The ASEAN economy is expected to become the fourth-largest economy in the world by 2030, growing at a pace of over 5% per year. Small and medium enterprises (SMEs) are the biggest contributors to this regional growth — they account for between 89% and 99% of total establishments, and between 52% and 97% of total employment in the ten ASEAN Member States, which include Indonesia, Thailand, Singapore, and Vietnam.
They also contribute anywhere from 30% to 53% of their respective nations’ GDP, and a significant portion of exports and trade. It is astonishing, then, that 131 million or 41% of formal SMEs in developing countries have unmet financing needs.
Access to financing remains very much a challenge for SMEs across ASEAN. Though governments have set out mandates to relax eligibility requirements and interest rates to better support SMEs, many SMEs have also chosen to obtain financing from alternative credit sources such as peer-to-peer (P2P) lending platforms for additional working capital requirements, due to the simple application and quicker approval times.
Recently, one P2P platform in Southeast Asia, said they’ve seen an increased interest from high-net-worth individuals and institutional investors alike since the start of the pandemic, largely attributed to the company’s prudent risk management and careful acquisition strategy.
Compared to traditional financial instruments, P2P lending investments may offer low-volatility investing for more stable portfolio performance even in challenging market environments. By allocating a portion of their portfolio to SME private debt, investors can earn high-yield returns while also providing crucial growth financing support to small businesses. Financial data provider Preqin predicts that throughout 2025, the private debt asset class will be the second-fastest-growing alternative investment, hitting $1.46 trillion in 2025 at a growth of 73% in assets under management (AUM).
P2P lending is a welcome addition to investor portfolios
Though FinTech-driven P2P lending is relatively new, it has gained significant traction within the past few years thanks to the arrival of more legitimate platforms, stronger regulations, and more comprehensive data. Investors are increasingly looking for alternatives to the traditional 60-40 equity-bond split, with sophisticated investors exploring alternative investments including P2P lending for portfolio diversification.
62% of private fund managers surveyed by Preqin for the Future of Alternatives 2025 report believe that private debt funds will play a larger role within the next five years, especially in emerging technologies such as pharmaceuticals. 58% of fund managers intend to increase allocations to the asset class by 2025.
The key factors driving increased investment into this fast-growing space are the huge, growing demand from unbanked and underserved SMEs in the region, and the high-yield returns compared to other investments.
P2P Lending Investment Outlook across Southeast Asia
Singapore, Indonesia, Vietnam, and Thailand are four of the most promising ASEAN markets for P2P lending. Singapore is arguably the region’s strongest regional hub. Vietnam is rich in innovation and the number of startups from the country has risen exponentially over the past few years; the market is one to watch. Indonesia is home to plenty of unicorns and promising startups; Thailand is a strong producer of tech talent and innovation. Let’s review the lending outlooks for each of these key markets.
The small city-state of Singapore has the second greatest population density in the world and tops world rankings such as the UN Human Development Index. As one of the Four Asian Tigers, Singapore is one of the strongest economies in Asia and, indeed, the world, and its economic policies and growth set the tone for many other countries to follow suit.
The Monetary Authority of Singapore (MAS) regulates most fintech products and services in Singapore. P2P lending and fintech in the region are considered a fast-growing market that have the potential to “signal the end of banking” because of how they increase access to markets for both lenders and investors. The P2P lending model is often marked by lower fees, higher returns, and better interest rates.
SMEs contribute 69% of employment and 49% of the country’s economy. But half of SMEs are struggling from cash flow problems during the pandemic. The Financial Stability Review of the Monetary Authority of Singapore (MAS) reported in December 2020 that much of the nation’s economic growth would not recover to pre-pandemic periods even by the end of 2021.
Small and medium-sized enterprises (SMEs) are bearing the brunt of the pandemic’s damage because they are smaller and struggle with limited access to capital. Natalie Choy of The Business Times writes, “The proportion of vulnerable small and medium-sized enterprises was estimated to be about 30 percentage points higher than that of vulnerable large firms.”
P2P platforms have a major part to play in supporting and saving many of Singapore’s SMEs. Over the past few years, they have gained legitimacy in the country and are recognized by MAS as crucial financial actors that contribute to the economy’s stability.
Some platforms are able to provide high-quality loans and stability in a time when SMEs desperately need quick, trustworthy access to cash.
Singapore is a well-regulated market full of promising SMEs. There are few risks for HNWIs and Institutional Investors wishing to invest in Singapore; data is transparent and regulations are clear. The main concern is to choose P2P platforms with low default rates and select the ones which best fit your personal investment preferences.
Indonesia is ripe for P2P lending—as one of the biggest economies in Asia, it’s a great place for HNWI and investors to make their mark. The country boasts a bigger market than Vietnam, Myanmar, Malaysia and Thailand combined.
Statista reports that transaction value is expected to show a CAGR of 11.6% between 2020 to 2024, reaching an estimated US$65.1 million by 2024. Over half of that is in crowdfunding—where groups of investors pool their funds to offer loans to lenders. P2P, which is a type of crowdfunding, currently makes up roughly 40% of fintech business in Indonesia, according to the Asian Development Bank.
