Guide To P2P Lending In Malaysia (2020)
Intrigued by the high returns promised by peer-to-peer (P2P) lending platforms, but skeptical of what they actually entail? We’ll try to demystify P2P lending for you, as well as help you decide whether you should (or shouldn’t) invest in it.
P2P loans consist of lending money to individuals and businesses through online platforms. This allows borrowers to get loans without having to go through the strict requirements of banks.
P2P loans generally promise higher returns than traditional investments, but investors also take higher risks. Like traditional financial institutions, P2P lending platforms calculate interest rates based on the risk profile of the borrower.
High returns. Your return on investment with P2P loans can range from 10% to 18% (depending on the data provided by the platforms themselves). These are quite high returns compared to other investment options:
- Fixed deposits: Fixed deposits in Malaysia offer interest rates of around 2% per annum.
- Unit trusts: Most of the unit trust funds available on Fundsupermart have reported an annualized return of less than 10% over the past three years.
- EPF: The Employee Provident Fund (EPF) declared a dividend rate of 5.45% for conventional savings and 5% for Sharia savings for 2019.
- Malaysian Stock Exchange: The KLCI (the stock market index that tracks the 30 largest Malaysian companies) has an annualized return of -1.1% over the past five years.
Monthly returns. With P2P loans, you will usually start receiving monthly repayments a month or two after your initial investment, which is ideal if you like consistent returns on a monthly basis.
Low initial investment. You need as little as RM50 to RM100 to start investing in P2P loans, although some platforms may require an initial initial of RM1,000.
Control. You have direct control over which companies to invest in. Don’t want to invest in education related businesses or just want to invest in Sharia compliant businesses? It’s your call.
High risk. Businesses applying for loans with P2P lending platforms tend to be startups or small businesses that aren’t well established – and startups are known for their high failure rate. These companies tend to have lower credit scores which make them ineligible for bank loans. When you invest with P2P lending platforms, you put yourself at higher credit risk, so be prepared for the possibility that a borrower will default on their loan.
You could lose all of your capital. If borrowers default on their payments, you could lose the principal you invested. Some platforms may take legal action against borrowers or work with them to provide alternative repayment solutions. Even so, your repayments are unsecured because you are an unsecured creditor.
To mitigate these risks, it is best to diversify your P2P portfolio. Don’t invest your entire portfolio in one company. Instead, consider diversifying your investments across different industries, risk ratings, and even platforms. This way you decrease the impact of a default on your portfolio.
P2P loans are regulated by the Securities Commission Malaysia (SC). Before you start investing in a P2P lending platform, check if it has been authorized under the SC.
There are strict guidelines on who these platforms can offer loans to. SC Approved Platforms are required to perform background checks of all potential issuers to verify their business proposition and assess their creditworthiness. P2P platforms reject around 70% of potential issuers.
Licensed platforms don’t actually hold your money, but instead entrust it to a third-party trustee to manage it. This is to minimize the possibility that P2P platforms will not manage your funds. If the platform you are investing with closes, the trustee will ensure that your outstanding loans remain due.
Yes you do. If you are a Malaysian tax resident, you must report the interest you earned when filing your taxes.
Here’s how P2P lending platforms in Malaysia stack up:
|Last name||Default rate||Minimum investment||Fees|
|AlixCo||2.59%||RM500||0.35% -2% of reimbursement|
|Finpal B2B||3.15%||Initial deposit of 1000 RM,|
RM100 per campaign
|30% of interest earned|
|CapitalBay P2P funding platform||0%||10,000 RM||10% to 30% of interest earned|
|CapSphere||not indicated||Initial deposit of 1000 RM,|
RM50 per campaign
|Up to 2% of monthly repayments|
|Cofundr||not indicated||Initial deposit of 1000 RM, |
RM100 per campaign
|For investments of 12 months or less: 20% interest|
For investments over 12 months: 2.0% pa on the principal
|MicroLEAP||not indicated||RM50||2% of the first monthly repayment of each campaign|
|Finance companies||1.22%||Initial deposit of 1000 RM,|
RM100 per campaign
|Commercial term financing: 2% per annum of each repayment|
Financing of accounts receivable: 15% of interest earned
Accounts Payable Financing: 30% of interest earned
|Fundaztic||10.42%||Initial deposit of RM2,000 (if you use the “Smart Invest” function); |
otherwise no initial deposit required, 50 RM per campaign
|Monthly repayments: 2% of the repayment amount|
Refunds per bullet: 1% of the refund amount
|QuicKash||1.34%||RM100||1.35% – 1.50% per reimbursement|
It is better to choose reputable P2P platforms. In 2018, finance companies, B2B Finpal and Fundaztic held the largest market shares in Malaysia. Finance companies are taking the lead with over RM 4.97 billion in funds raised to date.
In terms of the number of available investment transactions, finance companies and Fundaztic seem to be leading the way. However, Fundaztic has a much higher default rate (10.42% since inception; 3.26% last year) than finance companies (1.26%). This suggests that Fundaztic is taking higher risk loans, which could translate into higher interest yields – if borrowers don’t default on their payments.
On the other hand, if you want to invest in Sharia-compliant businesses, consider Islamic microLEAP, although the number of investments available may be limited.
P2P loan is a high risk investment option. And thanks to the coronavirus pandemic, more businesses may struggle to repay your loans, which means there could be a greater chance of losing your investment capital.
But if you can bear the risk associated with P2P loans, it may be worth including in your portfolio for its high returns. Since this is a high risk investment, try to limit it to a fraction of your portfolio. Balance your portfolio with other low-risk investments, such as bonds and retirement savings.
This article was first published in 2019 and has been updated for its freshness, accuracy and completeness.
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