- 6 months ago
Where traditional banks hesitate, P2P platforms step in. MicroLEAP’s COO Matthew Fernandez on how they’re bridging the funding gap and driving growth for MSMEs.
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00:00Hi, you are tuned in to Awani Review with me Cynthia Ng.
00:13Today we will be talking about P2P financing with Microleap,
00:18a company founded in 2019 to help improve access to funding for small and medium businesses in Malaysia
00:25and potentially abroad as well.
00:27We'll talk about that later but I'm so excited to have with me today is the CEO of Microleap,
00:32Matthew Fernandez joining us to understand a bit more about this model,
00:36why it works and where this space is headed.
00:39So first of all, thank you for having me here at your office,
00:42really such a pleasure to have you on the show.
00:44Yes, likewise, thank you for coming over, made our job easier as well.
00:48Alright, so let's start with something simple.
00:50For those of us who are not familiar with P2P financing, that is peer-to-peer financing,
00:56how is Microleap different from a bank and why does it matter to small and medium-sized businesses?
01:03Yes, thanks for that.
01:05First things first, Microleap is a peer-to-peer financing platform matching investors to issuers,
01:12which are the MSMEs in this country.
01:14So we go from as low as RM1,000 right up to RM1,500,000 at the moment.
01:19So we've grown really a lot over the years.
01:23But P2P and SC were the first, Securities Commission Malaysia, SC,
01:28were the first to regulate peer-to-peer financing from 2016.
01:33We were the second batch.
01:34We started 2018-2019 once we went live.
01:38It has been, what's it called, booming ever since.
01:41We were also the first to do share-to-compliant financing and conventional financing on one platform.
01:47So that's the main drive on Microleap side.
01:50I mean, that's also how we're different.
01:52The banks, of course, now it's the time and the fact that they don't really do small cost financing.
01:58So the banks would only look at larger profitable loans.
02:01So that's the main difference between banks and us.
02:03But the good thing is there's now 18 players.
02:05So it's grown from five and then 11 and then now there's 18.
02:10All serving everyone from mid-tier companies right down to the people like us who handle the MSMEs, also up to SMEs.
02:17Let's talk about the sectors that you serve.
02:19Are there particular areas that Microleap is more focused in?
02:22Microleap is sector agnostic in general, but we do have certain sectors that,
02:27an ecosystem that we've been financing, invoice financing, purchase order financing,
02:33like the Laurier.com.
02:35They have IKEA, Maidin, a lot of good clients and we've been taking care of that ecosystem financing for many years.
02:41But those during COVID times, there were a lot of companies that they were,
02:46there's one famous one in Johor that was doing,
02:50but she pivoted during COVID because obviously no one could go out.
02:54But Grab and Food Panda sales would go through the roof.
02:57And thankfully, those are the kind of guys that we also looked at.
03:00So those that kind of like maybe KIV or maybe the banks were not so sure.
03:04But if we can see that they can afford the financing, that's where we came in.
03:07Okay. Yeah.
03:08So I see that P2P financing, a company like yours, plays a very vital role to fill in that gap.
03:14The financing for companies which may not have the traditional metrics that the banks would look at or really accept, right?
03:23So talk to us about the businesses that you're serving and what do you aim or the bigger objective here?
03:29Yeah. So like the name suggests, Microleap, we're trying to get them starting small and making a big leap
03:35and maybe getting a mix of bank financing as well as ours.
03:38And that's actually been the core of how we've been running.
03:41So the good thing is it's a funding escalator, so to speak.
03:46So pure startups, they can go to equity crowdfunding, also regulated by Securities Commission Malaysia.
03:51So those other ones, maybe they can look at pre-revenue and look at the expansion growth,
03:56or maybe they've secured some big contracts, but these guys are pure startups.
04:00So equity crowdfunding comes on that side.
04:02Peer-to-peer financing is from revenue-generating right up to IPOs and publicly listed companies and subsidies as well.
04:10So that's where we come in on the P2P side.
04:13But the good thing is banks, of course, again, they'll always take the larger ones.
04:18So we have the, unfortunately, we also have the Alongs in East and West Malaysia, unfortunately.
