P2P Financing Update

Dear Readers

In my last article, Who’s afraid of P2P financing?, I shared about my initial experience of P2P financing through Funding Societies Malaysia. So, if you haven’t read Who’s afraid of P2P financing?, I strongly suggest you give it a go.

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Credit Yourstory.com

Now, not everyone has the appetite for the volatility of equity investment (shares investing), and its derivatives. But, at the same time, I am sure most of us are seeking other investments which may yield better returns than conservative investments such as fixed deposit and bonds. This is because we are living in a low interest rate environment ever since the last global financial crisis in 2008. Interest rate in Malaysia, although higher than most developed economies such as Japan, USA and Europe, has remained stagnated since 2008. Low interest rates couple with higher inflation will see your hard-earned savings slowly diminishing, in terms of purchasing power.

Between 2008 and 2016, fixed deposit in Malaysia,  on average, yields a measly 2.85%.

deposit rate malaysia

Exacerbated by a rising inflation rate since the beginning of 2017, which has been hovering around 4% mark and hit a high of 5% in March 2017, higher inflation rate may have nudged us to look elsewhere for higher yields other than the low return generated by fixed deposits.

As for me, I only maintain a minimum amount in fixed deposit for a rainy day. My logic is simple; putting too much money in cash is not going to benefit me in the long run.  In fact, it may be detrimental. Hence, this is where P2P financing comes into the picture as it provides an opportunity to achieve a balance between a manageable risk and considerable return.

So, let’s get down to it.

What is your experience of P2P financing with Funding Societies Malaysia?

I am pleased to report that I have received my first monthly return from a crowdfunding which began in May 2017. I have made an initial test investment of RM1,000.00 in a crowdfunding exercise which raised RM1 mil for a small and medium-sized enterprise (“SME“). I did this after satisfying myself of the viability of the venture by carefully reading the investment fact sheet provided by Funding Societies Malaysia (think of it like a product disclosure statement).

Funding Societies Malaysia also performs stringent due diligence and credit assessments to sift out SME with bad creditworthiness – like how any banks would conduct themselves before approving a financing facility.

In this particular crowdfunding exercise, the investment tenure is for 6 months with an interest rate of 10% per annum. That is effectively, 5% interest over the course of 6 months (excluding service fee). Some crowdfunding exercise may yield up to 16% per annum (even after deducting service fee).

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So for July 2017, I received RM174.99 from the investment, of which, RM166.66 is principal and RM8.33 is the interest (or the yield). RM1.74 (or 1% of investment) is deducted from RM174.99, as service fee for Funding Societies Malaysia, thus leaving me with a balance of RM173.25.

A thing which I am particularly fond about P2P financing is that the money received from the instalment repayments can be reinvested, in another crowdfunding exercise, as soon as it is made available to me. In other words, if there is an available crowdfunding exercise (there are about 2-3 crowdfunding exercises per month on average), I can reinvest my balance of RM173.25 through Funding Societies Malaysia. Hence, I am constantly generating income, as I should, because inflation never sleeps.

In my case, a yield of 10% per annual (excluding service fee) is handsome and definitely ample to tackle a rising inflation.

How would you rank P2P financing against fixed deposits and bonds in terms of yield?

Because P2P financing via Funding Societies Malaysia could potentially yield up to 16% of interest per annum (after deducting service fee), it has a return which is much higher than that of fixed deposits and most investment grade bonds (the AAA or AA-rated bonds).

See, by taking on an acceptable risk, you could be in a position to potentially receive a yield of about 4-5 times higher than that of the yield from a fixed deposit.

How does P2P financing stack up against investment in the share market (equity)?

P2P financing is an investment in debt as oppose to an investment in shares (equity). Hence, it has zero correlation with the performance of the share market. In spite of that, the yield from P2P financing is comparable with the yield from investing in the share market, which averages to about 7-10% per annum, in the long run.

