Peer-To-Peer (P2P) Lending And Equity Crowdfunding (ECF) For MSMEs
Peer-To-Peer (P2P) Lending And Equity Crowdfunding (ECF) For MSMEs
Business Model Description
Invest in P2P lending and ECF platforms to help MSMEs access conventional and Islamic debt and equity assistance for them on lending and working capital needs. These platforms generate revenue through fees charged to borrowers and investors on transactions either as a percentage of the investment amount or as a percentage of the returns generated by the investment. These platforms may generate additional revenue from services such as credit scoring, loan servicing and value-added services such as data analytics, risk management and marketing via their platforms. Examples of companies active in this space are:
Ethis is an Islamic fintech platform that provides crowdfunding and peer-to-peer lending services to SMEs. The platform connects investors with SMEs seeking funding, with a focus on projects that promote social impact and sustainability. Ethis has raised a total of USD 5.5 million in funding to date through Quest Ventures and angel investors (26).
B2B FinPal: A Malaysian digital lending platform that connects small and medium-sized enterprises (SMEs) with lenders, allowing businesses to access financing in a quick and efficient manner. B2B FinPal has funded a total of c USD 110,000 to date (43).
CapBay is a Malaysian fintech platform that provides supply chain financing solutions to SMEs, allowing businesses to access working capital by connecting them with investors who provide funding based on invoices and purchase orders. CapBay has raised a total of USD 27.6 million through investors KK Fund and Kenaga Capital (44).
Fundaztic offers funding between USD 5,000 to USD 50,000 with short repayment periods of 3 - 36 months with interest rates as low as 8 per cent per annum. Fundaztic has raised a total of USD 1.5 m to date (45).
Expected Impact
Increased access to finance for MSMEs contributes to job creation, proliferation of inclusive business models, and consequently to improved community and household financial wellbeing and resilience.
How is this information gathered?
Investment opportunities with potential to contribute to sustainable development are based on country-level SDG Investor Maps.
Disclaimer
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Country & Regions
- Malaysia: Federal Territory of Kuala Lumpur
- Malaysia: Penang
- Malaysia: Johor
- Malaysia: Federal Territory of Labuan
- Malaysia: Countrywide
Sector Classification
Financials
Development need
In 2021, 11.6 per cent of the Malaysians had no official bank account (12.4 per cent of women and 10.8 per cent of men) (35). Businesses' access to capital remains limited (more than 50 per cent reported it as a moderate to severe issue and MSMEs finance gap is at 7.2 per cent GDP) (1, 6, 9). Insufficient insurance penetration is also an issue, with 50 per cent of Malaysians being uninsured (3).
Policy priority
Enhancement of financial literacy to promote responsible and rational behavior of Malaysians (in 2019, 1 out of 3 Malaysians reported having low financial knowledge) is a national priority, alongside the development of an inclusive, progressive and resilient financial system, including for Islamic and green finance instruments (2, 4, 5).
Gender inequalities and marginalization issues
Access to finance is unequal across Malaysia, with 5 per cent of sub-districts not having access in 2020 (2). For MSMEs it remains limited, particularly for sole proprietorships due to the perceived high credit risk, with 1/4 of loan requests by MSMEs rejected in 2021, despite increased covid recovery support by banks (7, 34). Financial literacy is lower among households with low income, with 17 per cent of B40 not having a bank account (4, 35).
Investment opportunities introduction
The Islamic finance sector (1.2 per cent growth from 2020 to 2021) presents growing opportunities considering that Malaysia is the world's biggest Islamic finance and banking center (5, 8). Digital banking provides investment opportunities, with mobile banking attaining a total of RM 101.5 billion (USD 22.21 billion) in 2022 (46.9 per cent growth from 2021 to 2022) (3).
Key bottlenecks introduction
The Malaysian financial sector is exposed to nature- and climate-related risks (10). Additionally, some regulatory constraints are limiting the evolution of the sector, including constraints regarding the use of electronic signature, the regulation of digital payments, and the complicated insolvency regimes for MSMEs (17).
Corporate and Retail Banking
Development need
To support the economic recovery after the Covid-19 pandemic there is need for a strong and resilient financial system relying on knowledgeable consumers, enhanced access to financial services for households and businesses, and digitalization (2). The need to access finance is especially pressing for households having income lower than RM 4,850 (USD 1,500) (B40) and for SMEs (2).
