P2P lending platforms in Malaysia: What do we know?

Statistical analysis

Since there is no data publicly available for individual P2P lending platforms in Malaysia, this study employs first hand-collected information for the analysis. Descriptive and cross-tabulation statistics were produced by Microsoft Excel 2010 and IBM SPSS Statistics 26, using a five-month data set to examine the potential exposure that individual investors may face at the nine selected P2P lending platforms. In addition, other tests for normality, coefficients, and multiple regression tests were also conducted. However, the limited number of loan campaigns available during the study period may be insufficient for normality, coefficient and regression tests. Thus, only descriptive statistics are reported and analyzed in this paper as the way to let the raw data speak for itself. This first-hand observation for loan campaigns posted at the nine P2P lending platforms in Malaysia is essential to provide implications to potential investors at those platforms.

Subscription requirements at P2P lending platforms

As shown in Table 2, information required from potential investors at the nine P2P lending platforms were varied. At each P2P lending platform, potential investors must have initial deposit amounts ranging from RM5 to RM1,000, kept at a specified third-party’s account at each platform. Each platform requires each investor to provide basic personal information such as identification card (ID)/passport number, most recent bank account statement, details of sources of income and proof of current residential address. Some P2P lending platforms, such as QuicKash, Money Save, and AlixCo, require additional documents: a selfie photo or a video clip that clearly shows the face of the potential investor while holding his/her passport/ID with the first page open. Most of the platforms allow only Malaysian investors, except QuicKash, MicroLEAP, CapSphere, and AlixCo. Funding Societies, in particular, welcomes investors from four countries, namely Thailand, Indonesia, Singapore, and Malaysia for investment opportunities. Nusa Kapital specifically welcomes Malaysian Muslim investors to participate. Money Save is the only platform that assesses potential investors’ financial literacy to categorize them into three groups of investors: (1) with basic investment knowledge, (2) with basic investment knowledge and experience, and (3) with sophisticated investment knowledge and experience.

Credit rating and interest rate

Credit rating is one of the most important criteria for most lending institutions, including P2P lending platforms, when deciding on the interest rate charged to a borrower. A credit rating is given to a borrower based on evaluating the potential default incurred by that borrower. In Malaysia, credit ratings can be obtained from Credit Bureau Malaysia. Upon request from a lending institution, Credit Bureau Malaysia provides information such as personal identifying data, personal credit histories reported by various lenders previously, information showing the honesty and stability of a borrower, and the number of requests made by lenders and legal authorities on the borrower’s credit status. Credit scores are determined based on factors that differentiate between a good and a bad borrower. A borrower with a good credit rating score can be offered lower interest rates.

However, it is found that some P2P lending platforms in Malaysia use the scores provided by Credit Bureau Malaysia, while others use their own formula to determine the scores for their borrowers. Additionally, the credit ratings are not shared between P2P lending platforms, which leads to varying credit scores across all platforms. It is unknown to investors how these scores are decided. As a result, a borrower may get a low credit score from one P2P lending platform and a higher one from another.

As shown in Figure 1, the principle that loans issued by SMEs with higher credit ratings should be charged with lower interest rates does not hold for most P2P lending platforms, except for MicroLEAP.

Figure 1. Interest rates and credit ratings at nine P2P lending platforms.

The results show that some loans issued by SMEs with lower credit ratings were charged with lower interest rates. For instance, at B2B a loan issued by an SME with a lower credit rating (C), was charged with an interest rate of 12% per annum. In comparison, a loan issued by an SME with an A credit rating was charged with a higher interest rate of 12.5% per annum (Figure 1). A similar finding is found on the AlixCo platform. A loan issued by an SME with a credit rating of CAA2 (Very high credit risk) (see rating classification at https://www.alixco.com/fag/statistics) was charged with an interest rate of 14.28% per annum, which is lower than what was (15% per annum) charged for loans issued by SMEs with CAA and CAA3 credit ratings. At Money Save platform, loans issued by SMEs with credit rating A were charged with interest rates ranging from 12% to 14.5% per annum, while loans issued by SMEs with credit rating B were charged with a much lower range of interest rates, i.e., 9.75% - 10.75% per annum.

Similarly, at QuicKash platform, an interest rate of 12% per annum was charged to SMEs with credit ratings ranging from 7-Good to 9-Strong. For Cofundr platform, a loan issued by an SME with a credit rating of CR3-Good was charged with a higher interest rate (9.75% per annum) as compared to that (9.6% per annum) charged to a loan issued by an SME with a lower credit rating (CR4-Satisfactory). Similarly, at CapSphere, loans issued by SMEs with a credit rating D were charged with lower interest rates (7.1%, 8% and 8.8%) as compared to those (9% and 11% per annum) charged to loans issued by SMEs with a credit rating C. Also, at Nusa Kapital platform, an interest rate of 15% per annum was charged to loans issued by SMEs with different credit ratings.