04:24So I hope that is something where we can come in as well and not so much eradicate,
04:30but at least help to give other options.
04:32Thankfully, now we're kind of growing our base.
04:34We have offices in Saban, Sarawak as well.
04:37So that's actually helped, and nationwide actually, with East Coast and West Coast.
04:42So that's where I hope the funding gap is what we're trying to close.
04:46It's a 90 billion funding gap for MSMEs up to SE's report as of a couple of years ago.
04:5190 billion?
04:52Yeah, 90 billion ringgit.
04:54So that is something which we're hoping, not just us, but the entire ecosystem,
04:59the players from ECF and P2P are trying to resolve.
05:02Because at the end of the day, the ones who actually build a track record,
05:05the track record is actually noticed by the banks as well.
05:08So they will take it into account when they're looking at maybe,
05:11they could probably be eligible for hybrid financing or maybe some bank specific grants or grant financing.
05:20So things like that, if they come from us to the banks, etc.
05:23That's also a natural progression.
05:25I'm really interested to hear more about how you manage risk because you've kept defaults at just 0.36%.
05:33I believe it's one of the lowest default rate in Malaysia.
05:38What is behind it and how much of it comes down to your credit scoring approach?
05:43And I do wonder how is it different from data that banks tend to overlook?
05:49I think the key factor there is the fact that our tenors don't go more than three years.
05:54Generally speaking now, even the investors that are on our platform from the 10 ringgit guy
05:59right up to the million ringgit or millions of ringgits of investors and asset managers,
06:03they're looking for as tight as possible, the best P2Ps, the best default rates basically.
06:10So we're pretty tight from day one.
06:13So we have some pre-disbursement conditions that they have to meet.
06:16So that kind of filters out a lot of people already.
06:19But the good thing is, luckily, Microleap is one of the few,
06:23or maybe with a rare P2P that actually has government agency support as well.
06:28So we can still take care of the micro and social enterprises and the lot.
06:31But we also, because that's a very, very low 3.5% per annum.
06:36So very, very low, or 0.5% per month for Traju, Bumi Putra Government Agency,
06:43that serves, of course, East and West Malaysia, which I should say.
06:46So that's the kind of thing that helped us from the start.
06:50We have really tight on credit and with disbursement conditions, mitigation steps,
06:54like post-data checks are important.
06:56So all these things actually help to bring down a default rate,
06:59because if they're already going to pay us every month through the direct debit e-mandate
07:04or standing instruction, that helps to mitigate the risk already.
07:08And so far, that's been running well.
07:10And we also have notice of assignment as well.
07:12So things like that ourselves and quite a number of the players are practicing the same,
07:17if it ain't broken, SOPs.
07:20So basically, everyone's mirroring each other as well.
07:23So overall, below 1% default rates, most of us are having the same kind of credit modules and credit assessments.
07:31Okay, so that's the default rate, which is kept very low.
07:35I want to talk about growth as well, because since 2019,
07:38Microleaf has more than doubled its funding every year, compound annual growth rate, about 280%.
07:43That's very, very impressive.
07:45How are you pulling that off? Grow fast, growing fast while keeping default rate low?
07:51That's the biggest challenge.
07:53I think the main crux of the issue is, of course, whether the issuers are actually in touch with us.
07:59But we also have a default management process with several credit agencies as well as debt recovery guys.
08:07So, not the ones that will throw paint on your house, the ones who are actually quite nice.
08:12And more importantly, I think they do it in a very professional manner.
08:15And they're working with several players and banks as well.
08:18So, so far, that's actually been helping us a lot.
08:21And the good thing is, if you have the conversation early, then we can restructure.
08:24Because that's something we always have to point out, the restructuring costs is manageable,
08:28and it's better they come to us for the restructuring.
08:31And so far, that's helped.
08:33Because the government agencies are the same.
08:35They won't call it default as long as you're paying something.
08:38So, that's why also, I mean, why we always say, like, if there's Microleaf, and there's also Microleaf Plus,
08:44and the government agency websites, SME Corp.micleafasia.com, Tradu.micleafasia.com, etc.
08:50So, these are the guys that can help you on other things as well.
08:53You know, and they're cheaper.
