What You Need To Know About P2P Lending In Malaysia
Intrigued by the high returns promised by peer-to-peer (P2P) lending 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 online 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% (according to data provided by the platforms themselves). These are pretty high returns when compared to other investment options:
- Fixed deposits: Fixed deposits in Malaysia offer interest rates of around 1.8% per annum.
- Unit trusts: Most unit trust funds available on FSMOne reported an annualised return of under 10% in the past three years.
- EPF: The Employees Provident Fund (EPF) declared annual dividend rates of 6.4% and under in the past five years.
- Malaysian stock market: The KLCI (the stock market index that tracks the 30 largest Malaysian companies) has an of -3.4% over the past three years.
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 some platforms may require an initial RM1,000 initial.
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 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 lending 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 investment 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 lending platforms in Malaysia
At the time of writing, there are 11 P2P lending platforms in Malaysia. Here’s how they compare:
|Name||Default rate||Minimum investment||Fees||Average net returns|
|AlixCo||0.36%||RM500||0.35% to 2% of repayment||12% p.a.|
|B2B Finpal||3.04%||RM1,000 initial deposit, RM100 per campaign||30% of interest earned||10.9% p.a.|
|CapitalBay P2P Financing platform||0%||RM10,000||10% to 30% of interest earned||8.3% p.a.|
|CapSphere||0%||RM200 initial deposit, RM50 per campaign||1 to 2% of monthly repayments||not stated|
|Cofundr||not stated||RM1,000 initial deposit, RM100 per campaign||For investments that are 12 months or under: 20% of interest|
For investments that are over 12 months: 2.0% p.a. on principal
|MicroLEAP||0%||RM50||2% of first monthly repayment of each campaign||not stated|
|MoneySave||not stated||RM5||Up to 15% of interest payment; up to 50% on prepayment||not stated|
|Nusa Kapital||not stated||RM500||10% of returns||not stated|
|Funding Societies||3.27%||RM100 initial deposit, RM100 per campaign||Business term financing: 2% p.a. of each repayment|
Accounts receivable financing: 15% of interest earned
Accounts payable financing: 30% of interest earned
|Fundaztic||8.72%||RM2,000 initial deposit (if using “Smart Invest” feature); otherwise no initial deposit required, RM50 per campaign||Monthly repayments: 2% of repayment amount|
Bullet repayments: 1% of repayment amount
|27.88% since 2017|
|QuicKash||1.38%||RM100||1.35% - 1.50% per repayment||not stated|
In terms of the number of investment deals available, Funding Societies and Fundaztic seem to come up top. However, Fundaztic has a higher default rate (8.72% since inception; 1.94% in the past year) than Funding Societies (3.27% since inception). This could suggest that Fundaztic is taking on higher-risk loans, which may translate into higher interest returns – if borrowers don’t default on their payments.
Does P2P lending have a place in your portfolio?
P2P lending is a high-risk investment option. And thanks to the coronavirus pandemic, more businesses may have trouble repaying your loans, which means that could be a higher chance of you losing your investment capital.
But 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.
This article was first published in 2019 and has been updated for freshness, accuracy and comprehensiveness.