From Left to Right: Darrel Ang (Co-founder of CapBay), Murali Samy (Audit Partner of Deloitte)

• P2P fundraising saw a 38% increase in 2022, raising RM1.58 billion across 24,455 campaigns as announced in Securities Commission Malaysia Annual Report 2022
• CapBay played a role in the growth, having finance RM1 for every RM4 raised through P2P financing in 2022
• Government reinforces commitment to bridging the financing gap through MyCIF and DIGID initiatives

KUALA LUMPUR, 27th March 2023 – Peer-to-peer (P2P) financing in Malaysia has continued to experience strong growth, with a 38% increase in financing amount for a total of RM1.58 billion across 24,455 campaigns in 2022 as reported in Securities Commission Malaysia’s recently announced Annual Report 2022. This comes on the back of a surge in the number of issuers with an 88% increase, highlighting the strength of alternative financing as a viable source of funding for the underbanked Small and Medium Enterprises (SME) segment.

Continued headroom for alternative financing growth

While adoption rate continues to improve, there are still opportunities for alternative financing such as equity crowdfunding (ECF) and P2P financing as the penetration rate in Malaysia is still relatively low. In 2020, ECF and P2P only contributed <1% of the economy when compared to traditional financing at around 88%, lagging behind neighbouring countries such as Indonesia and Singapore, signalling potential for future growth.

CapBay’s Co-founder and CEO, Ang Xing Xian, concurs that the growth opportunities within P2P financing has not reached its full growth potential. “The P2P financing industry has been vital in the Covid-19 recovery, extending a lifeline to businesses who require urgent working capital assistance. As we move towards a post-pandemic economy, the industry’s continued growth is a testament to the viability of P2P financing. CapBay is proud to have played a role in the growth, having financed RM1 for every RM4 raised through P2P financing in 2022, demonstrating our commitment to supporting underbanked SMEs.”

Ang Xing Xian, Co-Founder and CEO of CapBay

P2P financing campaigns outside the Klang Valley has doubled

Further growth opportunities exist for niche sectors such as agriculture, real estate, and healthcare that have shown impressive growth in 2022, but still lag behind sectors such as wholesale and retail trade; repair of motor vehicles and motorcycles that represented over 58% of financing raised. Furthermore, while the number of campaigns outside the Klang Valley has doubled, 54% of issuers are still located within Kuala Lumpur and Selangor.

In 2022, one of the most popular P2P financing products was invoice financing at 21% of the total investment notes, which is typically a lower risk product. “CapBay’s focus is in the lower risk segment, having contributed over 2,200 invoice financing notes in 2022 alone. We remain committed to maintaining prudent risk management practices, and will continue to prioritise lower risk products to safeguard both our investors and issuers,” said Xing Xian.

Government initiatives reflect commitment to developing alternative financing

Recognising the key role of alternative financing, the Government has continued initiatives to bridge the financing gap. Within Budget 2023, the Government committed RM40 million to the Malaysia Co-Investment Fund (MyCIF). According to the recent MyCIF report, the funds raised by P2P and ECF operators have increased sixfold since 2018 with the support of MyCIF. MyCIF will also introduce new initiatives to increase their co-investment ratio into ESG (environmental, social, governance) related campaigns and extend existing initiatives for the agriculture sector.

The Digital Innovation Fund (DIGID) was also introduced in Budget 2023 to co-fund projects that demonstrate the use of innovative technology within the Malaysian capital market. This initiative would assist in developing new sources of growth, process enhancements, and improve competitiveness through the use of new technologies.

In Malaysia, Peer-to-peer (P2P) financing has become increasingly popular within the alternative investment space. Since the Securities Commission Malaysia (SC) started granting P2P licences in 2016, the P2P financing sector has been rapidly expanding, with the total financing amount raised doubling in 2021 when compared to the previous year. This represents remarkable growth as retail investors become more familiar with P2P financing as a viable investment alternative to equities and fixed deposits.

However while P2P financing is attractive as it generates high returns, as with all investments there are still risks involved that investors should be aware of – specifically default risk. While CapBay P2P represents a leading P2P platform with one of the lowest default rates at <0.1% across over RM880 million in financing (as at time of writing), it is still important for investors to fully understand both the causes of default risks and how it affects their investment portfolio to have the confidence to invest with P2P financing. . 

What are defaults? 

Similar to bank loans, P2P financing can be thought of as another short term financing product, where the borrower represents the company in need of financing, and the lenders represent the crowdfunders and in this particular case, the investors. With supply chain financing, the loans are generally tied to invoices that details the nature of the work done, the owed amount, and the repayment period. 