The above findings show that loans with similar credit ratings may offer investors different interest rates. This finding suggests that credit ratings given to an SME loan at the Malaysian P2P lending platforms do not reflect the probability of its defaults. Similar to Zhang, Jia, Diao, Hai and Li (2016)’s claim, the meaningless relationship between interest rates and credit ratings found in this study suggest that the credit ratings given by the nine Malaysian P2P lending platform cannot be used as predictors for SMEs’ default risks. The default misrepresenting credit ratings may be due to incomplete information given by the Malaysian SMEs to their respective nine P2P lending platforms, which may lead to a poor prediction on their defaults later, as mentioned by Li, Chen, and Zeng (2018). Furthermore, suppose an SME is given a higher credit rating than it should. Investors attracted to this rating may suffer losses due to potential moral hazards caused by that SME, as also pointed out in Suryono, Budi and Purwandari, (2020). In short, Malaysian investors at the nine P2P lending platforms may enjoy many opportunities when a higher credit-rated SME offers a higher interest rate than a lower credit-rated SME.

Interest rate and loan purpose

Loan purpose is the main reason for a borrower to request a loan. Lending institutions often assess a borrower’s loan purpose to see the level of default risk associated with the requested loan. Regularly stated loan purposes declared at the nine P2P lending platforms are invoice financing, working capital, Covid-19 relief financing, trading, expansion, insurance premium, and equipment maintenance (Figure 2). As shown in Figure 2, different interest rates are applied to SMEs whose loan purposes are the same at the nine individual P2P lending platforms. This may suggest that the nine P2P lending forms do not differentiate risk levels among different financial activities associated with their loans. The loan purposes listed at the nine P2P lending platforms mentioned above reflect different risks associated with their financial needs. For instance, a loan applied to cover a temporary shortage of funds, known as invoice financing, due to late payment received from a customer should be viewed as a lower risk loan than a loan applied to expand a business. This is because the uncertainty associated with a business extension in the future is higher than the uncertainty of not getting the payment from a customer within the credit period. This finding implies that a loan required to finance less risky financial needs is not necessarily charged with lower interest rates than those required to finance more risky ones. This way, investors at the nine Malaysian P2P lending platforms can enjoy lending to SMEs with low risky financial needs, as suggested by Serrano-Cinca and Gutiérrez-Nieto (2016) and Xia, Liu and Liu (2017), while still earning good returns. In other words, investing in a low risky loan at the Malaysian P2P lending platforms does not necessarily come with a sacrifice of earning a lower return, as believed.

Figure 2. Interest rates and loan purposes at nine P2P lending platforms.

These results show that loans with a similar loan purpose may offer investors significantly different interest rates. In addition, loans with different borrowing purposes can be charged with the same interest rate, suggesting that loan purposes may not indicate much difference in potential risks associated with them at the nine P2P lending platforms.

Interest rate and loan duration

Duration measures the sensitivity of the value of a debt instrument when the interest rate changes. According to the term structure of interest rates, loans with a longer duration should be charged with a higher interest rate because interest rates may change during that long period.

However, this does not seem to be the case for the nine P2P lending platforms. As shown in Figure 3, a similar interest rate was applied to loans with different maturities at the nine P2P lending platforms. At B2B FinPal, loans with short durations, i.e., 37 days, had a higher interest rate than those charged for loans with a 98-day duration. Similarly, at Fundaztic, loans with a three-month duration are charged an interest rate of 15%, while a loan with a 36-month duration is charged with a lower interest rate, i.e., 12.23%. At AlixCo, the highest interest rate (15.36%) is charged to a three-month loan, while other loans with four- and six-month durations are only charged at 15%. At MicroLEAP, a 12-month loan is charged with a higher interest rate (14%) than those (12%, 11.5% and 11%) charged to 24-, 30- and 36-month loans. At Money Save, six 1-month loans offer investors interest rates of either 14.75% or 12%, while a six-month loan offers investors a 10.75% interest rate.

Figure 3. Interest rates and loan durations at nine P2P lending platforms.

At Cofundr, a one-month loan is charged with the highest interest rate of 17.5%. At CapSphere, some 12-month loans are charged with lower interest rates (8.8% per annum) than those (10% per annum) charged to six-month loans. At NursaKapital, a three-month loan is also charged with a higher interest rate (15%) than that (14%) charged to a six-month loan.

The insignificant relationship between loan terms and interest rates suggests that a loan with a longer duration is not necessarily viewed as having a higher probability of default at the nine Malaysian P2P lending platforms. Therefore, it should not be charged with a higher interest rate than one with a shorter duration. Similar to Zhang, Zhao, Wang and Shen (2020)’s finding, investors who invest in longer-term loans may not necessarily earn higher interest rates at the nine P2P lending platforms. In other words, investors at the nine Malaysian P2P lending platforms can avoid high risk by investing in a shorter-term loan as suggested by Galak, Small, and Stephen (2011), Lee and Lee (2012), Prystav (2016), Cai, Lin, Xu and Fu (2016), Ye, Dong and Ma (2018), and still earn higher rates of return.

