For many years, investors in Singapore have been lamenting the lack of fixed income investment opportunities. This is because most of the corporate bonds in the market are accessible only to the institutional investors. Further to this, the dream of owning a second property to generate rental incomes for retirement purposes has also become unattainable for many retail investors after the implementation of the slew of property cooling measures. The emergence of crowdfunding is set to change all this. In fact, crowdfunding could well be a game-changer for the financial sector in Singapore.
In a consultation paper issued by Monetary Authority of Singapore (MAS) in February 2015, the MAS recognizes the enormous growth potential of crowdfunding and defines crowdfunding into four forms, namely: donations, reward-based, lending-based and equity-based. MAS deems that the latter two involves exchange of “debentures or shares”, and hence, they would be subjected to securities regulation.
Currently, there are a few companies in the market that offer lending-based crowdfunding services in the form of “peer-to-peer lending”. One of them is Capital Match, co-founded by Pawel Kuznicki. According to Pawel, Capital Match aims to provide business borrowers with the next best interest rates after banks and at the same time, offers investors access to attractive yield with a low investment entry amount.
Contrary to what most people thought, peer-to-peer lending companies like Capital Match compliment, and not compete, with the banks. This is because they address the capital needs of small enterprises which do not qualify for bank lending. In this regard, peer-to-peer lending companies offer an alternative source of lending for start-ups and small enterprises.
On the hand, peer-to-peer lending opens the door to retail investors who hunger for fixed income investment opportunities, at very accessible level, usually minimum of $1000, and at lucrative returns, at about 15-20%.
However, before investors get carried away, MAS issued a sobering caution in the consultation paper that there are risks involved for peer-to-peer lending. First, there is the potential loss of capital arising from the failure of start-ups. This is true indeed as many start-ups started off as promising ventures but ended up as major flops. Most rich people are able to dabble in various early stage investments because they have the capital. Thus, they can afford to fail 9 out of 10 but they just need one champion investment to make much more money than they lose. However, retail investors don’t have this luxury and therefore should be aware of their risk tolerance. Secondly, there might be risk of frauds or platform closure. Thus, the promised rewards or returns may not materialize.
To safeguard the interests of retail investors, MAS is reviewing the licensing requirements for securities-based crowdfunding platforms. This would help to mitigate the possibility of fly-by-night operators cheating retail investors’ monies and set a standard for the crowdfunding industry. Like many countries, crowdfunding for investment purposes is still relatively new in Singapore. But it can have the potential to revolutionize the investment industry and could be a major disruptor.
SG Wealth Builder