Business Lending In Asia — A Significant Investment Opportunity. Part 2
Alternative lending is a new opportunity for investors. The markets in the US, UK and China are maturing, but the Asia Pacific region (excl China) is an emerging market. Within this market, business lending to SMEs is a significant investment opportunity.
This article gives detailed information to support this contention.
ALTERNATIVE LENDING — WHAT IS THE OPPORTUNITY?
- Meeting the unmet demand for credit to SMEs
- Lending companies, SMEs and investors
STATUS OF ALTERNATIVE LENDING IN ASIA
- Providing financial inclusion through mobile technology
- Market growth
- Growth of business lending
- Balance sheet business lending
SOUTH EAST ASIA AS AN INVESTMENT OPPORTUNITY
WISHFINANCE: A NEW INVESTMENT OPPORTUNITY IN SINGAPORE
STATUS OF ALTERNATIVE LENDING IN ASIA
Providing financial inclusion through mobile technology
According to the 2017 Global Financial Centres Index, Singapore, Hong Kong and Tokyo are the top financial centers in the world after London and New York, with Shanghai and Beijing also high in the rankings. Despite this, there are more than a billion people in Asia who don’t even have a bank account. According to a World Bank report in 2014, 21% in China, 47% in India and 64% in Indonesia are unbanked. Although SMEs contribute 47% to Singapore’s GDP, 40% have no access to finance. This represents a huge opportunity for alternative finance.
At the same time, the Asian Pacific region is rapidly adopting mobile technology. Some key findings of the 2016 report of the GSMA (representing mobile operators worldwide) included:
- 62% of the population in Asia Pacific (2.5 billion individuals) subscribed to mobile services. The projection is for 74% penetration by 2020 and 3 billion people with smart phones
- Growth rates in the region are set to remain above the global average
- The focus of growth will shift to South and South-East Asia
- There has been fast uptake of 4G technology, and South Korea, Japan and China are now driving the development of 5G mobile technologies
- Network providers’ investment and encouragement from governments support growth.
This combination of high numbers of unbanked people with high penetration and usage of mobile technology has created a whole new fintech opportunity.
- FinTech companies have provided solutions and apps that allow people to send and receive money on their cell phones without a bank account. Some examples are AliPay in China, Paytm in India, True Money E-Wallet in Thailand and others.
- FinTech companies have moved into the online lending and credit-scoring space
Market growth
A research team from universities in the UK, Australia and China, supported by KPMG, have conducted surveys of the FinTech industry in Asia Pacific. Their first report, titled “Harnessing Potential”, was followed by a second report, titled “Cultivating Growth”, released in September 2017.
The findings show the tremendous growth of the market and of business lending:
- China represents 99% of the market, with astounding growth from $5.5 billion in 2013 to more than $243 billion in 2016. China represents 85% of the total global market. The impact of stringent new regulations introduced during 2016 will be seen only in 2017.
- The rest of Asia Pacific has smaller numbers, but the growth trend is the same, and is across all the regions. The following figure shows how alternative finance volume grew from $137m in 2013 to more than $2 000m in 2016:
Figure 1: Total Asia Pacific alternative finance volume (excl China) — 2013–2016 ($ US million)
- In East Asia, South Korea showed dramatic growth from about $40m to $376m. Most of this was for real estate lending. However, P2B volume also grew, from $1.3m in 2015 to $34.9m. New regulations, including a proposed limit of approx $9 000 per investor, may have an impact on this market.
Figure 2: South Korea alternative finance market size 2013–2016 ($ US million)
- South East Asia (Singapore, Indonesia, Malaysia, Cambodia, Thailand, Vietnam and the Philippines) showed the biggest growth of 363%, most of it in Singapore. This dramatic growth can be seen in the following figure:
Figure 3: South East Asia alternative finance market size 2013–2016 ($ US million) ans-serif”;
To note is that
- $115m of the total volume of $215m for 2016 was for business lending — up from less than $10m the year before.
- Several companies are headquartered in Singapore, but provide loans into Indonesia, Malaysia and Cambodia.
- Although the amounts are small, Indonesia had a 1 462% growth, from about $2m to $35m. $22m of this was in P2B lending.
Growth of business lending
Business lending models include P2B business lending, balance sheet business lending, invoice trading and crowdfunding. The Cambridge University report, Cultivating Growth, highlights the growing importance of P2B and balance sheet business lending:
- Across the entire region (incl China), consumer lending was largest at 24% of alternative financing. However, it was closely followed by balance sheet business lending at 23%, P2B lending at 17% and invoice trading at 16%. It was noted that individuals often used consumer loans to fund micro or small businesses. So, alternative financing is supporting SMEs in the Asia Pacific region.
- In Asia Pacific (excl China), business finance increased by 72%, from $848m in 2015 to $1,464m in 2016. This amount represented 73% of the total market volume of $2,004m.
Figure 4: Growth of business finance in Asia Pacific (excl China) 2013–2016 (US $ millions — rounded)
- Patterns of lending are changing. For example, equity-based crowdfunding has decreased significantly — from approx $1,4bn to $0,5bn in China and from $204m to $99m in the rest of Asia Pacific. There has been growth in balance sheet business lending and in real estate lending. P2B is changing to balance sheet in major markets such as Japan.
- The top 5 countries in the region (excl China) are Australia, Japan, South Korea, New Zealand and Singapore. The following figure shows the combination of balance sheet business, P2B lending and invoice trading as a % of total market volume in each country:
Figure 5: Balance sheet business, P2B and invoice trading as a % of market volume
- Australia: The 58% is made up of balance sheet business lending (36%) and invoice trading (22%).
- Japan: 92% of activity in Japan is in business lending. There has been a significant shift from P2B to balance sheet lending
- South Korea is predominantly real estate lending. P2B lending has grown slightly from 3% to 9%. There is no balance sheet business lending.
- New Zealand is predominantly consumer lending. P2B is starting, but is at only 4%.
- Singapore: P2B lending represents 54% of the total market volume, with invoice trading adding 5%. There is no balance sheet business lending.
Balance sheet business lending
There are interesting findings about balance sheet business lending:
Growth:
- China grew from half a billion in 2015 to nearly $28 billion in 2016 — ie from 1% to 11% of market volume. According to an article in Forbes, this is driven by tech giants Alibaba, Tencent and Baidu who offer loans through their respective online banks, MYbank, WeBank and Jinrong.
- Asia Pacific (excl China) grew from 11% to 23%
- Japan grew from 1% to 51%
- India grew from 0% to 37%
Apparent gaps in the market:
- Several countries have not implemented the balance sheet business lending model. Significantly, these include South Korea, and all the SE Asia countries, including Singapore
Ownership of lending platforms:
- 80% indicated some level of ownership by angel or VC investors, 40% by non-financial companies and 20% by banks.
Sources of funding:
- Balance sheet business lenders attracted the largest volume of funding from funders abroad, with 44% of funds coming from outside nations.
Read Business Lending In Asia — A Significant Investment Opportunity. Part 3 >>>