Furthermore, P2P investing is definitely a suitable investment for those who cannot stomach the volatility of the stock market (like my mum) or for those looking to balance their portfolio with some high-yield debt investing (like me).

As an investor, I can truly appreciate the element of certainty of the return from P2P financing. For example, I know beforehand the return of investment which I will be getting from the get-go.

Conclusion

P2P financing is definitely a strong contender to other conservative investment such as cash or bonds. On the other hand, equity investors could also benefit from a high-yield diversification into P2P financing.

Like any other investments, the element of risk is inevitable and should be accepted as part and parcel of investing. With proper risk management, the risks involved in P2P financing can be greatly reduced.

In my next write-up about P2P financing, I will share some considerations which I personally make before investing in a particular crowdfunding exercise. Such consideration is part of my risk management strategy which I hope will be useful to you.

So how do you find P2P financing? Do drop me a comment.

Until then.

Helpful links

Register an account with Funding Societies Malaysia now as they will top up an additional RM50.00, for free, into your account when you deposit and invest a minimum of RM1,000.00. To participate in this special promotion, please register an account via this LINK (be careful not refresh the link before completing the registration as it will affect the promotion code) or alternatively, use the promotion code: j1mzpcw5 when registering through Funding Societies Malaysia.

If you find this write-up helpful, please hit that like and share buttons on my Facebook for more updates and analysis.

A guide to peer-to-peer (P2P) financing in Malaysia

Dear Readers

My last article, Who’s afraid of mutual funds?  did stir up curiosity about mutual funds and their decent yields compared to stock picking in the stock market. The apparent lack of investment knowledge, amongst Malaysians, is quite troubling especially when Malaysians are enduring higher inflation after fuel subsidies were scrapped.

Inflation is your biggest enemy. It seeks to undo all the wealth that you have accumulated. The only resolution against inflation is investing and I hope that this blog serves to disseminate investment knowledge which will be acted upon.

Today, I will be talking about P2P lending. Just so you know, this post is about my first-hand experience in P2P lending, as your worthy guinea pig.

What is P2P lending?

P2P lending or peer-to-peer lending means the coordination of a group of people (either individuals or legal entities) to pool in money (crowdfunding exercise) for the sole purpose of lending the said pooled money (or principal) to a borrower.

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Credit: Bankrate

In exchange, the borrower (usually a business seeking short-term financing) promises to repay the principal, and on top of that, the interest, over a set period of time.

Your investment return is the interest on the principal.

Most, if not all, P2P lending operators run an online platform.

Is P2P legal in Malaysia?

In case you are wondering, yes, P2P lending has been legalised in Malaysia. These P2P lending operators have been given the go-ahead, in 2016, by the Securities Commission.

What are the potential returns?

The rates are as competitive as those offered by institutional lenders on the premise that the lending is unsecured.

Unsecured lending is where a lender lends without the need for a borrower to offer a collateral as security. Because there is no collateral, the interest rate is relatively higher than the interest rate offered by lenders for secured lending. Of course, other factors are also taken into account in determining the interest rate such as:

  1. the credit worthiness of the borrower;
  2. nature of the borrower’s business (a business in a high risk industry would be offered higher interest i.e. technology industry)

From my observations, the interest rate is within the ballpark of 10-14% per annum. It is relatively higher than most conventional debt investments such as bonds, debentures and fixed deposits (but junk bonds may offer surprisingly good returns).

What are the risks?

The main and obvious risk is the risk of default by the borrower.

Other risk may include the P2P lending operator going under which may be more of an inconvenience or nuisance rather than a risk of a loss to your investment. This is because the pooled funds are segregated and held entirely by a trustee appointed by the P2P lending operator.

What does a P2P lending operator do?

The P2P lending operator establishes a platform to accommodate both, lenders and borrowers. For example, a business, in need of a lending, may approach the P2P lending operator. On the other hand, a P2P lending operator actively promotes its platform to investors so that there are sufficient  members to fund the lending.

