KUALA LUMPUR: The Securities Commission (SC) has appointed six parties to run peer-to-peer (P2P) financing platforms, making Malaysia the first country in Asean to regulate this segment of financial technology (fintech), which in turn provides new funding sources for small and medium enterprises (SMEs).
The six, a mixture of local and foreign parties, are expected to be fully operational by next year.
P2P financing allows investors to lend directly to individuals and businesses.
In return, they receive an attractive yield – provided the borrower does not default.
The licensed platform operators match the two.
Malaysia’s regulations on P2P only allow for lending to businesses.
Applications from more than 50 local and foreign parties were submitted to the SC four months ago.
Lending on these platforms has been growing fast, with the United States generating some US$8.8bil in P2P loans last year, while in the United Kingdom, the figure hit US$2.7bil.
In China, the industry is much larger, hitting more than US$400bil since the beginning of P2P financing in the country a few years ago, said Kevin Guo, co-founder of Dianrong, the third-largest P2P financing platform there.
SC chairman Tan Sri Ranjit Ajit Singh said the issuance of P2P licences is part of the regulator’s digital agenda, which allows greater access to financing and better investor participation.
“This is about access to financing, where we are trying to create an opportunity to use the developments in digital finance to allow better access to financing for Malaysian entrepreneurs and SMEs.
“According to some estimates, the Malaysian SME sector has a financing gap of more than RM80bil.
“Market-based financing including equity crowd-funding (ECF) and P2P may provide alternative solutions to address this,” he said.
The SC was also the first in the region to put in place a regulated framework for ECF last year, and since then, 11 SMEs have raised RM8mil via the six operational ECF platforms.
P2P financing, however, has seen some significant blowouts elsewhere.
In China, while the sector has seen explosive growth, its fallout has been just as spectacular, led by allegations that Ezubao, the country’s biggest online P2P lending platform, was running a US$7.6bil Ponzi scheme.
Some reports allege that one third of the more than 3,000 P2P online lending platforms in China have been found to be problematic.
In the US, detractors point to the Lending Club episode that had tarnished the image of P2P.
Chin Wei Min, an executive director of the SC who leads the regulator’s Innovation and Digital Strategy Division, noted that Malaysia’s guidelines for ECF and P2P financing instills governance and a market-based approach into the system.
“My expectations for the P2P financing environment in Malaysia for the next one to two years is for us to stay true to our objectives to serve the underserved and unserved markets.
“When we are in a haste to grow, we might forget our objectives.
“So, by taking time to serve the SMEs, we will get better insights from understanding consumer behaviour, build a solid credit model, as well as instill trust and confidence over the next two years,” he said.
Another aspect of P2P financing is that it introduces a new asset class for investors who provide financing to borrowers on the platforms.
Sunil Aranha, the CEO of ThinCats Australia which operates a Sydney-based P2P platform, said that it has given an average return of 13% to investors.
“We fill a gap of financing to SMEs and use traditional credit scoring methods supplemented by technology providers using big data analytics. “I would like to say there’s more ‘fin’ in our fintech,” the experienced former banker said in the panel discussion yesterday.
Meanwhile, the SC’s Ranjit said that the commission would introduce a regulatory framework for digital investment services next year.
“This will allow approved licences to offer automated discretionary portfolio management, which some may term as Robo-Advisors,” he said.
Finance Minister II Datuk Seri Johari Abdul Ghani, who delivered a speech during the SCxSC Digital Financing Conference yesterday, said the Government should take a page out of P2P platforms on how to be more transparent in its spending.
He recommended looking into using or adapting such platforms to be more inclusive with the public, by letting them know what the Government was doing and what it was spending on.
Johari made a comparison on how the Government gave out grants versus how market-based financiers had to be more upfront with their investors. “The rakyat want to see that the money they are paying as taxes is being spent in a responsible and transparent manner,” he said.
Referring to how P2P operators were required to furnish extensive details on the companies seeking funding, he said that a large open platform allowed for scrutinisation of the information and reduced skepticism among investors, adding that such measures were important and should be one of the Government’s steps in embracing digital technology.
Johari also commended the SC’s entry into digital markets by facilitating market-based financing avenues for SMEs like ECF and P2P.
He noted the fact that 11 companies managing to raise RM8mil in a short period since the launch proved that ECF was a viable option for SMEs.
The local SMEs play a key role in the country’s economy, contributing 36% of the country’s gross domestic product last year and 65% of total employment.
P2P financing has been proven successful globally in meeting the needs of SMEs seeking funding for growth, with US$25bil raised globally last year and is estimated to grow to US$96bil in 2025.
“I must add that innovation should not purely be the domain of start-ups and entrepreneurs, as I also hope to see our traditional capital market players push forward with their own digital and innovation programmes to remain competitive,” said Johari.