DESPITE a tumultuous year for many micro, small and medium enterprises, investor interest and funding enquiries hit an all-time high for many peer-to-peer (P2P) financing operators.
This, says microLEAP founder and chief executive officer Tunku Danny Mudzaffar, makes perfect sense.
“Bank Negara slashed interest rates from 3% in December 2019 to 1.75% by July 2020. This has forced investors to look for better returns than fixed deposits, and with returns of 10%-15% per annum on microLEAP’s platform, we have seen a surge of investors too, ” he says.
Notably, the cash flow crunch for many small businesses last year also sent them looking for alternative avenues to get financing.
MicroLEAP saw a strong uptick in financing enquiries.
The P2P operator provides shariah-compliant and conventional financing to microenterprises.
However, Danny notes that the platform had to be stricter in its credit assessment in 2020 to ensure that investor interests were taken care of as well.
“We could not host businesses on our platform that looked like it would close down within two months. Instead, the types of micro-enterprises that we were keen on were those that pivoted online.
“We knew that these businesses would survive several sustained lockdowns throughout the year, ” he says.
Danny expects the growth of investors to far outstrip the growth of issuers this year as investors continue to chase better yield.
“With shariah-compliant EPF returns at 4.9% in 2020, worse-off than the EPF conventional that is paying a dividend of 5.2%, we are seeing a steady stream of investors looking to invest in our investment notes that are paying 10%-15% per annum.
“The number of issuers on the other hand will grow, but at a slower pace. At the moment, there is a lack of quality or credit-worthy issuers in the market and so our credit assessment process must be spot-on, ” he adds.
He also observes a growing interest in shariah-compliant assets from P2P investors on its platform. There is notable demand for businesses that seek Islamic financing and are in a shariah-compliant industry.
In fact, Danny says many of its issuers who had at first sought to raise funds via conventional means were happy to do so in a shariah-compliant manner as soon as they are informed that there may be greater demand for such products on the platform and with no additional costs.
“The majority of investors on our platform are tech savvy investors between the age of 30 and 45 years. They are accustomed to digital financial services and, as long as the platforms they use are regulated and efficient, are happy to invest with a simple click of a button.”
But given the challenging economic environment, default rates are, understandably, a challenge when it comes to P2P microfinancing.
But Danny opines that this can be mitigated with a good default management system at the credit assessment stage.
“We make sure that the issuer can afford the financing and that the owner runs a business that is sustainable. And because of this, our default rate stands at 0%, ” he says.
Nonetheless, he notes that a good strategy for P2P investments is to always diversify one’s risk and invest in as many investment notes as possible.
“Our edge is that we are all about impact investment, and that isn’t just lip-service.
“By investing on our platform, that small amount of investment will have a huge impact on the livelihoods of the many micro-enterprises that we focus on.
“So, if you are looking for Islamic impact investments that provide good returns or you are looking to raise shariah-compliant financing that is quick and done completely online, then microLEAP is the platform you want to be involved with, ” says Danny.