02 September 2018

[Crowdfunding] What is P2P financing? And, what's in it for investors?

Peer-to-peer (P2P) financing is a web-based innovation that broadens the ability of entrepreneurs and small business owners to unlock capital from a pool of individual investors in small amounts and provides a quick turnaround time to obtain financing for their businesses, through an online digital platform. P2P Financing is already a well-established concept in the USA, UK, and China, amongst many other countries.

Instead of the traditional ways of sourcing funds from financial institutions (which normally takes longer processing time and stricter rules), P2P financing serves as an alternative financing method for SMEs to raise funds for working capital or business expansion.

How does P2P work?

P2P operator facilitates businesses or companies to raise funds from both retail and sophisticated investors through an online platform. Through the SC registered P2P platform, 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.

How does an issuer (company) raise funds through P2P?
When an issuer applies for funding, the P2P operator will evaluate the issuer’s suitability, among others, by assessing its capacity to repay through credit history checks and analysis of any alternative data.

These factors allow the P2P operator to assess and assign a risk score to the investment note or Islamic investment note issued by such issuer. Such issuance will then be hosted on the P2P platform where investors will then select and invest accordingly.

How does an investor invest through P2P?

In general, upon understanding and analysing the information disclosed by issuers concerning its business, financing purpose, and financial information; credit assessment; repayment schedule and risk information published on the P2P platform, an investor will then make an informed decision on the issuers and amount they wish to invest in.

"For example, Issuer X issues an investment note which seeks to raise RM100,000. The investment note is rated “A” with a rate of return 0.5 percent per month for a 12-month period. 

Therefore, the investor that chooses to invest in Issuer X in such amount he so decides, he will receive monthly repayments (principal and returns) for the duration of the investment note."

Anyone also can invest in P2P?
Yes. P2P investment opportunities are open to all investors. Retail investors are encouraged to limit their investments exposure on any investment note or Islamic investment note executed or offered on or through a P2P platform to a maximum of RM50,000 at any one time in order to manage their risk exposure.

However, retail investors should be aware and cautious of the risks of investing in investment note or Islamic investment note beyond the advised RM50,000 threshold.

Good. What's the interest/return like?

Depending on the risk scoring of the issuer, an interest rate from 8% up to 18% is expected from an investment note. However, please take note that the higher interest rate offered means the higher risk of default as well. Anyway, the average simple interest rate offered by most of the issuers are within the range of 10% to 14% per annum. It's pretty attractive to most investors.

Is it risky to invest in P2P notes?
The only risk of P2P investing is the default risk of the issuer. So, the credit assessment performed by a P2P operator is crucial to determine the risk and published relevant information to investors to make an informed decision, whether or not, to invest in that particular note.

Considering that the primary objective of introducing market-based financing is to help build small businesses which in turn help to spur and promote the growth of the economy, hence the P2P operator is NOT permitted to facilitate individuals seeking personal financing.

In Malaysia, ONLY locally registered sole proprietorships, partnerships, incorporated limited liability partnerships, private limited and unlisted public companies can raise funds via a P2P platform. Unlike some other countries, Malaysia has more stringent rules in place, hence relatively safer for investors.

Trust Account?
Yes. Similar to unit trust investment structure, a P2P operator must ensure that monies obtained from investors and issuers are placed in a third party trust account until the appropriate disbursements are required to be made. This is to avoid the misappropriation of investors' monies by P2P operators.

List of Approved P2P Operators as at Aug 2018 May 2019:
  1. B2B Finpal Sdn Bhd (B2B Finpal)
  2. Ethis Kapital Sdn Bhd (Nusa Kapital)
  3. FBM Crowdtech Sdn Bhd (Alixco)
  4. Modalku Ventures Sdn Bhd (Funding Societies with referral code: jf95qsa4)
  5. Peoplender Sdn Bhd (Fundaztic with referral code: HndCCl)
  6. QuicKash Malaysia Sdn Bhd (QuicKash) 
  7. Bay Smart Capital Ventures Sdn Bhd - new
  8. Capsphere Services Sdn Bhd - new
  9. Crowd Sense Sdn Bhd - new
  10. MicroLEAP PLT - new
  11. MoneySave Capital PLT - new

Preliminary Peer-to-Peer Key Statistics (as of June 2018)

In our next article, we will blog about each of these P2P platforms in Malaysia. Stay tune!

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