Policy priority
One of Malaysia's priorities is to develop safe and efficient payment solutions, including e-payment (5). Malaysia is also aspiring to foster entrepreneurship, which can be done through facilitated access to funding and a capable financial architecture to enable seamless transactions (13).
Gender inequalities and marginalization issues
MSMEs are particularly disadvantaged in accessing loans, with their financing gap reaching 7.2 per cent of GDP (6), due absence of collateral and insufficient documents to support their application (14). Moreover, women's businesses, which constituted 20.6 per cent of total MSMEs in 2015, are less likely to use external financial services to fund their businesses, which negatively affects their growth potential (19).
Investment opportunities introduction
Malaysia is a leading marketplace for Islamic finance and Islamic banking represents 44.5 per cent of financing, amounting to RM 974.1 billion (USD 213.15 billion) in 2022 (12). Additionally, fintech sector is expanding in Malaysia, with an increase of 27 per cent compared to 2021, and mobile payment representing the majority fintech segment (3).
Key bottlenecks introduction
In Malaysia, SMEs' digitalization is limited, with only 58 per cent of them having digitalized payments and 35 per cent having digitalized accounting and finance, limiting their access to finance (15). The domestic banking market is saturated given the high number of actors present. The recent economic situation also made interests rate to fall affecting banks' benefits (16).
Commercial Banks
Pipeline Opportunity
Peer-To-Peer (P2P) Lending And Equity Crowdfunding (ECF) For MSMEs
Invest in P2P lending and ECF platforms to help MSMEs access conventional and Islamic debt and equity assistance for them on lending and working capital needs. These platforms generate revenue through fees charged to borrowers and investors on transactions either as a percentage of the investment amount or as a percentage of the returns generated by the investment. These platforms may generate additional revenue from services such as credit scoring, loan servicing and value-added services such as data analytics, risk management and marketing via their platforms. Examples of companies active in this space are:
Ethis is an Islamic fintech platform that provides crowdfunding and peer-to-peer lending services to SMEs. The platform connects investors with SMEs seeking funding, with a focus on projects that promote social impact and sustainability. Ethis has raised a total of USD 5.5 million in funding to date through Quest Ventures and angel investors (26).
B2B FinPal: A Malaysian digital lending platform that connects small and medium-sized enterprises (SMEs) with lenders, allowing businesses to access financing in a quick and efficient manner. B2B FinPal has funded a total of c USD 110,000 to date (43).
CapBay is a Malaysian fintech platform that provides supply chain financing solutions to SMEs, allowing businesses to access working capital by connecting them with investors who provide funding based on invoices and purchase orders. CapBay has raised a total of USD 27.6 million through investors KK Fund and Kenaga Capital (44).
Fundaztic offers funding between USD 5,000 to USD 50,000 with short repayment periods of 3 - 36 months with interest rates as low as 8 per cent per annum. Fundaztic has raised a total of USD 1.5 m to date (45).
Business Case
Market Size and Environment
> USD 1 billion
< 5%
1.23 million MSMEs are officially registered as of 2021. This accounts for 97.4 per cent of business establishments in the country. according to Department of Statistics Malaysia Data (25).
The total funding gap for Malaysian MSMEs stands at around USD 20 billion, with the country hosting 1.23 million MSMES.
In total some RM 1.7 billion or USD 385.5 million was raised by P2P and ECF operators in the country. Since 2018, some RM 4.4 billion or USD 1 billion has been raised impacting 7,218 MSMEs. Non-Klang Valley deals increased by 4.4 times since such products were gazette in 2018 (20).
The increase in Non-Klang Valley Deals is important. The Klang Valley is a geographic area that covers Kuala Lumpur, Putrajaya and Petaling Jaya, traditional financial and business hubs. This indicated that take-of such services outside of the traditional financial and business hubs has risen.
From November 2022, the Securites Commission Malaysia (SC) announced that it would be expanding the number of P2P license holders in the country seeking more shariah-compliant service providers. Applications for licenses were being received by the Securities Commission Malaysia from Jan 1, 2023, and successful applicants will be contacted (21).
Indicative Return
> 25%
> 25%
> 25%
P2P and ECF providers have been adopting a SaaS model as of late, according to stakeholders consulted for this IOA. As such, SaaS platforms have noted a gross profit margin of 70 per cent to 80 per cent were noted to be around average for such platforms.
