Peer-To-Peer (P2P) Financing or Peer-To-Peer (P2P) Lending is a way of lending money to individuals or businesses through online services that match lenders / investors and borrowers. P2P Financing is not a new thing in the business world. It became popular for quite some time, e.g. at around year 2005 in United Kingdom and at around 2006 in United States. In recent years, P2P financing gains its popularity in Asia, as far as I know, like in Taiwan, Hong Kong, Indonesia and Singapore.
P2P Financing in Malaysia
In Malaysia, the Securities Commission (SC) has appointed six parties to run peer-to-peer (P2P) financing platforms: B2B FinPAL, Ethis Kapital, FundedByMe Malaysia, ManagePay Services, Modalku Ventures and Peoplender. Malaysia is also the first country in ASEAN to regulate this segment of financial technology (fintech).
How P2P Financing Works
There are three parties in the whole process. The investors, the issuers and the P2P financing operator. Businesses (or the issuers) who would like to raise fund will apply funding via the P2P financing platform. The P2P financing operator will evaluate the issuer’s suitability, among others, by assessing its capacity to repay through credit history checks and analysis of any alternative data. These factors allow the P2P financing operator to assess and assign a risk score to the investment note issued by such issuer. Such issuance will then be hosted on the P2P financing platform. The P2p financing operator will also decide the interest rate base on the risk.
The investors who register with the platform will have access to the companies’ information. The investors have to evaluate the risks of the loan based on the interest rate provided by comparing it against the market rate. Investors are also provided with the financial statements of the issuers, allowing them to make an informed decision. Depending on the operator’s policies, investor can start invest in P2P financing with amount as low as RM50.
Just like a person loan, the issuers will make repayment to the P2P financing operator monthly, with interest. Investors, on the other hand, will receive repayment from the P2P financing operator monthly, with interest less the platform fee.
How much I can earn?
The platform aims to provide investors with a simple return of 12% and 14% or an effective return of 22% and 24.91% respectively over a year. Some operator may give lower or higher interest rate. Although the return seems quite high if compared with fixed deposit or high dividend yield stock, there are risks in the investment. The loan may default and you get nothing. However, by statistic from other countries, the default rate is quite small. Singapore’s has default rate of about 2%.
So far, I only see two companies have started to operate. I may write a review for each of them later. The entry cost is very low so you can start trying with small amount. To reduce your risk, I will suggest you to diversify your investment among different P2P financing platforms and among different notes (or loans).
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