All You Need To Know About P2P Lending In Malaysia
Intrigued by the high returns promised by peer-to-peer (P2P) financing platforms, but sceptical about what they really entail? We’ll try to demystify P2P lending for you, as well as help you decide if you should (or should not) invest in it.
What is P2P lending?
P2P lending is when investors lend money to individuals and businesses through P2P financing platforms. This allows borrowers to obtain loans without having to go through the strict requirements of banks.
P2P lending generally promises higher returns than traditional investments, but investors take on higher risk as well. Like traditional financial institutions, P2P lending platforms calculate interest rates based on the risk profile of the borrower.
Pros: what are the advantages of P2P lending?
High returns. Your return on investment with P2P lending can range from 10% to 18%. These are pretty high returns when compared to other investment options:
- Fixed deposits: Fixed deposits in Malaysia offer interest rates of 3% to 4% per annum.
- Unit trusts: Only 22 funds out of the 300+ unit trust funds available on Fundsupermart reported an annualised return of over 10% in the past year.
- EPF: The Employees Provident Fund (EPF) declared a dividend rate of 6.15% for Conventional Savings and 5.9% for Shariah Savings for 2018.
- Stock market: The S&P 500 Index (a stock market index that tracks the 500 largest US companies; often used as a benchmark among American and global investors) has an average annual return of around 8% since 1957.
Monthly returns. With P2P lending, you’ll generally start receiving monthly repayments a month or two after your initial investment, which is great 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 lending, although platforms like B2B Finpal and Funding Societies require an RM1,000 initial deposit.
Control. You have direct control over which businesses to invest in. Don’t want to invest in education-related businesses, or only want to invest in Shariah-compliant businesses? It’s your call.
Cons: what are the drawbacks of P2P lending?
High risk. Businesses who apply for loans with P2P lending platforms tend to be startups or small businesses that aren’t well established – and startups are notorious for their high failure rate. These businesses tend to have lower credit ratings that make them ineligible for bank loans. When you invest with P2P lending platforms, you’re exposing yourself to higher credit risk, so be prepared for the possibility that a borrower will default on their loan.
You could lose your entire principal. If borrowers default on their payments, you could lose the principal you have invested. Some platforms may take legal action against borrowers or work with them to propose alternative repayment solutions. Even so, your repayments are not guaranteed as you are an unsecured creditor.
To mitigate these risks, it’s best to diversify your P2P portfolio. Don’t invest your entire portfolio in a single business. Instead, consider diversifying your investments across different industries, risk ratings and even platforms. This way, you lessen the impact of a default will have on your portfolio.
Is P2P lending safe?
P2P lending is regulated by the Securities Commission Malaysia (SC). Before you start investing on a P2P financing platform, check if it has been licensed under the SC.
There are strict guidelines on who these platforms can offer loans to. SC-licensed platforms are required to conduct background checks on 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 hand it over to a third-party trustee to manage. This is to minimise the possibility that P2P platforms will mismanage your funds. If the platform you invest with closes, the trustee will ensure that your ongoing loans still remain payable.
Do I have to pay tax on my interest returns?
Yes, you do. If you are a Malaysian tax resident, you need to declare the interest that you have earned when you file your taxes.
Comparison of P2P financing platforms in Malaysia
Here’s how the P2P financing platforms in Malaysians compare:
|Name||Launched||Default rate||Minimum investment||Fees|
|CapitalBay P2P financing||currently in pilot launch||0%||not stated||not stated|
|CapSphere||launching in Q1 2020 but accepting prelaunch registration||n/a||RM1,000 initial deposit, RM50 per campaign||1% to 2% p.a. depending on tenure|
|B2B Finpal||2018||0.18%||RM1,000 initial deposit, RM100 per campaign||30% of interest collected|
|Nusa Kapital||2017||not stated||RM500||10% of return|
|AlixCo||2017||not stated||RM500||1% of total repayment|
|MicroLEAP||currently in beta||not stated||RM50||1% – 2% of first monthly repayment of each campaign|
|Funding Societies||2017||1.26%||RM1,000 initial deposit, RM100 per campaign||Business term financing: 2% p.a. of each repayment
Invoice financing: 15% of interest repayment
|Fundaztic||2017||3.52%||RM2,000 initial deposit (if using “Smart Invest” feature); otherwise no initial deposit required, RM50 per campaign||RM0 – RM3 per investment transaction
1% of monthly repayments
|QuicKash||2017||0%||RM100||1.35% - 1.50% per repayment|
It’s best to choose P2P platforms that are reputable. As of 2018, Funding Societies, B2B Finpal and Fundaztic have the biggest market shares in Malaysia. Funding Societies takes the lead with over RM2.06 billion funds raised to date.
In terms of number of investment deals available, Funding Societies and Fundaztic seem to come up top. However, Fundaztic has a much higher default rate (3.52%) than Funding Societies (1.26%). This suggests that Fundaztic is taking on higher-risk loans, which could translate into higher interest returns – if borrowers don’t default on their payments.
Does P2P lending have a place in your portfolio?
If you can stomach the risk that comes with P2P lending, it may be worth including in your portfolio for its high returns. As it’s a high-risk investment, try to keep it to just a fraction of your portfolio. Balance out your portfolio with other lower-risk investments, such as bonds and retirement-scheme savings.