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What is Islamic Peer-to-Peer (P2P) Microfinancing and Why it Matters More Than Ever in 2021
by Tunku Danny Nasaifuddin Mudzaffar

Microfinance, also referred to as microcredit, is a form of lending intended to help low-income individuals or micro-enterprises receive financing purely for business purposes. Often, this is the underserved or unbanked community that needs the funds the most. Peer-to-Peer (P2P) Financing, also called P2P Lending or Marketplace Lending in other countries, involves 2 parties: the Issuer (borrower) and the Investor (lender), who are private entities where the former is a business requiring funds and the latter is an interested party seeking investment opportunities. P2P Financing marries the two and provides a platform where a multitude of Investors may finance one Issuer. Typically, banks require an applicant to undergo a stringent process where up to three years’ worth of credit score and a long approval process are typically needed. However, small businesses and micro-entrepreneurs may not even have been around for that long to build up the required status by banks needed for funding approval. Oftentimes, several months can result in many changes especially for smaller organisations, meaning a long approval period would hinder overall company growth and progress.

For micro-enterprises, these issues merely scratch the surface of the problems plaguing the finance industry and its effectiveness when run by banks. While this is the fault of no particular party, there has definitely been a growing need for alternative financing methods such as P2P Financing to ease the burden of banks. To date, there are 11 P2P Financing platforms regulated by the Securities Commission Malaysia (SC) with microLEAP being one of them. These platforms function to provide MSMEs (Micro, Small and Medium Enterprises),startups as well as one-man businesses with the required funds to either stay afloat or expand.

Before the pandemic struck, Malaysian businesses were already struggling to keep up with economic conditions making running a business all the more difficult. Enter COVID-19 and people around the world, just like Malaysians, were plunged into uncertainty – a financial nightmare. Social distancing and movement restrictions imposed by the government in an effort to curb the spread of COVID-19 posed a huge threat to the economy, as consumers were forced to stay at home and not spend, resulting in a downward spiral for most businesses unless they had an online presence. While larger entities have been able to cut operation costs and manage assets more efficiently to stay afloat, the same cannot be said for much smaller businesses that rely on day-to-day cash-flow to keep themselves above water.

Hence, the importance of alternative funding methods became clearer as not just another method of obtaining financing, but a crucial means of keeping businesses alive. The micro-economy depended heavily on private entities such as microLEAP and other P2P financing platforms to help spur them on amid a global crisis. With P2P financing believed to have surpassed RM 1 billion in value of financing disbursed in 2020, and COVID-19 as a catalyst, 2021 should prove to be no different. In fact, the familiarity of both Issuers and Investors with such platforms should mean greater awareness and in turn, increase the number of transactions.

Here is where Islamic P2P micro-financing comes in. It is the very essence of microLEAP and it is our DNA if you will. Based on the Shariah principles of Commodity Murabahah, it allows Issuers to raise Shariah-compliant financing and at the same time allow P2P Investors, when they lend, the ability to invest in Islamic assets. The Issuer of course must not be involved in non-Shariah compliant industries such as alcohol, tobacco & dangerous drugs, pornography, gambling and pork & it’s by-products (full list may be found in microLEAP’s Islamic FAQs).

For microLEAP, we have a Shariah Pronouncement proclaimed by our Shariah Advisors and approved by the SC Shariah Advisory Council. Therefore, Investors may invest in our Islamic Investment Notes, safe in the knowledge that their funds are used in a Shariah-compliant manner. Having said that, it is not only Muslims on our platform that invest with us. We have people from many other communities that believe in microLEAP’s vision, as they believe in ethical and socially responsible investments. The beauty of Islamic finance is that ethical and social principles go hand in hand with Islamic teachings, and this is the core of what I believe in, that Islamic investments are open to all.

Islamic P2P microfinancing is all about impact investments. As we allow Issuers to raise financing from as little as RM1,000 to RM50,000 on our platform, a small amount of funds will have a stronger social and economical impact for these small businesses than medium-sized SMEs. The type of micro-enterprises that we have helped to raise working capital financing include an entrepreneur selling halal confectionery from his bedroom in Pahang, a restaurant that sells pisang goreng online and offline in Johor, a food truck driver that sells nasi lemak and kuih muih in Negeri Sembilan, and many other businesses that would generally find it difficult to raise funds from a traditional bank.

As we head into the early days of 2021, the work that we do at microLEAP and other Islamic microfinance institutions matter even more. Lockdown and MCOs, though I do see the necessity for it, is detrimental to a business, even more so for the micro-enterprises that we serve. Thus far, the Malaysian government must be commended for their efforts to curb the spread of COVID-19 and along with the vaccine believed to be administered soon in stages, 2021 looks to be a recovery period from an economic standpoint. Through this gradual recovery, many businesses will still need ample support to ensure survivability, much less to expand or grow their business. As 2021 looks to be a recovery period for many individuals and businesses alike, Islamic P2P microfinancing platforms will be crucial to rebuilding Malaysia’s micro-economy.

Link to article here.

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