08:54So, and cheap, definitely cheaper than the banks or even P2P.
08:57So, those are the areas where we can, you know, we really look to help.
09:01And again, we're really happy that that's really helped fuel our growth also.
09:06And Islamic finance adoption.
09:08I think everybody likes the transparency factor.
09:10Everyone likes to see the fact sheet, and we personalise it like Kiva.com.
09:14We personalise it as much as we can.
09:16So, people have an understanding of who they're investing in as well, and the nature of the business, and the facts and figures are all there.
09:25If you look at the environment or economic conditions, right, some critics would say that ultra-high growth, the risks tend to only show up when there is a downturn.
09:37So, how confident are you about the microleaf model, especially the MSMEs that you're serving?
09:44I think the good thing is even SC and even our FMPM is looking for social enterprise financing, social financing.
09:52So, that will take care of like the B40s and all that, because they're not expected to pay back with interest.
09:58It will be Cardhassan financing, so 0%.
10:01So, that is something really interesting.
10:03So, that also, again, where we'll be launching it with Securities Commission, hopefully by start of next year.
10:08So, between helping the NGOs to the kind of social enterprises.
10:12So, this is a completely different segment from what you're serving now?
10:14Yeah, a completely different segment.
10:15But, similar in a way, because we know some of these guys who are in that bracket, then also the government agencies as well as Microleaf will take care of the rest.
10:23So, it's definitely something we don't want to, you know.
10:27I mean, it's the easiest thing to do is, okay, yeah, just like the banks, okay, we're not going to look at the small guys, but it can be done.
10:33I mean, you know, and it is promising to know that the government itself is giving support.
10:38Okay, so that's the one spectrum of the businesses.
10:41What about the businesses that you are handling right?
10:43Yeah, good thing is, I guess, is the tenor.
10:46You know, only for Microleaf, we keep our tenors shorter for our retail investors and our investors on our platform.
10:52So, also, there'll be more initiatives that I think I will touch on.
10:56But, like, basically, that's also something that is sovereign-backed, you know, like, basically, government-backed financing, state-level or federal.
11:05So, all these things is where we can still grow and keep our default manageable and or as close to zero as possible.
11:12I think zero is pretty hard, but it takes a long time to go from, say, 0.58 to 0.36.
11:20Is that target?
11:21No, we just, I mean, obviously, just like all the people we're working with on every level, as well as the regulator, keep it as close to zero as possible.
11:32That's the aim.
11:33But I think, realistically, as long as we can get the conversation rolling and restructuring is happening, that helps.
11:39You know, so, and sometimes that's, most of them are pretty genuine.
11:42So, but again, the credit side, they're doing a really good job.
11:45So, they're doing the main filtering.
11:47We're not as high as the bank's rejection rate-wise, but, you know, we're not that low either.
11:52But a good thing is the ones that maybe can't fit here, okay, maybe you can come apply on this side.
11:57Maybe the agency side or the social financing side.
12:00Okay.
12:01Now, one factor that has been driving growth for Microlib is your government partnerships.
12:06Yeah.
12:07That's shaping up to be quite a large portion of your portfolio.
12:11Can you talk to us more about that?
12:12Yeah, we've grown quite a bit.
12:14We started off with 10 million during the COVID times.
12:17So, we did the COVID Digital Financing Initiative for SMEs and anyone under SME Corp that has a valid cert.
12:25So, after that, we had also, and MTDC, we've also been long-term partners with, as well as Traju recently.
12:33And we're looking to work with BPMB and some DFIs.
12:36So, that's where we can really maximize some of these growth areas as well.
12:41They are a decent, sizable chunk, but fortunately for us, everything else has a natural knock-on effect.
12:48For some of these guys who took the government agency funds, then won some large contracts,
12:52and they were like, can we just do the normal Microlib?
12:54Because A, they can afford it, and B, their business has grown.
12:57So, or we've also had some that grew it from term financing to invoice financing just on our platform alone.
13:02So, that also is a good sign.
13:04I mean, we never said no.
13:05We never said they can't go to the banks.
13:07Although they can't, they're not allowed to do multiple P2Ps at the same time, that's under the regulations.
13:12So, that we are very careful of.