Interest rates and business cycles

Most companies asking for loans at the nine P2P lending platforms are in one of the three main stages: growth, extension, and maturity. A stage that a business is going through may indicate the uncertainties that it may face. In a typical business cycle, a company goes through seven stages: seed, startup, growth, established, extension, decline, and exit. There are plenty of opportunities for growing companies; however, they may be exposed to high competition, unstable economy, and market demand, which may hamper their business. Thus, lenders are also concerned when granting loans to such businesses. They aim to expand the market share and achieve a new profit level for companies in their extension stages. However, if the expansion to a new product line adds considerable risk to a firm, lenders may need to evaluate loan purposes for such businesses. At a mature/decline stage, companies can experience a drop in their revenues and profits, and therefore might want to close their business. For this reason, lenders find granting loans to these businesses a high risk.

As shown in Figure 4, most loans given by the nine P2P lending platforms are for companies in their growth and expansion stages. However, mixed interest rates are charged to both growing and expanding companies at most platforms, except Nusa Kapital. This finding may be mainly due to the limited data available on Nusa Kapital. The stage of a business does not reflect its entire potential risk. A similar interest rate may be charged to both growing and expanding companies on the same platform. In eight out of nine P2P lending platforms, fewer loans are given to mature businesses. There are two possible reasons for this. First, mature businesses can get loans at traditional lending institutions at lower rates. Second, P2P lending platforms may view small mature businesses as riskier than growing and expanding businesses due to their potential closure.

Figure 4. Interest rates and stages of business at nine P2P lending platforms.

It is shown that similar interest rates may be charged to loans issued by companies at different business stages. In short, loans issued by companies are primarily in their growth and expansion stages. The results suggest that investors who dislike risks may choose to invest in companies with a business cycle with less uncertainty, for instance, expansion stage, and still can enjoy similar or higher interest rates than those in a riskier business cycle, i.e. growth stage, at the nine P2P lending platforms.

Interest rate and industry

If an industry is less sensitive to any economic downturns, companies from that industry are often expected to have stable businesses for a long time. Thus, lending institutions may prefer to provide loans for such businesses.

The ununiformed classification of industries in the nine P2P lending platforms, as shown in Figure 5, may indicate potential different risk assessments done by each platform for businesses applying for loans. The results show that at B2B the industries with two or more loans charged with a similar interest rate are: advertising (2), consumer goods (3), design (2), import and export (3), and E-commerce (2). In contrast, loans from the same industry, i.e., construction, food and beverages, packaging and distribution, and trading, can be charged with different interest rates. For AlixCo, loans that come from two classified industries: Retail/Trade (FMCG) (4) and Retail/Trade (Smartphone) (18), are charged at the same interest rates, 14.28% and 15.2%, respectively. However, loans from the E-commerce industry are charged with different interest rates, ranging from 13.8% to 15.1%. For MicroLEAP, two loans from the automobile industry are charged at the same interest rate (12%), while loans from the E-commerce industry are charged with different interest rates, ranging from 11.5% to 14%. For Money Save, it appears that loans from the same industries are charged with different interest rates. For QuicKash, only loans from E-commerce are charged at the same rate of 8% per annum. However, it cannot be determined if all future loans from E-commerce will be charged at the rate of 8% since only two loans were reported for this industry at the time of data collection. For Cofundr, loans from automobile are charged with the same interest rate of 15%. However, there were only two loans reported for this industry.

Figure 5. Interest rates and industries at nine P2P lending platforms.

For CapSphere, three different loans from Freight and Logistics are charged at the same interest rate of 7.1%, while loans from other industries are charged at various interest rates. Due to limited data on Fundaztic and Nursa Kapital, a conclusion cannot be reached for these two P2P lending platforms.

In short, there seems to be a pattern of having loans issued by companies from the same industry being charged with similar interest rates across the nine P2P lending platforms. Also, results show that similar interest rates are applied to companies from different industries. In other words, investors who dislike uncertainty may choose to invest in companies from a less volatile industry, i.e. food/beverage, and enjoy earning similar returns as those from a more volatile industry, i.e. construction.

Study limitation

This study provides a first and original insight into Malaysia’s current P2P lending platforms. However, the analysis was based on small sample size as it only considered nine P2P lending platforms in this country.

Underlying data

Figshare: P2P Lending Platforms in Malaysia: What Do

We Know?

Doi: 10.6084/m9.figshare.14880369 (Nguyen, 2021).

This project contains the following underlying data:

Data file 1. Dataset_P2P lending in Malaysia What do we know_TIM21109.xlsx

Data are available under the terms of the Creative Commons International “No rights reserved” data waiver (CC BY 4.0).