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P2P: Crafting Digital Avenue For SMEs and Investors

Book with title P2P peer to peer lending on a table.

2016 was a meaningful year for the financial technology industry. Six peer-to-peer financing platform operators had been granted licence to operate by the Malaysian Security Commission (SC). B2B FinPAL, Ethis Kapital, FundedByMe Malaysia, ManagePay Services, Modalku Ventures and Peoplender were the first authorized peer-to-peer platform in Malaysia, which made Malaysia the first country in ASEAN to regulate P2P financing.

P2P financing is a web-based innovation that extends the opportunity for entrepreneurs and small business owners to unlock capital from a pool of individual investors through an online digital platform. The P2P business model is different from the traditional banks. P2P platforms do not lend their funds. They are platforms that match borrowers who are seeking loans with investors. These platforms generate revenue from origination fees charged to borrowers, from a portion of the interest charged to investors as servicing fees, as well as additional charges such as late fees. Investors generate revenue from the remaining portion of the interest that borrowers pay on the loan. Borrowers benefit from a streamlined application process, quick funding decisions and 24/7 access to the status of their loan.

Understanding P2P
It is important for investors and borrowers to understand that P2P platforms only operate as matchmakers, pairing borrowers with investors. There is more innovation in credit modelling and underwriting in P2P lending than with traditional lending. Many P2P platforms incorporate a wide range of data elements to move beyond traditional credit scores and reach a broader spectrum of potential customers. Risk-based pricing, return-seeking investors, and the desire of investors to diversify their portfolios drive acceptance in lower credit tiers. Investments vary and can be set up so that investors have the flexibility to invest 100% of their investment in one loan or diversify and make partial investments in multiple loans. The platforms offer automated loan selection where investors can set predefined criteria for the loans that they wish to invest in. The system would match the investors with the loans of their interest.

The P2P process is more simplified and streamlined. Borrowers can log on to the website to get real-time updates throughout the approval and funding processes. Once a borrower has obtained approval, borrower can track the percentage of the loan that has been funded. Besides that, they can also check the interest rate online. Plus, the platforms also provide effective customer support and updates via email. This has made investing and borrowing more simple and efficient.

Adhering to the guidelines
Although the P2P platforms are relatively new, they are still subject to lending and securities laws and regulations, stipulated by Security Commission’s Alternative Funding Guidelines. According to the Security Commission’s guidelines:

  1. Ensure there is an efficient and transparent risk scoring system in place relating to the investment note or Islamic investment note.
  2. Carry out risk assessment on prospective issuers intending to use its platform.
  3. Carry out investor education programmes.
  4. Ensure the issuer’s disclosure document lodged with the P2P operator is verified for accuracy and made accessible to investors through the platform.
  5. Inform investors of any material adverse change to the issuer’s proposal.
  6. Ensure that it does not engage in any business practices appearing to SC to be deceitful, oppressive or improper (whether unlawful or not).
  7. Obtain and retain the self-declared risk acknowledgement forms from the investors prior to them investing on P2P platform.
  8. Have in place processes to monitor anti-money laundering requirements.
  9. Have in place processes or policies to manage default by issuers including using its best endeavours to recover amount outstanding to investors.
  10. Ensure that its rules set out to rate of financing that is not more than 18 per cent per annum and consult the SC should the operator wish to increase the percentage.

The scope of risk assessment by P2P operators should include taking reasonable steps to conduct background checks on the issuer to ensure fit and properness of the issuer, its board of directors, senior managements and controlling owner. The operator also needs to verify the business proposition of the issuer and carry out assessment on the issuer’s creditworthiness.

Regulated by the Security Commission, P2P operators are also required to establish a framework which sets out policies and procedures to manage conflicts of interest. In this context, P2P operators are prohibited from providing financial assistance to investors to invest in investment note or Islamic investment note executed or offered, on or through its platform. It is also prohibited from providing any funding to issuers or investing in any of the investment note or Islamic investment note executed or offered, on or through its platform.  

Whilst its presence in Malaysia is relatively new, the emergence of P2P would provide an alternative for SMEs and entrepreneurs to obtain greater access to capital markets and raise funding. It is also an avenue for investors to diversify their investments. Although there are speculations that P2P could potentially disrupt the banking and financial services industry, the impact has yet to be seen. However, this is the opportunity for P2P to complement the banking and financial services industry in benefitting the SMEs and entrepreneurs.

References;

  1. Malaysia SME; 26 November – 9 December 2016
  2. https://fundingsocieties.com/blog-detail/151/funding-gap-smes-in-malaysia
  3. http://www.thestar.com.my/business/business-news/2016/10/12/what-awaits-in-peer-to-peer-lending/
  4. http://www.capitalmarketsmalaysia.com/new-shot-at-funding-for-creditworthy-smes/
  5. http://www.thestar.com.my/business/business-news/2015/10/29/sc-to-unveil-p2p-lending-framework-next-year/
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Paul Conway
Paul Conway
My role as CEO is to take the business to the next stage of growth. I already have a fantastic and growing team. There are opportunities with payments, banking channels, additional software, cloud deployment and with over 300,000 customers in South East Asia and a publicly listed majority shareholder in Censof holdings, the opportunity and tools for growth are very real.

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