P2P Funding Investment

Peer-To-Peer (P2P) financing is gaining momentum lately in Malaysia.  It is a web-based innovation that broadens the ability of entrepreneurs and small business owners to unlock capital from a pool of individual investors in small amounts and provides a quick turnaround time to obtain financing for their businesses, through an online digital platform.

The Securities Commission Malaysia (SC) announced the regulatory framework for P2P financing in 2016, and approved six P2P operators later in the year (Read more here).

According to the statistics from Funding Societies (Read more here), investors can earn upto 10 – 14% return p.a.  The tenure of each investment could range from 1 to 24 months.  The minimum investment amount is RM100.

At the current default rate of 1.64%, from total 3233 number of financing upto 26^th April 2018, the lending performance is on-par compared to Malaysia’s February 2018 non-performing-loan (NPL) percentage, which stood at 1.6% (Read more here).

The following graph shows the historical default on quarterly basis.  The default rate could go up as high as 2.31% on Q2-2016.  With the default rate ranging from 1.15% to 2.31%, and at an average return of 10% per annum, is the investment worthwhile?

Source: Funding Societies Malaysia

Let’s look at the expected return for a single investment.

Expected return, E(X)

= (positive return)*(positive return probability) + (negative return)*(default rate)

= (10%)(100% – 2.31%) + (-100%)(2.31%)

= 9.77% - 2.31%

= 7.46%

The expected return of 7.46% is still higher than the current average one-year fixed deposit rate of 4%.  Investors may wish to consider to allocate a small portion of their investment into P2P lending as part of their diversification.

Investors who are interested to invest in P2P lending could sign up using the following link

promo.fundingsocieties.com.my/referral?r=

Disclosure: The author will receive a one-time referral fee of RM50 for each new investor who sign-up via the above link AND invest at least RM1,000 (Read more here).  To learn more about P2P lending, please send your queries to engineering2finance@gmail.com