2022 Median net IRRs for APAC PE funds stood at 15 per cent, with top quartile funds registering a net median IRR of 25 per cent (48). In 2020, IRRs in Southeast Asia based deals stood at 21.44 per cent (49).
Investment Timeframe
Short Term (0–5 years)
Expert stakeholders in this space have noted that it takes about 2 years to develop and successfully market a technically sound platform. One year is to develop the platform, and another year is for the platform to gain enough traction from a customer acquisition perspective. However, this is subject to regulatory approvals and requirements.
Ticket Size
USD 1 million - USD 10 million
Market Risks & Scale Obstacles
Market - Highly Regulated
Capital - CapEx Intensive
Impact Case
Sustainable Development Need
Access to finance is challenging for MSMEs, which accounted for 97.4 per cent of overall business establishments in 2021. Only 45 per cent of total business financing was dedicated to MSMEs in 2020 (75 per cent of which was attributed to microenterprises) (31, 2, 25).
Although there are some public funds or angel investors, start-ups in Malaysia are mainly funded through personal sources and retained earnings (65 per cent of young firms are funded through the founder's own personal funds) (30).
While being the first source of funding for MSMEs (providing 95 per cent of MSME loans in 2019), banks lack expertise on emerging and untested areas such as innovative start-ups (32). They tend to perceive high risks, limiting the new businesses' access to funding in Malaysia (32).
Gender & Marginalisation
In developing countries, 65 per cent of women-led businesses are financially unserved or underserved. Women are more likely than men to be discouraged by funding application process and they lack awareness on financing options, thus rely more on self-financing for their businesses (19, 28, 33, 41).
People in rural areas have lower access to financial services such as insurance offers due to low level of financial literacy, lack of documents and poor internet connectivity, in spite of a national internet access rate of 95.5 per cent in 2021 (51, 52).
Expected Development Outcome
Alternative financing, such as P2P lending and equity crowdfunding, offers additional and more accessible financing options for MSMEs, who mainly require small investments. In 2020, 74 per cent of P2P financing that was fundraised was of ticket sizes up to RM 50,000 (USD 10,941) per enterprise (31).
Alternative non-bank financing enables a broader support for business establishment and growth via increased funding options throughout the business life cycle (ideation and early-stage mainly), especially since loans are provided without collaterals (30, 32).
Providing funding to innovative and high value-added start-ups as well as MSMEs, alternative sources of financing contribute to Malaysia's 2030 objectives of 50 per cent GDP contribution by SMEs and 80 per cent generation of jobs by SMEs (13, 34).
Gender & Marginalisation
Provided that a supportive environment is put in place, alternative financing can increase women-owned businesses' access to finance thanks to less burdensome procedures and being more accessible via digital options (41).
Supported with improved internet penetration in rural regions, alternative financing eased by digital solutions can improve rural regions access to financing (51).
Primary SDGs addressed
8.1.1 Annual growth rate of real GDP per capita
8.2.1 Annual growth rate of real GDP per employed person
8.5.2 Unemployment rate, by sex, age and persons with disabilities
The GDP grew by 7 per cent in Q4 2022 (27).
2.4 per cent of growth in 2021 (35).
In 2020, 4.54 per cent of overall unemployment, with 4.7 per cent for female and 4.5 per cent for male (35).
Target to reach a GDP growth per annum of 4.5-5.5 per cent by 2025 (36).
Target to reach a GDP growth per annum of 4.5-5.5 per cent by 2025 (36).
9.3.2 Proportion of small-scale industries with a loan or line of credit
19.65 per cent of small-scale industries in 2019 (35).
Secondary SDGs addressed
Directly impacted stakeholders
People
Gender inequality and/or marginalization
Planet
Corporates
Public sector
Indirectly impacted stakeholders
People
Gender inequality and/or marginalization
Planet
Public sector
Outcome Risks
Increased availability of financing without enhanced financial literacy of MSME owners may risk their level of indebtedness increasing beyond a sustainable threshold.
Provision of financial services via digital platforms might cause cyber security threats for clients and businesses.
If a sustainable financing approach is not adopted by P2P lenders, increased funding might flow into unsustainable businesses.
Without well adapted consumer protection measures in the regulatory environment, consumers may be vulnerable to exploitative practices by financial service providers.
