Friday 29 Mar 2024
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This article first appeared in Personal Wealth, The Edge Malaysia Weekly on February 4, 2019 - February 10, 2019

Malaysia’s peer-to-peer (P2P) financing sector is forecast to stay healthy in 2019, according to industry players. The impending economic slowdown could see more small and medium enterprises (SMEs) turn to alternative lending channels such as P2P financing and this bodes well for the industry.

Funding Societies Malaysia CEO Wong Kah Meng says SMEs may find it more difficult to get financing from banks if they are planning to expand their business. “We foresee that alternative debt financing platforms will become an increasingly important avenue for SMEs to obtain financing to support their business growth as well as to tide them over during these challenging times.”

Kristine Ng, director and founding CEO of Fundaztic, believes that the industry is well poised for exponential growth, as seen in the last two years. She says existing players will intensify their efforts to drive their business forward while new players are likely to join the industry in the middle of the year.

“The growth of the industry will be vital to spur the economy as we expect traditional financial institutions to further tighten on credit. Just because we are an alternative financing option, it does not mean we do not have stringent criteria,” says Ng.

“The major difference is the decision as to whether an SME gets funded or not lies with the general public. It is their risk appetite that determines whether the funding is successful or not.”

Wong says the government too recognises the importance of P2P financing. For instance, it announced an allocation of RM50 million to co-invest in equity crowdfunding and P2P financing campaigns during the tabling of Budget 2019 in parliament last November.

“This initiative will not only help address the SME financing gap but also improve efficiency by leveraging the technological advantage of P2P financing platforms as well as their due diligence and risk management expertise,” he adds.

Ng agrees, saying that the purpose of funding SMEs is to assist those who are so near their funding goal but have not achieved it yet. “The government, as investors, would earn returns and be able to reinvest in other SMEs on a continuous basis,” she adds.

The main challenge Ng foresees this year will be increasing the awareness and understanding of P2P financing, which will impact investors’ acceptance and trust in P2P financing. This may cause some investors to experience mismatched expectations and pull out without realising that having a small portfolio increases risks instead of building resilience.

“There are times investors ‘forget’ that they are investing in the debt financing of SMEs and defaults will happen no matter how careful the platform has been with the credit processes. There are too many factors that impact the local SMEs’ ability to repay promptly, from weather conditions to the state of the global economy,” says Ng.

“The challenge is to be able to convince investors to keep on going with their investments until they build a resilient portfolio. If they continue reinvesting their returns, their capital works even harder and they can enjoy the compounding effect, which ensures that their portfolio will be very profitable in the long run.”

The tenures of note issuances this year is expected to be similar to those of last year. Wong says Funding Societies has focused on addressing the short-term financing needs of SMEs and will continue to do so this year. At Fundaztic, Ng says investors prefer 12-month notes. But instead of shortening the tenure, which impacts cash flow, it is looking to develop a secondary market.

“Investors who need to exit earlier than the committed funding tenure can put up their notes or portfolio for ‘sale’ to other investors on the platform. This flexibility would counteract the concerns of being committed over a perceived long funding tenure because of the ability to exit at any time, based on certain terms and conditions,” she says.

“Fundaztic is ready to launch the secondary market and is awaiting guidelines from the Securities Commission Malaysia. We believe this will be a game changer, especially in times of economic uncertainty and volatility as it will encourage investors to continue investing. Also, the SMEs hosted will have a stronger chance of obtaining funding for growth.”

Malaysia is the first Asean country to regulate P2P financing, which not only makes the industry more structured but also provides better protection for investors. Ng and Wong believe that this has driven the growth of the industry as well as made sure that the proper safeguards are in place.

Wong believes that alternative investments such as P2P financing provide an interesting opportunity for investors during such times as the asset class is less correlated to traditional asset classes such as stocks and bonds. “Investors should take a diversified portfolio approach to managing their investments,” he says.

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