Recently, I read this article about Funding Societies in the Sunday Times. And it got me curious about P2P (peers to peers lending) and crowd funding.
In gist, P2P Lending is the loan of money to individuals, or “peers”, without going through a traditional financial intermediary such as a bank. This lending takes place online using various different lending platforms and credit checking tools. Another definition is P2B lending (peers to business).
As stated in this article: Typically 80 to 90 percent of small business bank loan applications are rejected by large financial institutions in Singapore. So the prospective borrower can either risk turning to ah long (loan sharks – never a good idea), or they can give that new-fangled P2P lending a try.
According to figures released by Singapore SME consultancy Loyal Reliance, only about 13% of loan applications made by its SME clients in 2012 were approved.
Click here to read how peer to peer lending can help SMEs.
Crowdfunding is the practice of funding a project or venture by raising monetary contributions from a large number of people, today often performed via internet-mediated registries, but the concept can also be executed through mail-order subscriptions, benefit events, and other methods.
4 Crowdfunding Platforms In Singapore (read here)
In Singapore, there are a number of P2P lending companies: Funding Societies, Capital Match, MoolahSense, Crowdo, etc. It is still relatively new. For example, Capital Match was launched in 14th April 2015. Basically these companies allow retail investors to be lenders to SME borrowers (without the need to go through banks).
For the individual investor, the process is simple, one just need a bank account. Moreover, you can start investing with just as low as S$100.
“It’s very simple, it’s very fast. Really, you can do it in your pajamas at two in the morning. That is the beauty from the borrower perspective.” Peter Renton, a peer-to-peer blogger who recently made a foray into investing raising $28 million this year for Lend Academy Investments LLC. (read here)
For the yield-starved retail investors, the returns via P2P lending are significantly higher than the bank savings (which ranges between 0.01% to 0.5% – click here), traditional bonds or dividends from shares. (Read the 5 ways of generating fixed returns in Singapore – click here). In the last 10 years, the 10-year SGS (Singapore Government Securities) yield has been between 2% to 3% most of the time (read here). FYI Singapore Saving Bonds are a special type of Singapore Government Securities that is suitable for individuals. While for Singapore stocks, typically, 8 to 10% dividend yields are considered high (read here), however one would need to be subject to the volatility of the stock prices and financial fundamentals and performance of the companies.
On the other hand, lenders using P2P platforms can expect 12% to 20%+ returns.
For MoolahSense, they indicated that an investor could expect to earn returns that are determined by investors through an auction process.
For Capital Match, the example they gave was earning a monthly return of 2% This would turn out to be 24% p.a. return on capital at risk or 13.6% p.a. effective return. (read here)
For Funding Societies , they indicated that lenders could expect a return of 12% – 16% annual returns, focusing on safer and more stable SMEs. (read here)
P2P lending is already common in the US and China. (read here)
Besides the higher returns, what are the other factors attracting people to P2P lending? See below.
According to Lawrence Yong, the founder and CEO of the startup Moolahsense, who’s a banking industry veteran, explains its appeal to investors: “The main draw would be attaining attractive fixed income returns, bounded by a contract. Investing in mutual funds and index funds have variable returns.”
The risks are lower for investors, due to the different nature of firms seeking debt financing versus equity financing. The former is preferred by businesses with validated models and predictable revenue.
“There would already be some financial performance for the investors to review, where the investors can then evaluate the business’ capacity to repay. Unlike investors of equity, debt investors do not yearn for 20x capital gains but rather, are yield focused, desiring a fixed income on their investments,” explains Yong.
(read the full article here)
Beside lending to SMEs, investors can choose to Crowd Fund and invest in start-ups (eg. Crowdo, Fundedhere) or real estates (CoAssets, DomaCom and FundPlaces – read here). Note: One typically need to declare that he or she is an Accredited Investor.
The P2P lending companies are relatively new in Singapore. In the case of Funding Societies, they have selected Orangefield Trust to hold the crowdfunding funds received from lenders. Given the absence of a governed framework in P2P lending in Singapore, the onus is on P2P lending platforms to find ways to gain the confidence of lenders. This collaboration thus aims to provide lenders and borrowers increased transparency and protection as Orangefield Trust has a trust business licence that is issued by the Monetary Authority of Singapore. (read here)
However, a cautionary note:
P2P lending is considered as shadow banking (in numerous articles though some choose to define it otherwise) – read here. In China, Shadow banking was recognized as a potential source of systemic risk, and the way it was addressed was to comply with the Financial Stability Board monitoring framework. The CBRC closely watched both the bank and shadow banking sectors for potential sources of risk but allowed shadow banking activity to carry on. (read here)
The caveat is that P2P investing still has significant risks that accompany its higher yields, from a material risk of default (which can only be partially diversified away) to significant illiquidity.
MARKETPLACE LENDING: INVESTORS BEWARE (read here)
In China, dozens of the P2P lending websites that sprang up in recent years have shut as borrowers default on loans… the rapid collapse of smaller rivals highlights the mounting difficulties in the Chinese micro-lending industry as economic growth slows and monetary conditions tighten.
Of the nearly 1,000 P2P companies operating in China, 58 went bankrupt in the final quarter of last year, according to Online Lending House, a web portal that tracks the industry. Several more had already run into trouble this year, it added.
The signs of distress began to emerge in the second half of last year, when China’s central bank withheld liquidity from the money market and fuelled a significant jump in lending rates.
“The main reasons are the intense competition in the P2P industry, the liquidity squeeze at the end of the year and a loss of faith by investors,” said Xu Hongwei, chief executive of Online Lending House.
He estimated that 80 or 90 per cent of the country’s P2P companies might go bust.
(read the full article here)
As for me, I will be putting a small amount of my cash as loans via these P2P companies. It will not form the bulk of my investments. Value investing in quality growth companies is still my preferred form of investing.