In some cases, investors can see up to 50% returns annually, a massive difference compared to banks’ 5.1%. There are very few non-performing loans (NPLs) as well—even during the pandemic, most P2P platforms shared a NPL rate no more than 3%. This low default rate, the unparalleled returns, and incredible potential of Indonesian MSMEs make this country one of the best places to invest.
OJK, the main government body that oversees fintech companies, is diligent about vetting and reviewing fintech companies. Investors can enjoy a supportive and well-regulated market, as well as plenty of choice when it comes to selecting loan recipients.
However, investors should be wary of fake P2P sites—there were over 200 fake or unlicensed P2P sites in Indonesia as of July 2020. Investors should select one that has a license or is approved by the OJK—less than 50 lending platforms are actually permitted to legally operate.
In Vietnam, P2P lending is neither prohibited nor supported—yet. Much of the nation’s financial developments are governed by the State Bank of Vietnam (SBV), and several P2P platforms operate in the region; however, the country has yet to develop a clear regulatory framework to govern such activities. The country is in the process of developing sandboxes across various segments of FinTech—including P2P lending and digital payments—to determine the best way to regulate the rapidly-growing market.
Considering that 60% of MSMEs in Vietnam are unable to access bank capital, it’s no wonder that corporate financing such as P2P lending and crowdfunding are expected to reach a 35.9% CAGR in Vietnam between 2017 to 2025. In some cases, investors have been able to invest in small, short-term loans with returns of up to 30 to 40%.
Vietnam’s government is highly cautious in their desire to prevent predatory loans, so only about 20 consumer lending companies have the approval to operate in the country. More regulations are needed to protect SMEs and lenders. Some businesses are fearful about turning to P2P—low trust in the region will be a barrier for investors and lenders.
P2P lending investors interested in Vietnam must do research on relevant financial regulations. They can consider submitting business plans to the SBV for consideration and approval to legally invest in the country.
The Office of Small and Medium Enterprises Promotion (OSMEP) reports that of 2.7 million enterprises active in the country, 99.7% are small and medium-sized enterprises (SMEs). But according to the Asian Development Bank, a lack of collateral poses a significant barrier to many Thai SMEs looking for funding.
During the pandemic, the government has offered to raise credit limits for companies to 100 million baht, up from 20 million baht. The GSB will lend to commercial banks at a yearly interest rate of 0.01%, and commercial banks will lend to businesses at 2% per annum for two years. Still, these measures aren’t nearly enough—loan approvals in Thailand can take a very long time, and SMEs who are short on cash often need their funds much sooner. Aside from that, many SMEs may not qualify for a traditional loan—which means they need other, reliable options.
Loan intermediary platforms are governed by the Bank of Thailand and Securities and Exchange Commission. A source for the Bangkok Post explained that these platforms are becoming more and more necessary because many SMEs have difficulty accessing loans from traditional financial institutions. 2007-2013 data from the ADB shows that in Thailand, SMEs are charged an average 1.6% higher interest rate than large enterprises; even then, they make up less than 40% of bank loans.
Thailand has shown great interest in P2P intermediaries and alternative financing platforms; it is likely they will become more and more necessary to fulfil the aforementioned financing gaps. The Bank of Thailand is proposing an amendment to the Credit Information Business Act of 2002 in hopes of attracting more qualified loan intermediaries—though no changes have been made yet, it’s a good sign for P2P investors and SMEs in the country.
SME private credit set to grow
Private lending has traditionally been seen by some as an untrustworthy, unprofessional method of investment—especially in Southeast Asian countries, where tales of vicious moneylenders abound. However, the growing presence of regulators, laws, and licenses will help to mitigate risk and develop a strong regional private lending market.
It is a difficult time for SMEs in Asia. Their cash flows are severely depleted, and because of the pandemic, many of their own clients are delaying or restructuring payments. The need for financing is higher than ever to support these viable SMEs as they rebuild the region’s economy, especially as economic activities resume post-Covid-19. Even now, ASEAN’s most promising SMEs are already seeking assistance in fulfilling purchase orders and invoices.
As with all investments, P2P lending does carry risk. Platforms do not always have an independent credit rating agency; some borrowers do default or request restructuring; investments are still subject to some degree of volatility driven by market conditions. Lastly, currencies can be cause for consideration—lending in Southeast Asian countries is often done in local currency.
HNWIs and institutional investors can mitigate these risks by assessing the platform through which they distill private lending. It is critical to seek out the data and determine how the platform calculates a borrower’s credit-worthiness. Though the opportunity is present, careful due diligence is required to ensure that disbursed funds are tied to project delivery, completion, and payment.
Milena Naitoh is Head of Investor Relations and Corporate Development at Validus. Milena is focused on growing Validus’ Investor base on the platform, as well as driving strategic initiatives and new country expansion. Prior to her current role, Milena started her career in global operations at Novartis AG. She has worked in the Financial Services vertical of PwC Japan’s Consulting division as part of the cross-regional team responsible for building the financial risk management business and capabilities between PwC’s Southeast Asia and Japan offices. In Singapore, she transitioned to capital markets services startup Call Levels in Singapore, leading commercial operations for the company. Milena holds a Masters of Arts in East Asian Studies from Harvard University and a Bachelor of Arts (International Relations Global Business, East Asian Languages, and Culture) from the University of Southern California.