[Last updated: 10 July 2019]
What is Peer-to-Peer Lending?
Peer-to-peer lending, also known as P2P lending. It was introduced in Malaysia since 2016.
P2P lending essentially refers to giving loans to individuals or businesses through an online marketplace that matches between the lenders and borrowers.
Borrowers are typically individuals seeking for personal loans or companies sourcing funds for business purposes.
Lenders are generally investors who seek to earn passive income in the form of interest from the loans lent out to the borrowers.
The P2P lending platform facilitates the loan transactions by connecting the borrowers directly to the lenders. It earns money by charging origination and servicing fees.
The loan offerings on P2P lending may differ in terms of the tenure, loan size and interest rate focusing on different target markets. But all P2P lending platforms, in essence, operate based on the same principle.
It doesn’t involve a financial intermediary such as a bank or financial institution in contrast to the traditional borrowing and lending activities.
Pros and Cons of P2P Lending
There’re various reasons why P2P lending is so captivating to both the borrowers and lenders. Because such business model provides a win-win formula to both parties that fit their interests perfectly. But the model also underlies some risks and downside that both parties may fail to observe.
Let’s look into some of the pros and cons of P2P lending from both borrower’s and lender’s perspective:
Borrowers – Pros:
a) Simpler and speedy process
P2P lending eliminates the needs of stringent and cumbersome processes that the banks or financial institutions practice. Therefore, borrowers can raise funds conveniently with ease.
b) Lower eligibility criteria
It also generally has lower credit requirements as compared to the banks in particular to borrowers who do not possess good credit scores.
c) Lower interest rates
Besides, borrowers have the opportunities to bargain for competitive interest rate when the lenders bid for the loans.
d) Loans are unsecured
Not to also mention that collateral is not required for the borrowers to get loans through P2P lending.
e) No prepayment penalty
Lastly, the borrowers are not subject to significant penalty if they decide to pay off the loan before its due date.
Borrowers – Cons:
a) Loan amounts may not be available
Large amounts are usually not available as typically groups of retail lenders supply the amounts.
b) High interest rates
Borrowers with low credit scores that unable to get loans from the banks are normally charged with high interest rates.
c) Privacy exposure
Most of the P2P lending platforms require public disclosure of the borrowers’ financial history and information before lenders choose to bid the loans.
Lenders – Pros:
a) Low investment capital
The initial investment capital for the lenders to participate is very low.
b) Higher return on investment
Lenders also enjoy much higher returns with more than 10% yield p.a. as compared to placing deposits with the banks.
c) Diversification of risk
Besides, lenders can diversify their loan portfolios to lower the risk of investment based on their risk appetite.
d) Alternative investment
P2P lending appears to be a good investment alternative for investors to earn a steady stream of passive income. Besides, investors don’t need any specialized industry knowledge.
e) Discretion over investment
The lenders also have full control over their loan portfolios. They have the flexibilities of reinvesting or withdrawing their returned capital anytime.
Lenders – Cons:
a) Risk of default
The lenders are exposed to the risk of default by the borrowers and the loans are generally uninsured. Therefore, there’s a risk of losing their capital in the event of default.
b) Lack of regulations
There’s lacking in regulations and framework to govern the P2P lending activities in some territories as the industry is still at infancy stage.
c) Risk of insolvency
There’s a risk of P2P lending operators going out of business causing the lenders to lose their capital. In contrast to the banks under financial distress, central bank or government provides bailouts to protect the interest of the depositors.
Overview of P2P Lending Malaysia
P2P lending has emerged in Malaysia when Securities Commission Malaysia (SC) introduced a regulatory framework in 2016. It governs the registration and obligations of a P2P lending operator.
Malaysia became the first country in ASEAN to regulate P2P lending. The primary objective is to provide an alternative to the Small and Medium-Sized Enterprises (SME) to obtain financing to spur economic growth. Further, it also provides an alternative investment choice to retail investors.
However, SC prohibits P2P lending operators to offer personal loans through its platform.
Obligations of P2P Lending Operators in Malaysia
Based on SC requirements, a P2P lending operator must be incorporated under Companies Act 1965 with a minimum paid-up capital of RM5 million.
Among other criteria, the directors of an operator must demonstrate that they are fit and proper to operate such business. And the operator must also ensure that a transparent and effective risk scoring system is in place.
The obligations of an operator include determining the suitability of the issuers and ensure compliance of its platform rules.
This involves background checks, credit assessment, disclose relevant information to investors etc.
The operator also must place the amounts deposited by both investors and issuers in a 3rd party trustee account before making any disbursement.
SC doesn’t impose a limit on the financing amount that an issuer can raise through a P2P lending platform. An issuer only can the financing if the amount raised exceeds 80% threshold of the target amount.
However, the issuer can raise funds concurrently at different P2P lending platforms.
SC encourages retail investors to limit their investment to a maximum of RM50,000 at any one time to reduce their risk exposure. The operator must disclose all fees, charges and expenses to the investors in connection with the investment.
Besides, investors can also obtain relevant information relating to the investment such as the purpose of funding, business plan, historical financial information, etc.
If you have any other burning questions, you can refer to the FAQ on P2P lending.
P2P Lending Platforms in Malaysia
There were six licensed P2P lending operators initially introduced in Malaysia.
In May 2019, SC Malaysia announced additional licenses to 5 new P2P lending operators. They are CapitalBay, Capsphere Services, Crowdsense, MicroLeap and Money Save Capital.
As of today, most of these new operators have yet to launch their platforms to the public.
If you are interested, you can refer to this article that provides a complete review of all P2P lending platforms in Malaysia. You can choose the platform that suits you the best.
Personally, I’ve been investing in P2P lending via Funding Societies. It’s currently the most popular and largest P2P lending platform in Malaysia.
You can refer to this article for the complete guide to invest in Funding Societies.
Many people are still unfamiliar with P2P lending in Malaysia as it’s still at the infancy stage. But the number of investors is growing rapidly due to its lucrative returns with up to 18% interest rate p.a. Not to also mention the low entry requirement with a minimum amount as low as only RM100!
The Bottom Line
It’s undoubtedly that P2P lending evolves as a game changer in transforming the landscape of the financial services industry.
Would you give it a try? Share your thoughts below!
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