SME lending in South East Asia

Funding Societies is setting out at a breathtaking pace to reshape small business finance across southeast Asia. The wave of peer to peer lending that has seen notable success across the US and Europe has yet to crest in many other markets. However, predicated on the models of companies that created an online business lending market worth an estimated $230 billion in 2015, Funding Societies is aiming to change that.
We got a chance to sit down with Kelvin Teo, the co-founder of Funding Societies. As he describes it, his dynamic company had humble beginnings as a project at Harvard Business School. “My first co-founder Reynold Wijaya and I launched a peer-to-business (“P2B”) lending platform in Singapore at the dorms of Harvard in early 2015,” explains Teo, “Iwan Kurniawan later joined us and started Funding Societies Indonesia (also known as Modalku or My Capital in Bahasa language), and Wong Kah Meng soon came onboard with Funding Societies Malaysia.”
“To me, the was idea intriguing but crazy. While in the US, I took the opportunity to visit several major P2P lending platforms and realized that it could really work in Southeast Asia. After a consulting career at Accenture, McKinsey and KKR, I wanted to do something more impactful to the broader society.”
Today, the company operates in all three geographies. It is one of few online peer to business lenders to operate across borders, a group which includes firms like Funding Circle and Bondora. While the vast majority of Asian marketplace lenders are concentrated in China – an estimated 4,000 firms before the PBOC began its crackdown – Funding Societies is ranked among the top of them. Competitors include Moolahsense and Crowdo, which both also operate in the fiercely competitive Singapore market. Though the space is relatively new to southeast Asia, it is growing quickly in offerings.
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Funding Societies loans are simple to understand: they provide 3 to 24-month loans of S$20,000 to S$200,000. Since launching, they’ve also expanded into invoice financing and micro loans to cater to the needs of different SME’s.
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“When we started Funding Societies in Singapore, there were 4 known P2B lenders. As of Nov 2016, there are about 35 similar players in the city state with 5.6 million population,” notes Teo, “Market saturation could result in negative competition, as players give out loans more recklessly to grow their loan book, leading to a race to the bottom. But on the other hand, there is also an issue of market adoption. The Securities Commission of Malaysia approved 6 equity crowdfunders in 2015 and 6 P2B lenders in Nov 2016. The market is not terribly crowdfunded but equity crowdfunding has yet to take off after a year. Funding Societies differentiates ourselves as the only regional player in Southeast Asia. We use our strengths in risk management and technology to solve customer pain points with laser-sharp focus.”
The market stratification provides other opportunities for Funding Societies, such as diversifying their labor force and bringing down their costs. Their offices in Singapore resemble any Silicon Valley startup, with a quirky, personalized open floor-plan in a skyscraper near Singapore’s financial district. Yet a lot of their new employees join the company in their Djakarta office, which gives Modalku regional expertise while also providing a salary cost advantage.
The company didn’t always operate in three markets. Starting in Singapore, Funding Societies undertook a consistent market research process before expanding. “Before we enter a market, we always evaluate 3 criteria: whether we’re passionate about the space, whether there is real demand and whether we can be Number One there,” comments Teo.
“Based on the Financial Services Authority of Indonesia and the World Bank, the financing gaps in Indonesia and Malaysia are $76B and $19B respectively. They’re clearly difficult markets to crack, but we’re proud to make good progress. As of Nov 2016, we’re the only P2B lending platform to be licensed by regulators in Singapore, Indonesia, and Malaysia. We’ve crowdfunded S$19M over 270 business loans, with only 5 defaults on a relatively mature portfolio. We’re passionate about small-medium enterprises and our home countries, and shall crack them soon.”
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Even though these geographies are close by, the difference between them are vast. This forces companies to be thoughtful in their approach to expansion. “Southeast Asia is a huge market, but it is an extremely fragmented region. There are 11 countries, each differs significantly in terms of regulation, economy, infrastructure, and culture,” explains Teo, “Even if we focus on bigger markets such as Indonesia or its capital Jakarta, there are nuances working with people who come from the 17,000 different islands in Indonesia. Each time we enter a new country, we need to rebuild the business from scratch. And for most parts of Southeast Asia, regulations are still unclear, credit and fraud risks are high, and the legal framework do not provide meaningful recourse for lenders. Hence we paid quite a bit of ‘school fees’ in terms of time and resources to build and scale.”
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Funding Societies, which has already lent $15.3 million in 2 years as of December 2016, already has a few local success stories to tell from its loans. “In Singapore, there was an Indian restaurant looking to expand,” remarks Teo, “The owner is a hardworking man who tried increasing his revenue with catering and delivery, but he had reached their limits. He found a second restaurant location, but was unable to pay the deposit, and banks were not willing to lend to a 2-year-old business. We crowdfunded a S$50,000 loan for his restaurant. He’s been prompt in each of his repayment and has completed the loan.”
“In Indonesia, a bags and accessories shop wanted to re-stock but had cash flow challenge due to poor terms of payment. It could not get a loan because [they] had no collateral. They took a loan from us given our fast response, process, and service, after we carefully assessed the business and its payment history. It will soon complete the loan. Besides unsecured loans, we’ve since introduced invoice financing and micro loan to cater to the needs of different SMEs.”
As Funding Societies’ own whitepaper notes, the opportunity in the Asian p2p space is growing quickly. “P2B lending is an excellent form of alternative financing for SMEs and alternative investment for retail and high-net worth investors,” notes Teo, “Our vision is to build the most trusted P2B lending platform in Southeast Asia and make such form of alternative financing/ investment mainstream. We’ve spent the first 2 years building the foundation in Singapore, Indonesia and Malaysia. We’re now ready and excited for the rapid growth that we expect in 2017.”

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