” founder and CEO Tunku Danny Nasaifuddin Mudzaffar told DealStreetAsia. “We have to take a closer look at the type of industry the business is in and how much funds they have to weather the storm.”
Still, the platform aims to have even more Islamic investment notes in the coming weeks following its recent partnership with boutique Shariah advisor, Masryef Management House. “There is a lack of Islamic investment notes in the market and I believe this will be the main driver for our growth in the coming months and for the rest of the year,” Danny said.
Still nascent industry
P2P lenders typically match borrowers with individuals or companies who want to lend and earn interests through an online platform. In Malaysia, through P2P platforms, an investor may invest in an investment note or an Islamic investment note issued by businesses or companies for a specified tenure with the expectation of a predetermined financial return. Such platforms enable financing for working capital or capital for growth for the underserved or ‘unbankable’ micro, small and medium enterprises (MSMEs). The industry has begun to gain popularity in Malaysia and saw tremendous growth in total financing over the past three years.
Malaysia is also the first country in Southeast Asia to regulate P2P financing, in April 2016. In November of that year, six operators registered. Only last year were five more added to the list.
SC data showed there were 9,989 successful campaigns that raised a total of RM738.99 million as of March 31, 2020, since 2016. But it is still far from the estimated gap of RM 21.8 billion in SME funding in Malaysia to be filled by the alternative financing sector, according to a report by Bank Negara, published in 2016.
“Compared to other countries, Malaysia is at an early stage. In 2018, Malaysia’s alternative finance per capita volumes stood at $1.96 compared to Thailand’s $0.45, Philippine’s $1.09, Indonesia’s $5.42 and Singapore’s $88.61. In contrast, the developed nations stood at almost 100 times more at $186.88 for the US and $155.93 for the UK,” CapBay executive director Darrel Ang told DealStreetAsia, citing a report by Cambridge Centre for Alternative Finance published last month.
Elsewhere, however, the industry has been plagued with liquidity issues and delinquent loans. In the UK, the collapse of high-profile P2P platforms such as FundingSecure and Lendy left investors millions of dollars out. Early this month, RateSetter halved its interest payout for investors as the pandemic caused a sharp increase in expected defaults, the Financial Times reported.
In China, the industry collapsed as the government tightened regulations after a wave of defaults and fraudulent practices by platform operators.
Last month, DealStreetAsia reported that Indonesia’s scores of P2P lending firms are bracing for a brutal cull amid rising defaults, wary lenders and a crippled micro-business segment.
In Malaysia, the SC said the overall default rate is approximately 4%. Chairman Datuk Syed Zaid Albar said last month the regulator is working actively with platform operators to monitor the situation. Proactive steps taken include adapting credit assessment and credit limits and offering reschedule and restructuring (R&R) measures.
Nevertheless, in microLEAP’s Danny’s view, regulation in Malaysia a huge step in bringing credibility and order to the market.
“It also stops illegal operators coming into this space, so Malaysia has definitely been leading the way in this regard,” he said. “We still have a long way to go if you compare us to the size of the P2P markets in China, India and Indonesia. Although their accelerated growth is commendable, there have been a lot of problems such as illegal and unlicensed operators mushrooming everywhere, high default rates causing massive losses to investors. In that context, Malaysia has done an incredible job in building a safe and trusted P2P financing market,” he said.
Education, governance needed
Even so, the lack of transparency, relatively weak liquidity, and weaker governance compared to other financial instruments are issues of concern for investors. Critics doubt whether P2P platforms are efficient, competent allocators of capital.
One veteran securities research analyst pointed out that some investors may not fully understand the risks of investing in such financial instruments.
“Lending money to someone who couldn’t get a loan from a bank doesn’t sound like a good idea, especially during these times of uncertainties,” one analyst of a local mutual fund told DealStreetAsia.
“Unless the clients are Lazada/Shoppe merchants and you have their activity and payment data, I doubt that P2P platforms have superior credit assessment capabilities than the well-funded banks and their professional credit teams,” he argued.
However, he acknowledged that P2P financing provided MSMEs with convenient, short-term loans, and is a far better option than illegal moneylenders.
Industry players say investor education and more collaborations are key.
Funding Societies’ Wong said: “Such partnerships may include government-mandated bank referral schemes such as referral of unbankable SMEs in need of financing to alternative financing platforms, joint-educational programs to promote stronger awareness surrounding alternative financing solutions, and the shift of responsibility for the provision of financing from the public sector towards the private sector.”
“Many alternative financing platforms performed well after the 2008 financial crisis, because SMEs found themselves in a cash crunch, and banks were unwilling to lend. On the other hand, investors were seeking higher returns on their cash as the bank deposit rate dropped as central banks worldwide cut benchmark rates. Hence it is an opportune time for P2P financing platforms, but there needs to be more awareness of these as both a platform for borrowing and investing,” CapBay’s Ang said.
“In the digital economy, data is paramount, and it is this data that we utilise for faster processing and credit analysis. Collaboration between companies also helps P2P platforms generate leads, and this, in tandem with market education, will help the industry grow further,” he added.
P2P players eye opportunities, offer higher returns
Ultimately, P2P lenders are seeing opportunities, as demand for alternative means of financing rises.
For one, with Malaysia’s central bank cutting its key interest rate for the third time this year to 2.00% last week, its lowest since 2009, P2P lenders expect investors to turn to the platforms in the hunt for higher returns.
“Looking back at the 2008 Global Financial Crisis, with low-interest rates and a bank credit crunch, it resulted in the growth of P2P platforms. Investors are looking to generate higher returns on their cash while staying away from risky assets (e.g. stock market). The Overnight Policy Rate cut has diminished fixed deposits returns and investors are looking for higher-yielding assets,” CapBay’s Ang said.
At the same time, a squeeze in banks’ net interest margins (NIM) owing to the rate cut, coupled with heightened default risks due to a dip in economic growth, means tighter credit policies. “Banks are less willing to lend to businesses, especially new customers as they don’t have an existing history. As a result, businesses will turn to alternative financing solutions to meet their needs,” Ang explained.
The SC has also introduced several initiatives to lend support to the industry. It lifted fundraising limits on Equity Crowdfunding (ECF) platforms and allowed ECF and P2P platforms to operationalise secondary trading, with immediate effect.
Also, until September 30, 2020, the state’s co-investment fund, administered by the SC, has increased its funding matching ratio from 1:4 to 1:2 for eligible ECF and P2P campaigns, to provide additional liquidity into the alternative fundraising space.
“The fact that SC now allows secondary note trading is huge for the P2P market,” said microLEAP’s Danny, pointing out that the lack of liquidity is a major problem in the market. “We will have a more robust and liquid market and at the same time bring even more P2P investors into the fold.”