Peer-to-peer (P2P) Lending: Six months in
It has been slightly over 6 months, since July 2017, when I invested RM1,000.00 in P2P lending with Funding Societies Malaysia, one of the first P2P lending operator established in Malaysia.
If you have missed the write-up, you could pick it up HERE.
I’m glad to announce that I’ve completed two rounds of successful crowdfunding exercises since July 2017:
a one month tenure with an interest rate of 10.8%; and
a six month tenure with an interest rate of 10%.
In other words, I’ve got back my capital and interest as stipulated in the terms of these crowdfunding exercises.
But that is not quite the end. Instead, I’m just slowly churning this compounding interest machine to its fullest. The capital and interest received from crowdfunding exercises are reinvested into other crowdfunding exercises. I have four ongoing crowdfunding exercises at the moment (soon to be five). This is an investment strategy of minimising risks whilst maximising profit. Hence, even though I’ve only invested RM1,000.00 of my own money, I have effectively invested RM2,300.00 (see below picture).
Thanks to the vigorous due diligence conducted by Funding Societies Malaysia, in sieving out viable crowdfunding opportunities, not only did I make a handsome return from P2P lending but I also did not encounter any untoward events such as defaults. According to Funding Societies Malaysia, there hasn’t been any default in Malaysia.
The interest which I’ve received since July 2017 is RM60.68, of which RM12.44 was deducted for service fee (see above picture). This leaves me with a net interest of RM48.24 or 4.8% return from an investment of RM1,000.00. If all things being equal, a return of investment of 9% or more per annum, by July 2018, is looking promising indeed.
However, the beauty of P2P lending is that it is possible to achieve a compounded return of 18% per annum (before adjusting for service fees). The compounding potential can be unlocked if the monthly repayments from a crowdfunding exercise (yielding a 10% interest rate per annum) is reinvested, on a monthly basis, into other crowdfunding exercise (yielding a 10% interest rate per annum). In my experience, I have yet to come across a crowdfunding exercise, on Funding Societies Malaysia, which offers an interest rate of less than 10% per annum.
And if you’re wondering how does an 18% return of investment per annum measure up against other conventional investments? On average, most fixed deposits for a 12-month tenure offer about 3% interest rate or return. On top of such meagre return, your money is locked in for a 12-month period; deprived of any means of compounding. In other words, after 12 months, you will only make a return of 3% on your capital.
A potential compounded return of 18% per annum is also much higher than the return from funds such as Amanah Saham Malaysia which declared a 6 cents dividend for each RM1.00 invested or 6% return per annum for its last financial year.
Similarly, the average return from an investment in Real Estate Investment Trust or REIT is only expected to achieve an average return of 6.3% throughout 2017.
It is clear that a potential return of 18% per annum, from an investment in P2P lending, through Funding Societies Malaysia, would overshadow the returns of other types of conventional investment such as fixed deposit, Amanah Saham Malaysia or REIT, and at least in my case, relatively low risk.
Do you have any reservations about investing in P2P lending? If so, do drop a comment.
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This article is written in association with Funding Societies Malaysia.
evenu last edited by evenu
Hi - thanks for sharing your POV. I read it with interest.
Still, what nags me is this thought: while an annualized return of 10% for a fixed income investment vehicle like FS is alluring at the moment, are such high returns really sustainable?
Also, I feel it's unfair to compare P2P lending in Malaysia (which is very much in its nascent stage) with mature vehicles like mutual funds and REITS. And, further, we should also factor-in the effect of tax on overall returns. If not mistaken, REITS continue to enjoy a flat 10% tax, and capital gains returns from mutual funds are still tax-free. P2P lending returns do not have any such tax shelter, I believe.
It is not accurate to compare relative returns to other investments when you are still in the early stage and hence experiencing "zero" default rate. Let's face it, default is to be expected at some point of investment cycle. Plus, I feel the fees charged by P2P operators are way too high!!
evenu last edited by evenu
@ironman - I don't really think < 1% service fee charged by FS is unacceptably high. We do want them to survive and be healthy. Else, all will be lost. In addition to the service fee, they also charge some 3-4% origination fee, which they get from successful borrowers. Although the latter fee is collected progressively (and not upfront), thus aligning their interests with lenders, I would think a slightly lower origination fees would promise greater sustainability. If necessary, they could introduce this as a discount to borrowers upon successful and timely repayment of loans, thus incentivising borrowers to do the right thing.
Loan recovery is a painful and costly process for all involved, except the lawyers, and I presume (and hope) FS has a solid back-end system to manage this.
@evenu not sure how you came to the conclusion that service fee is <1%...