13:14That also will be done under the trade assessment side.
13:17So, so far, so good.
13:18I mean, that's what I hope it continues.
13:21Long may continue, but the team is, we've got quite a good Agile team.
13:25And also, like we mentioned earlier, we will, which I'm sure we'll touch on, is the fact that our partners in Indonesia are running at a 0.25% default rate, lower than us.
13:35Okay.
13:36And that's a 30, well, we had, the size of Jakarta is the size of Malaysia, right?
13:40So, the fact that they are running at such a low default rate for the whole of Indonesia, that also speaks volumes.
13:45So, ecosystem financing is the way to go.
13:47All right.
13:48I'll get to Indonesia in a bit, but I do want to talk about the Sarana program, the invoice financing,
13:52which helps small contractors get financing through P2P platforms like MicroLib.
13:59Can you talk to us about how being part of that scheme has helped MicroLib's operations and underwriting?
14:05Yeah.
14:06So, that is going to be a bit of a process because fortunately, unfortunately, we are super fully online, super digital.
14:13Digital adoption is huge.
14:15And so in Malaysia, likely post-COVID and the region, to be fair.
14:19But Sarana is a mix of wet signatures and a lot of back and forth.
14:24But we've got a team under, we've got a team specifically for Sarana, the underwriting, etc.
14:29As well as the follow-ups and the dispatch to go back and forth because you can't trust these kind of important documents to be with just any delivery.
14:37It has to be your own person.
14:39So, things like that.
14:40So, it's going to be a bit tedious, but the growth is exponential because you're talking about even people in Sabah that have federal contracts.
14:49Because eProlehan or eProcurement is specifically for federal contracts.
14:53But it used to be with the factoring houses at a very, very high cost.
14:56Now with P2P, it's capped at 1.25% a month.
14:59So, it's really cheap compared to what they were paying, which was, with Sharia, it was paying anywhere between 3.5% and above.
15:06So, I mean, all in cost.
15:07So, ours is a lot more straightforward.
15:09P2P also, you pay only at the end, the principle at the end, at least that's how we do it.
15:14The balloon structure.
15:15So, it's very easy on the balance sheet for SMEs or MSMEs.
15:18So, the good thing about these guys, they say their contract is 100,000 or 10,000 or maybe a couple of million.
15:23If it's MOD, it could be G1 to G7 guys can get a 10 million contract.
15:27But we can fund any of these amounts because the backers or the investors will be there because it's sovereign backed.
15:32The only issue is maybe sometimes the payment may be delayed, but the payment will be there.
15:37So, that's what I was going to get at.
15:38So, on paper, it does look like it's safer because the loans are tied to government projects.
15:45And the paymaster is the federal government.
15:47The paymaster is the federal government, but things like delay, bureaucracy, and also perhaps over concentration in certain sectors.
15:54Is that a problem that you're saying?
15:55Yeah, I think that could be.
15:57I can't deny that.
15:58I mean, that's also people that have been doing this exact Sarana program financing.
16:04Banks as well.
16:05Banks have obviously been doing eProLehan for many years.
16:08The feedback that we got from that is exactly what you rightly pointed out.
16:11Is the fact that these guys are sometimes either, you know, maybe it's just certain companies are getting it over and over again.
16:19Or, yeah, the over saturation.
16:21So, it is valid points, but we're trying to learn and see how to best navigate it.
16:27But so far, I think we're going to do the trial run within this year, this quarter, quarter four.
16:33But I think the advantage is we know that the growth is just, the sky's the limit.
16:38Because you're having sovereign backed financing that asset managers are looking at.
16:43Normal retail investors like you and me, with our RM10 or RM10,000 can look at.
16:48Because it's safe, you know.
16:50So, I mean, it's as secure as it possibly can.
16:53But yes, we cannot deny that the bureaucracy and red tape will be there.
16:57We cannot deny that the payments may be late.
16:59From your vantage point, what is the sweet spot in terms of portfolio allocation?
17:03Government, retail, Sharia, conventional, what do you see as a...
17:08So, we're kind of Jay-Z, 99% Sharia.
17:12So, unfortunately, unfortunately, that's something...
17:15Wait, 99%?
