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Not only has the concept plugged the country’s funding gap to some extent, it has also created an asset class that gives the man in the street a high yield he had never experienced before.
But is there trouble in paradise?
For some time now, traditional bankers have been harping on one anomaly: that despite offering higher yields than banks’ fixed deposits, these platforms claim to have lower default rates than banks.
Can these platforms really be that good at what they do, or is there some discrepancy in the way their default rates are calculated?
This goes into the crux of one of the issues facing P2P platforms in Malaysia. While their returns average from 10% to 18%, compared with banks’ fixed average deposit rates of 2.3% to 3.6% today, the average reported default rates of P2P platforms is 1% to 3% versus banks’ 1.4% to 1.7%.
This anomaly flies in the face of the concept of greater risk and greater returns.
P2P platforms do not use the same methodology of calculating defaults as banks do with non-performing loans (NPL).
The key difference is that P2P platforms use the total amount of loans disbursed since their inception and compares that with total defaults, while banks’ NPLs only use a six-months cutoff period.
As a result, the denominator of the P2P platforms’ default rate calculation tends to be a large number, ballooned by rollovers, leading to the low default rates.
Default rates can still vary across P2P platforms depending on the tenure and financing structures of their loans.
In some cases, loans get rolled over multiple times, with the borrower agreeing to pay a higher rate each time.
Hence, there is a need for the regulator to impose more stringent and standardised rules on these platforms.
An industry player says some P2P platforms that offer more short-term notes, like three-month notes – can appear to have much lower default rates.
“Short-term notes can make default rates look lower because the same borrower may take multiple three-month loans, inflating the cumulative disbursement base.
“When they finally default, it shows up only once – against a denominator that’s been multiplied many times over.”
To make default rates easier to compare across platforms, Fundaztic founder and chairman Jeffrey Chew says P2P operators should also show what their default rates would be using the banks’ method of calculating the NPL.
“This gives a more standardised and comparable measure for investors. When calculated in such a way, P2Ps’ default rates will be higher than the bank but it will be a fairer figure,” he says.
Funding Societies country head Malaysia Chai Kien Poon argues that using the banks’ NPL method to derive the default rate for P2P platforms for comparison sake, is not accurate as both methodologies have their limitations.
“The investment note tenures that P2P platforms offer are generally shorter than those of banks.
For Funding Societies, most notes run for about three to six months. Also, P2P operators’ loan portfolios are not as large and repayments can happen a lot faster.
Hence, using the bank’s NPL method to calculate a P2P platform’s default rate may yield very volatile figures,” he says.
Chai adds the Securities Commission (SC) has been engaging P2P operators to review the current default definition and consider refinements.
Several proposed approaches have already been circulated for industry feedback as part of an ongoing review process.
In written replies to StarBiz 7, the SC says it currently “mandates all P2P platforms to disclose comprehensive information, methodology and statistics on defaults”, and that “the nature of P2P financing, which involves the issuance of securities to the crowd, differs fundamentally from the balance sheet lending model of regulated banks”.
Bay Smart Capital Ventures Sdn Bhd co-founder and CEO, Ang Xing Xian says a direct comparison using the banks’ NPL ratio is “not feasible” as a P2P platform’s role is to facilitate financing, not to hold loans on its own balance sheet.
Bay Smart Capital Ventures’ default rate stands at 1.5%, where 0.9% is associated with financing that is fully secured in which it had good recovery rates of over 90%.
The question remains: are investors aware of the risks of P2P investing and are platforms providing sufficient disclosure to the public?
The SC, for its part, requires all recognised market operators, including P2P platforms, to disclose all necessary risk warning statements.
It also notes platform operators are required to “have in place risk assessment processes, conduct due diligence on potential issuers and publicly disclose information on the issuer alongside explanatory notes on its risk scoring methodology.”
P2P operators do disclose default and liquidity risks on their websites and onboarding materials but to say that it is prominently displayed is debatable.
One seasoned banker says that while there are risk disclosures, they do not clearly define what “high risk” or “low risk” means.
“There is a lack of education, which may not lie with the platform itself, but perhaps is something the authorities should address to help investors better understand the various types of risks.
“Different P2P platforms offer different products with different kinds of protection for investors.”
Fundaztic, for instance, offers principal protection of up to RM30,000 for investors with a diversified portfolio.
For Funding Societies, its financing products are guaranteed by the Credit Guarantee Corp, which covers 50% of the outstanding repayment in the event of a small and medium enterprise default.
However, Chai explains that such guarantees currently apply to only 30% of notes on the platform now, though it is being expanded over time.
Despite these concerns, the P2P model has its merits in plugging a real funding gap that galvanises economic activity, creates jobs all of which leads to tax revenues for the government.
But investors need to better understand the risks and default rates should be more reflective of the true levels of risk this type of lending entails.
Article By ELIM POON. "P2P-allure with a catch." The Stars , Saturday Nov 22, 2025, Star Biz7, p. 8.
Disclaimer
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