P2P Lending Investment

In previous article dated on 8 December 2017, we featured an article about P2P lending mechanism for borrower (Read more here).  This article will look at the P2P lending from investors’ perspective. 

According to the statistics from Funding Societies (Read more here), investors can earn upto 10 – 14% return p.a.  The tenure of each investment could range from 1 to 24 months.  The minimum investment amount is RM100.

At the current default rate of 1.35%, from total 3069 number of financing upto 20^th April 2018, the lending performance is on-par or better compared to Malaysia’s February 2018 non-performing-loan (NPL) percentage, which stood at 1.6% (Read more here).

The following graph shows the historical default on quarterly basis.  The default rate could go up as high as 2.31% on Q2-2016.  With the default rate ranging from 1.35% to 2.31%, and at an average return of 10% per annum, is the investment worthwhile?

Source: Funding Societies Malaysia

Let’s look at the expected return for a single investment.

Expected return, E(X)

= (positive return)*(positive return probability) + (negative return)*(default rate)

= (10%)(100% – 2.31%) + (-100%)(2.31%)

= 9.77% - 2.31%

= 7.46%

The expected return of 7.46% is still higher than the current average one-year fixed deposit rate of 4%.  Investors may wish to consider to allocate a small portion of their investment into P2P lending as part of their diversification.

Household Debt and Its Impact

Malaysia’s household debt has been growing moderately for seven consecutive years. In 2017, it grew by 4.9% from a peak of 14.2% in 2010. As a result, ratio of household debt to GDP declined to 84.3% (from 89% in 2015). Loans for purchase of residential properties represent 52% of total household loans. The median house price is five times the annual median household income in many urban centres of Malaysia. And this divergence is widening, with prices becoming unaffordable for many.

Borrowers are most affected by income shocks than cost of living or borrowing costs. A 10% decline in total income will severely impact ability to service loans. This is primarily for those with monthly earnings of RM3,000-RM5,000. Cost of living may be mitigated by moving further away from an urban centre while borrowing cost is mitigated by fixed rate loans.

Chart 1

Borrowers are most affected by income shocks

To curtail unwarranted house price increases, supply of affordable housing in major urban areas needs to be stepped up. The Government has several good plans but its implementation always seem wanting. More than ECRL or other grandiose projects, housing for urban middle and lower income (the M40 and B40) group requires focus. It is not exciting but certainly meaningful to meet basic needs of young (and not so young) people.

What needs curtailing is credit card debt, hire purchase loans and personal loans. Banks tend to encourage these areas in consumer lending because it is able to generate wider margins. Responsible borrowing /lending matters. The 2008 Crisis in the U.S. is a great example of irresponsible exuberance. Moving forward requires structural adjustments on income, productivity, affordability and implementation processes.

Ref:        Indebted to Debt: An Assessment of Debt Levels and Financial Buffers of Households.

  By Siti Hanifah Borhan Nordin, Lim Sheng Ling and Muhammad Khairul Muizz Abd Aziz, Bank      Negara Malaysia, March 2018

     

Living Wage, Minimum Wage and Aspirational Income

A living wage differs from a minimum wage (estimated at between RM920-RM1,000) for the following reasons:

·       Not statutory requirement;

·       It is the minimum acceptable standard of living; and

·       Primarily based on cost of living concerns

It is beyond the basic necessities of living. An aspirational income is achieving or trying to achieve a desired lifestyle – for example, having a 300-foot yacht parked off Bali. Bank Negara Malaysia writers Eilyn Chong and Farina Adam Khong, recently produced an excellent piece on “The Living Wage: Beyond Making Ends Meet”, March 2018.

In Kuala Lumpur, preliminary estimates suggest a living wage range between RM2,700 and RM6,500 per month (Table 1).

Table 1

The living wage estimates are below the median income in Kuala Lumpur of RM9,073. Up to 27% of households in Kuala Lumpur are earning below the living wage. And close to 70% consisted of just one employed household member. Many of who are school leavers with low to mid-skilled jobs. Tertiary graduates earned above the living wage with median salaries for managers and professionals at RM5,500 and RM4,450 respectively.

Productivity improvements and higher value-added output make paying a living wage more affordable for employers. Malaysia’s growth of GDP per person employed is only 1.7% compared to 3.8% for upper-middle income economies. Weak productivity growth means lower wage growth, hence the living wage could become an illusion.

The three key sectors that need an up-skilling are manufacturing, construction and agriculture. Malaysia was known for quality research in rubber (RRI) and palm oil (PORIM) which enhanced productivity. More needs to be done – with reducing labour intensity in the sectors mentioned. Otherwise, we will have the foreign labour force fully benefitting from job creation. There needs to be a coherent, concerted effort to train or re-train employees and incentives for both employers and employees in the pursuit of higher skills, automation and innovation.

Ref: “The Living Wage: Beyond Making Ends Meet”, Eilyn Chong and Farina Adam Khong, Monetary Policy Department, Bank Negara Malaysia, March 2018

A Conundrum: Low Cost Economy or High Income Nation?

Foreign workers take up more than 20% of employment in agriculture, construction and manufacturing sectors (Chart 1).

Chart 1

Of late, foreign workers as a proportion of labour force has trended downward (see Chart 2). Nevertheless, employment of low wage foreign workers allow employers to keep salaries low. As long as firms are engaged on a “race to bottom” on labour costs, it allows employment of cheaper foreign labour vis-a-vis locals. Bank Negara Malaysia (“BNM”) suggests higher living wages for employees. That’s a noble step. But if output/productivity is not any higher, deep seated problems remain unchecked.

Chart 2

There must be a conscious effort by the Government and private sector to move up the chain to a high-income economy. It is driven by productivity improvements, technological edge and technical know-how as cited by BNM. The key elements for that to happen would require some courage:

·       re-introduction of English as a medium of instruction;

·       greater focus on the sciences especially mathematics and physics;

·       an environment of research and innovation (digitalisation, artificial intelligence, big data etc.);

·       a more merit-based system in education, employment and advancement (in career/business);

·       a culture of transparency, accountability and competency; and

·       willingness to “benchmark” with other more developed economies

In each of the above areas, there are several steps that need to be effected and it is only when they come together that Malaysia can truly be a high-income nation. Otherwise, it remains a slogan for politicians and policymakers to debate, discourse and defer. Change is difficult and painful but no progress can be made without them.

Reference: “Low-Skilled Foreign Workers’ Distortions to the Economy” by Ang Jian Wei, Athreya Murugasu, Chai Yi Wei, Economics Department, Bank Negara Malaysia, March 2018