17:17Yeah, 99% of our entire funding dispersed.
17:21So, we've done over 420 million at the moment, touching 430, 430 plus.
17:26So, basically, we're at this point in time, we're 99% Sharia.
17:30So, it's... I think Sharia is going to be our makeup, no matter what.
17:34Because the retail investors who are non-Muslim are also looking at Sharia assets.
17:40Because they just like the transparency, they're kind of used to it now.
17:43So, it's good that... And again, we absorb all the cost.
17:46So, there's no difference between... As an SME, you don't...
17:49There's no difference in cost. As an investor, there's no difference in cost.
17:52Whether you're investing in Sharia or conventional.
17:54So, that is... I think, can't run away from the Sharia heavy bit.
17:58Even now, Indonesia is 100% Sharia. So, that's also nice.
18:02I mean, these guys are... Basically, they're very in line with us.
18:04But my partner is there.
18:06But the good thing is, I guess, the...
18:08If we can get the government Sarawana program to be maybe 20 to 30%, that would be great.
18:14Because then we know our growth will not be 420 million.
18:18We'll probably be touching double that.
18:20Because those ticket sizes are huge.
18:22You're right. They have the small ticket sizes.
18:24Cleaning contracts could be 10,000 ringgit, 5,000 ringgit, 30,000 ringgit.
18:28But you also have some huge contracts which are like 1 million, 10 million.
18:32But if the government is confirmed going to pay, then it's a bit safer for the person that's funding it.
18:38Okay. Now, just quickly, just to get a sense of what's happening.
18:41Just recently, OPI was cut to 2.75%.
18:44How are MSMEs responding?
18:46Do you see this last demand now for P2P platforms?
18:50What trends are you noticing?
18:52I think so far, of course, these cuts have happened before.
18:55So the good thing is now, yes, there's also digital banks can't deny that.
18:59So they have actually better rates.
19:01In fact, they're coming in hard.
19:03But I don't see the price big enough.
19:06I mean, they can survive, we can survive.
19:08And the banks are on autopilot, so they'll be fine.
19:11But the digital side, these guys as well as P2P, ECF, I mean, the market's big enough.
19:18So I think we've gone through these ups and downs and these cuts before.
19:22But the demand is quite stable over the years.
19:25It's not really dipped when the cuts have happened.
19:28It's not really dipped or vice versa.
19:30So I think we should be able to handle it.
19:33And again, I mean, if the growth, I would say the growth aspect would be the Sarana programs
19:40and the lot, because these are the ones where, again, the pie is big enough.
19:45I mean, the banks are also doing it, factoring it, pre and post sales.
19:50And we are doing the same.
19:51I know you say the pie is big enough, but do you see digital banks, for instance,
19:55as a competitor or increasingly a competitor?
20:00Yeah, exactly.
20:01But I mean, it's also if you can't beat them, join them.
20:03So we have to work with them.
20:05But luckily, they are quite on a similar mindset.
20:08And definitely, they try to digitize as much as possible.
20:12We've got certain partner banks that are AI driven.
20:16So also makes our job easier.
20:18We're trying to do that as well.
20:20So obviously, that's the way forward.
20:23So maybe CSR with the banks and DFIs that we already have in the pipeline
20:30and some we've already done.
20:32So we'll never say no to working with them.
20:35So we keep reminding them the same thing.
20:37Because there's no way we can compete.
20:39We're not doing balance sheet funding.
20:41But at the same time, the good thing is there's a lot of avenues
20:44where we can take the headaches off them.
20:46Because they don't need to worry about micro, we'll do it.
20:49Or so many other ways, like ecosystems, whatever we already have.
20:53Then maybe they can look at asset managers and banks and wealth managers can look at funding it
21:00because they know they're going to get their returns.
21:02Alright, so you have built a very strong base here in Malaysia.
21:05Next, of course, Indonesia, you mentioned briefly.
21:08Talk to us about what's exciting about the Indonesian market besides the size, of course.
21:13Default rates are even lower.
21:14Yeah, that's amazing.
21:16Explain to us, how is that?
21:18So the good thing is we're looking regionally.
21:20So we're just closing our Series A.
21:23So once Indonesia...
21:25Well, Indonesia again is quite a unique market.