Gender inequality and/or marginalization risk: Without supportive capacity-building efforts for women entrepreneurs and MSMEs with low digital capabilities, these might remain excluded and unserved.
Impact Risks
Instead of providing alternative financing, if P2P and crowdfunding platforms were to become shadow banking, i.e., an unregulated version of traditional banking, the intended impact might not occur.
Lack of internet access by certain MSMEs, especially informal businesses, constitute a limiting factor for impact creation.
Impact Classification
What
P2P and ECF for MSMEs increase access to funding for small businesses through simplified procedures and more suitable offers of financing throughout the business life cycle.
Risk
Execution risk due to shadow bank-like platform development, the risk of businesses' insolvency and failure, and stakeholder participation risk due to internet dependency.
Contribution
Contribute to the reduction of the current MSMEs finance gap of 23.48 per cent (47), affecting local business growth, community's socio-economic resilience and the country's economic growth.
Impact Thesis
Increased access to finance for MSMEs contributes to job creation, proliferation of inclusive business models, and consequently to improved community and household financial wellbeing and resilience.
Enabling Environment
Policy Environment
Shared Prosperity Vision 2030: the policy emphasizes on the difficulties experienced by SMEs in accessing financing, especially loans, and highlights alternative funding as potential solutions to this issue (7).
Twelfth Malaysia Plan (2021-2025): the plan identifies peer-to-peer financing as a solution to enable and expand MSMEs' participation in larger and more competitive markets, in its Chapter 11: Boosting Digitalization and Advanced Technology (36).
Financial Sector Blueprint (2022-2026): the blueprint recognizes the potential of alternative finance solutions to complement traditional finance, providing new funding opportunities to underserved or unserved (2).
National Financial Literacy Strategy (2019-2023): aims at increasing the country’s levels of financial literacy, promote responsible financial behavior and healthy attitudes towards financial management, including for self-employed (4).
Industry4WRD Policy on Industry 4.0: The policy intends to support companies' digital transformation in manufacturing sector through incentives and support for infrastructure, human capital and technology development (55).
Malaysia Madani: The Malaysia Madani plan has six main principles including Innovation, with aspirations of strengthening MSME resilience (56).
Financial Environment
Financial incentives: MDEC has launched several initiatives, e.g., Fintech Booster capacity building program in collaboration with BNM and an Accelerator initiative to support the development of fintech companies. The latter provide start-ups with opportunities for local/foreign investments (22).
Regulatory Environment
Guidelines on Recognized Markets (Guidelines): regulates the registration of a person as a recognized market operator (RMO) and ongoing requirements applicable to RMO, including P2P and crowdfunding platforms (chapter 13) (37).
Capital Markets and Services Act 2007 and 2015 amendment: require a P2P operator to be registered as a Recognized Market Operator with the Securities Commission (38).
Electronic Commerce Act 2006: recognizes and regulates electronic contracts and digital signature (39).
Consumer Protection Act 1999: protects consumers against unfair practices and imposes minimum product standards (40).
Personal Data Protection Act 2010: regulates the processing of personal data in commercial transactions (29).
Marketplace Participants
Private Sector
Ethic Group; B2B FinPAL; Modalku Ventures; Fundaztic; CapBay; Capsphere; GoBiz; Cofundr; MicroLEAP; FundedByMe; Peoplender; ManagePay Services.
Government
Securities Commission (SC); Ministry of Finance (MOF); Ministry of International Trade and Industry (MITI); Bank Negara Malaysia (BNM); Malaysian Communications and Multimedia Commission (MCMC).
Multilaterals
International Finance Corporation (IFC); World Bank; United Nations Development Programme (UNDP); Asian Development Bank (ADB); International Monetary Fund (IMF).
Non-Profit
Malaysia Business Angels Network (MBAN); Malaysia Venture Capital & Private Equity Association (MVCA); Malaysian Global Innovation & Creativity Centre (MaGIC); SME Association of Malaysia (SMEA); Malaysian Association of Asset Managers (MAAM), Alliance for Financial Inclusion.
Public-Private Partnership
Malaysian Technology Development Corporation (MTDC); Malaysia Co-Investment Fund (MyCIF); Malaysia Digital Economy Corporation (MDEC).
Target Locations
Malaysia: Federal Territory of Kuala Lumpur
Malaysia: Penang
Malaysia: Johor
Malaysia: Federal Territory of Labuan
Malaysia: Countrywide
References
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