With regard to your comments:
- Its quite common for banks and financial institutions to charge an interest rate of beyond 10% for unsecured lending for SME. It is no different from P2P lending. Hence, 10% interest rate per annum or more is viable.
2.I'm not too entirely sure how tax will be implemented. P2P financing is still new. As an investor of Funding Societies Malaysia, I was informed that returns from P2P lending will be taxable. It may be taxable on a personal income tax level which varies between individuals.
Service fee varies upon each crowdfunding exercise. It can be less than 1% or more than 1%. You may read the investing factsheet (sort of a product disclosure statement) before investing. It will disclose the service fee involved.
@ironman Hi again. I was informed that the zero default rate in Malaysia. However, the combined default rate for Sg, Indo and Malaysia is 1.45% which means for every RM100, only RM1.4 faced default.
There is risk but the risk is quite negligible at this juncture.
This post is deleted!
Good luck to you all and wish you continuance of the low service fee and low default rate that you currently enjoy.
@bursagoinglong that's an amazing piece. Thanks for sharing your p2p journey.
Loh last edited by
Risk is always there, It is a matter of how the Platform (in this case P2P Operator) mitigate the risk and how we investors do our homework, clear about our financial goals and realistic expectation returns.
Do your homework on P2P Operators, there are only 6 of them approved by Bank Negara, so far I only see 2 I have confidence. For each Opportunity, I put more investment into Funding Society compared to other one, as I had compared and noted Funding Society does a better Due Diligence compared to the other one. But the other one has more Opportunities, so I ended up investing more in other P2P Operator, so I hope Funding Society can work harder to get us more Opportunities but remain its standard of Due Diligence.
Do homework on your financial goals, P2P is riskier than REITs and Unit Trust, so you only choose those providing you higher return in the shorter time frame (Unit Trust may bring higher return but take longer period) than the 2 formal.
Lastly, you don't invest RM1ooo because you have RM1000 to spare, you investment RM1000 (and for how long in which financial vehicles) to achieve your financial goals, this is best learned from certified financial planners.
@Loh That is very clear and accurate. You definitely know what you are talking about.
We are working hard to secure more loans for all of you, while keeping low defaults, which is very hard to do.
Please stay tuned for the new year, it is coming with a lot of opportunities.
@evenu Thanks for the kind words. Loan recovery is indeed painful.
We enforce strong due diligence and credit checks on our borrowers before we do a crowdfund for them. Even though it is good and working, we are constantly improving our systems and processes every day.
We will definitely consider your feedback regarding origination fee, and see how we can make the experience for our borrowers and investors better. Nothing will make us happier than to provide world-class customer experience to all our customers.
Agreed with evenu's thought process. The service fee is not that high taking into account the DD and Loan recovery costs borne by the company.
Although, we might start seeing defaults once FS MY increases its loan book. Its just part of the business when p2p companies scale up. Look at Lending Club and Funding circle. Both of them started with virtually zero defaults and now, they have stabilised defaults of 2-5%.
I don't think defaults is something one should be afraid of. They might decrease your returns a bit but p2p still feels a good investment vehicle all things considered.
Rajni123 last edited by
I'm not too entirely sure how tax will be implemented. P2P financing is still new. As an investor of Funding Societies Malaysia, I was informed that returns from P2P lending will be taxable. It may be taxable on a personal income tax level which varies between individuals.
@bursagoinglong where can we find more information regarding the taxation on p2p earns?
So far 6 p2p operators have been given license. But p2p companies have been sprouting up like weeds in Malaysia and singapore. This space is gonna get highly competitive very soon. I hope the companies don't start loosening their credit checks just to get a bigger piece of the pie in the SME loans segment, and thereby increasing market share rapidly. Which will effect badly on investors and the whole p2p industry as a whole.
I think there should be some kind of regulation in terms of credit checks being done by the companies as well. I heard ill reports of some companies in singapore loosening their underwriting process to do more and more loans in an attempt to retain investors and it might not go so well in the future.
evenu last edited by
@rajni123 - "Sprouting up like weeds?" :) I guess you are exaggerating for effect.
I believe there is ample room for this industry to grow in Malaysia, and in SEA. For years we in Malaysia have been talking of Ah-Longs and their shenanigans, and yet, the banks have not gone beyond their comfort zones to fill this gap. Fintech promises to fill it. Time will tell if it did so successfully. But, let's all hope the pioneers like FSMY don't take on excessive risk too early in the game and flame out.
@Rajni123 Malaysia's SME loans market is big enough for a lot of players. I don't think its gonna be a zero sum game for the companies for a long time. Having said that, growing p2p companies is a good sign, means that the market is maturing, and we as investors also have a lot of options in which to put our money in. Which provides a healthy diversification and reduces risk.
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