Occasionally, a borrower may miss their repayments by a small timeframe due to administrative issues such as public holidays or repayments made on weekends. Alternatively, there could also be more operational issues such as late repayments made to the lender by their debtors/buyers, which means they are unable to repay the P2P lenders. These cases would be considered late repayments rather than defaults. For CapBay P2P, we will provide reminders and make contact with the lenders even before the stipulated repayment date to ensure timely repayment for our investors. However, it is important to note that our investors will continue to accrue daily interest on late repayment notes until the actual repayment date (that may be past the expected repayment date). In this case, while late repayments may provide some concern to investors, they are not penalised for the delayed repayments, and instead will continue to earn returns. However, an extended period of non-repayments may eventually lead to signs of an impending default.  

Defaults occur when repayments are not made within a stipulated timeframe past the agreed repayment date. For example, a default may be declared when the borrower has yet to have made the repayment 90 days past the repayment date of the loan. In this case, the outstanding amount of the loan and any interest owed would be considered defaulted. Circumstances that may cause defaults include insolvency, non-repayment from the borrower’s debtor/counterparty, loss of a business licence, non-performance of a contract, or a direct refusal to make repayments for any reasons. 

Thus, it can be seen that default risks are related to the repayment ability and credit worthiness of the borrower. The safer the borrower, the lower the risk of defaults, and hence the lower the overall risk undertaken by the lenders/investors. 

Does this mean any defaulted amounts are lost? 

While defaults may seem like a complete loss for the lenders, there are still other avenues that may be pursued to recover any outstanding defaulted amounts. For CapBay P2P, CapBay will act on behalf of the investors to formal recover actions such as restructuring or legal proceedings (enforcement on collaterals or securities through a Court order, or through a recovery of debt action in Court). In Invoice Financing, which CapBay specialises in, we will also initiate recovery action against the issuer’s buyer or debtors for the invoices that have been factored to us.

Any amounts recovered will then be redistributed to our investors on a pro-rata basis, which is according to the proportion of the invested amount of each investor on the defaulted note. Thus, while defaults are a genuine risk to our investors, there is still hope to recover defaulted amounts. 

I’ve had a default, how does this affect me and what should I do? 

As a P2P investor, in the unfortunate event of a default there may be principal loss within your investment portfolio. This means that the initial investment amount may have been lost due to the non-repayment. However, as with all investments, we have to consider this from a big picture perspective. While any principal loss may cause unease, the diversification of an investment portfolio will dictate the actual impact on an investor’s portfolio. For example, if an investor with a well-diversified portfolio of RM50,000 faces defaults, this may only affect up to 2% of their portfolio as their funds are split into more than 50 notes. Considering that CapBay P2P offers 8% net returns per annum, this would mean that in a given year, an investor may not even incur any principal loss, but would instead receive slightly lower returns at 6% per annum.  

It is important to also recognise that a default faced by a single borrower does not reflect the repayment ability of other borrowers. This is because defaults occur due to an individual borrower’s inability to make their repayments. In most cases, a single default from an issuer wouldn’t necessarily mean that other defaults are bound to happen, as different issuers have different financial strengths and situations. At CapBay P2P, we also ensure exposures are controlled at the borrower level, where our investors are not overexposed to a single Issuer. This is a part of our risk management strategies and reflects how we’ve been able to maintain a default risk of 0% throughout the COVID-19 pandemic period, only having declared our first defaults at less than 0.1% of our total financing amount after the reopening of the economy as a testament to the strength of our credit model. 

While it may be tempting to stop all investments with a P2P financing platform after incurring a single default, it is also important to recognise the alternatives. Withdrawing your entire portfolio after a default will solidify any losses incurred, whereas the alternative of maintaining your investment portfolio may allow an investor to recoup their initial losses. With the example above, given a net return of 8%, it may only take 3 – 4 months to recover potential losses from the defaults, with the chance of further recovered amounts. Similar to the equities market that saw a significant downturn in 2022 where the S&P 500 saw an 18% decline, time in the market is not to be underestimated as the longer-term performance is still in the positive. Thus, the length of the investment timeframe matters, where returns are able to continue to compound to offset any losses incurred in the short term. 

In conclusion 

In summary, while defaults are a very real risk faced when investing in P2P financing, its impacts can be mitigated by having a diversified investment portfolio and allowing enough time for the returns to compound. Have a look on our article Top 5 reasons why you should diversify your investments with CapBay P2P to learn few more reasons of diversification. It is also imperative to truly understand the causes of the defaults in order to make the right decision in response. The default rate of any given P2P platform should be taken into account and the net returns expected should be measured against the defaults. 

As with all investments, it is important for potential investors to fully understand the risks involved in order to manage their risk tolerance levels as a trade off for the returns offered. CapBay P2P continues to pride itself on being a P2P platform that provides high quality investment notes to our investors, maintaining a default rate of <0.1% throughout these periods of volatility. To kick start your investment journey with CapBay, feel free to reach us.

Begin your investing journey with CapBay today!

*This article is not meant to recommend CapBay P2P products or be used as a tool to make any investment or financial decisions. Product recommendations must be independently evaluated before you invest. Any product recommendation by CapBay must not be regarded as financial planning or financial advice.

*All statistics are accurate as at the time of writing.