21:28They've only just opened up to investors coming in.
21:31Our foreign partnerships and mergers, etc.
21:34So we have to work and partner with the guys who are already existing.
21:39But more importantly, their mindset, their age profile, our C-suite and their C-suite.
21:46Like I'm founding partner with Microleaf and these guys on the other side.
21:50They're the same age, same mindset.
21:52I mean, that's a big pull.
21:55Do you see a chance to replicate the Malaysian model in Indonesia?
21:58Or is it completely different?
22:00I know you're spot on.
22:01There's a lot of things we can learn from them,
22:03but there's a lot we can fine tune for them as well.
22:06So it's just not going to be a straight cash.
22:10I mean, I'm acquiring and then we're walking away.
22:13It's a long-term thing.
22:14So we're looking at it as almost like a JV.
22:17So they've got a lot of things that we can learn from, for sure.
22:20And there's a lot of things that we can...
22:22What do you think that we can contribute?
22:24Like Microleaf can contribute to the Indonesian market?
22:26The tech side.
22:27So our certain things, they have some tech advantages over us,
22:30but we have a lot of things which are proprietary to us
22:33that now we can make proprietary available for them.
22:36So that's where I think that tech transfer,
22:38knowledge transfer on two sides.
22:40The markets, yeah, very different, but certain things are similar.
22:43But the lenders, I mean, that's something, you know,
22:46we want to bring foreign direct investments into the country
22:48and vice versa.
22:49I'm sure they will also want to know our lenders
22:52or who are some, which we do have some who are based in Indonesia.
22:56So now they can actually do their ecosystem financing
22:59and or investments in our partner P2P.
23:01So potentially in the future, cross-border P2P financing?
23:04Yeah, exactly.
23:05Is that the end game?
23:06Or at least cross-border investments, right?
23:07Because it's a matching platform between investors and issuers.
23:10So if we can get these super lenders on the Indonesian side,
23:13they are happy with these sovereign banks.
23:15You know, very risk-averse.
23:17Oh, I like your Sarana thing.
23:18It's not earning that much compared to what I earn in Indonesia,
23:21but I love it.
23:22It's safe.
23:23So yeah, those are the kind of guys that, you know,
23:26which country wouldn't want foreign investments coming in.
23:29So vice versa.
23:30I mean, I think it also goes both ways.
23:32We also can introduce super lenders, as they call them,
23:35to their side as well.
23:37So it's quite a good synergy.
23:40Luckily, they're also running for many years.
23:42So it's not like a brand new company either.
23:44And profitable.
23:45So that's also good.
23:46So that's something which, again, we synergize quite well.
23:50All right.
23:51One final question.
23:52P2P 10 years ago has been seen as more of an alternative investment
23:56platform financing model increasingly becoming more mainstream.
24:00But what do you hope to see in this space in the future?
24:03Actually, I'm hoping to see more synergies with the different partners
24:09like the banks and digital banks and the DFIs.
24:12And we're living proof that it works.
24:15So that would be great.
24:17Regulator to regulator also.
24:18Please be friendly.
24:19You know, please talk to each other.
24:21You know, your sister regulators after all.
24:23But the good thing is, I think, overall, there is a nice...
24:26There is light at the end of the tunnel, so to speak.
24:29It looks like that's where we're heading, at least at the moment.
24:33So I hope that long may continue.
24:35But that's something which I'm really hoping for more of the synergies
24:38between, you know, all of us.
24:40You know, and agencies as well.
24:41Because I think the agencies, you know, they don't need to reinvent the wheel.
24:44I mean, if they have to worry about payment collection, KYC,
24:47then that's a huge burden for them.
24:49But if they can just go like, yeah, here you go,
24:52put my funds in your trust account and blah, blah, blah.
24:55Right, because in any case, with the safety of investments
24:59with Microleaf and SC is that everything goes through the trustees.
25:02So I think what will happen also, the trustees are the custodians.
25:05All right.
25:06Well, thank you so much, Matt, for just giving us a sense of the
25:09where the sectors is heading and great to have you in the show
25:11and best of luck with your funds.
25:14Cheers.
25:25Cheers.
25:26Cheers.
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