Kristine Ng understands very well the struggles SMEs go through to obtain financing. She spent a decade in the banking sector - five with Credit Guarantee Corporation (CGC), which was set up with the sole objective to help SMEs obtain credit facilities by providing guarantee schemes.
“Even though some are viable businesses, the traditional lenders had to reject them,” says Kristine of some of the SMEs, which may have adequate track record and even creditworthiness but do not meet certain policies and risk guidelines of banks.
The gaps of financing still exist and it’s only going to get bigger
Recognising the need to plug the funding gap, particularly among smaller and micro enterprises. Kristine left her corporate career to start to start peer-to-peer (P2P) platform Fundaztic with a team of senior level ex-bankers.
“Even at CGC, we were just reaching the very tip of the iceberg (of SMEs facing funding needs). The gaps of financing still exist and it’s only going to get bigger. The banks are comfortable with what they are doing and don’t see the need to do anything differently.”
And there is certainly a big gap to be filled. The Securities Commission estimates the financing gap faced by SMEs in Malaysia is over RM80 billion.
“And that’s why I’m very intrigued with the Grameen model,” says Kristine who looks to Nobel Peace Prize recipient Professor Yunus Muhammad as inspiration for his work in founding microcredit institution Grameen Bank.
“To me, how wonderful it is to be able to help others and at the same time, help yourself.”
“I always take pride in us looking at a segment that nobody seems to want but it is a highly important segment for financial inclusion,” says Kristine of the SME market.
Just a little over a year old, Fundaztic had funded 22.8 million ringgit through 267 loans - or known as notes on the platform. It is one of the only six P2P financing platform licensed by the Securities Commission. In Malaysia, P2P lending is permitted for businesses only. Unlike other countries, it is not open to individuals seeking personal financing.
“About 60 percent of businesses in the country are made up of retail and wholesale businesses. So we found a certain niche, in the way we are able to underwrite SMEs that are in the services sector. For example, F&B outlets and tuition centres - these are the typical businesses that are not able to get funding from the conventional lenders.”
Our platform is quite unique as we are able to cater to startups. In fact, half of our funding is to businesses are less than three years old
While Fundaztic is not the leader among the six P2P lenders in terms of overall note disbursement size - its average note disbursement size is 90 thousand ringgit compared to its competitors, which ranges up to half a million ringgit - Fundaztic owns 83 percent of market disbursement to SMEs, says Kristine.
“Our platform is quite unique as we are able to cater to startups. In fact, half of our funding is to businesses are less than three years old and this is a breakthrough because besides CGC, I don’t think any of the banks does startups that are less than three years old.”
One thing that sets Fundaztic apart from other P2P lenders, according to Kristine, is the low entry barrier, which makes it attractive for investors to get on board. Lenders can fund a note with as little as fifty ringgit.
“We want to attract young people and those who are skeptical,” says Kristine on the low barrier of entry. “We want to build trust. That is why we decided to make it like online shopping - you put in the monies as and when you want to buy.”
Also, unlike most P2P platforms, Fundaztic do not require lenders to put in a deposit to use the platform.
At the moment, Fundaztic has attracted some 7900 members, with investors lured by prospects of attractive returns. “Our average effective return rate is about 20 percent and the average tenure of investment is 29 months,” says Kristin.
Defaults Are Bound to Happen
As with any investments, one's returns hinge on the risk - the higher the return, the higher the risk.
Lending on a P2P platform typically fetches attractive returns but it’s not without its own perils, such as a risk of default. As of press time, there’s no default on Fundaztic’s notes but that is also because the industry is still quite young in Malaysia.
Defaults are bound to happen - thats why its called investments not savings but it should not be dramatic
“Defaults are bound to happen - thats why its called investments not savings but it should not be dramatic. It should be slightly higher than bank. Banks are averaging around three percent. So we are looking at five to eight percent.”
“And the fact we have crossed one year mark with zero default, it shows that our line of defence is pretty strong,” says Kristen.
Strong defence or not, the P2P sector has raised eyebrows, especially with China - the largest P2P market in the world - making headlines of lenders plagued by mismanagement and fraud.
But Kristine says she is confident of the regulatory measures put in place in Malaysia to ensure the P2P sector do not face the same pitfalls.
“First of all, in the Securities Commission guidelines, our money can never co-mingle with the investors’ fund. It is managed through a trust account. For Fundaztic, the moment you pump in money, it goes directly into a trustee account maintained with Maybank trustee. And when you have a trust account, the money can only be used for its intended purposes which is investing,” Kristine explains.
China's P2P Lending Meltdown, Will It Happen in Malaysia ?
Another ‘safety’ measure put in place as part of the Securities Commission guidelines is the ‘living will’ which ensures that the integrity of notes issued will continue (taken over by another company) in the event of a platform failure, involuntary or voluntary exit.
“Where the Securities Commission has done a very good job is to come up with guidelines that protect the investors from day one. And this is why I’m confident that we will not end up like China because it only came up with guidelines after the industry has gone pretty big,” says Kristine.
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