When a potential borrower has fulfilled the credit requirements and is given the green light, the P2P lending operator will invite members, on its platform, to crowdfund the lending. Only after the crowdfunding has reached its intended target, the borrower is able to draw down on the lending.

For example, should a potential borrower requests for a lending amount of RM1 million, members would have to pool in their money to reach the said RM1 million mark. That must be done within a certain period of time which is predetermined by the operator. Only after the funding achieves the intended RM1 million mark would the fund be lent to the borrower.

If the fund fails to achieve the targeted RM1 million, within the predetermined period of time, the P2P lending operator may extend the crowdfunding time.

Investors also give an authority to the P2P lending operator to pursue debt recovery should a default arises.

What are the disclosures provided by P2P lending operator to members?

Like any regulated investment, the P2P lending operators are obliged to disclose the risk associated with the investment and also pertinent information about the borrower which includes:

  1. The terms of the lending (the amount of the lending, whether the borrower pays in monthly installments etc)
  2. The nature of the business of the borrower.
  3. The entity that owns the business (whether it is a company, partnership or sole proprietor)
  4. A background of the borrower (whether it is solvent, involved in litigation or blacklisted by any credit rating agencies)
  5. A summary of the directors of the borrower, if applicable.
  6. A past 3-year and current year financial report of the borrower (Profit and Loss and Balance Sheet).
  7. Bank account statement (monies in the bank account(s) of the borrower).

However, information which can identify the borrower’s identity remain undisclosed.

Be sure to understand the associated risks in this type of investment before pursuing any crowdfunding exercise.

Any tips to ensure maximum gain and minimum risks?

Do not put all of your eggs in one basket

There are usually a few crowdfunding exercises a month.  Say, if you have RM5,000, split your investment into 5 portions and invests them in 5 different crowdfunding exercises. That way, if one defaults, you will not lose all of your investment as illustrated below:

1 crowdfunding exercise x RM5000 x 10% per annum = RM500

5 crowdfunding exercises x (RM1000 each x 10% per annum) = RM500 (but risk of losing all of your investment is spread out)

From the illustration above, you stand to gain the same amount of return but your risk is substantially mitigated.

Be selective. It’s your money, after all

Read through the borrower’s financials, especially for the borrower’s cash flow statement and its ability to service short-term debt. It the cash flow is too constraint, move on; don’t attempt to take the plunge and hope for the best. A casino is where you should be if you want to indulge the latter.

What are the fees involved?

Generally, the P2P lending operator will get a 2% cut from your profits. Hence if the interest rate is 10%, you will effectively get an 8% return.

Any tax implications?

As much as we all hate to pay tax, unfortunately, the returns from P2P lending is taxable as it is considered by the good people of the Inland Revenue Board as interest income.

What P2P lending operator on which you are basing this article?

I am subscribed to Funding Societies Malaysia. There may be other better ones out there.

I suggest that you subscribe to more than one P2P lending operators for regular crowdfunding exercises. However, please do your research as fundraising exercise may differ from one operator to another.

My final thoughts

P2P lending is one of the most innovative ways of fundraising. It benefits individual investors, seeking good investment returns, and also borrowers, seeking for competitive borrowing interest rates.

Like all investments, there is an inherent risk of a loss. However in this case, be prepared to lose all of your investment if a borrower goes bust. On top of that, the issue of taxation may arise.

Nonetheless, with effective risk management, i.e. do not put your eggs in one basket, and research, P2P lending may be viable over the long run especially for those who can’t stomach the volatility of the stock market.

Do share this post and subscribe to learn to let your money work harder for you!

Reference

  1. http://www.thestar.com.my/business/business-news/2016/11/04/sc-issues-p2p-licences/
  2. http://www.theedgemarkets.com/article/special-report-six-p2p-lending-operators-malaysia