How risky is MSME Financing Platform? And what can a lender do to mitigate such risks?
MSME Financing Platform is funding practice that allows businesses to borrow money and provides a platform for individuals to lend money without the facilitation of a conventional financial institution.
Lenders, including individuals like you, would fund loans through Modalku, our MSME Financing Platform. To reach the targeted lending amount, the crowdfunding process of MSME Financing Platform is open for more than one lender. We operate as a facilitator between lenders and the working capital borrowers need. Through MSME Financing Platform loans, an MSME (micro, small, or medium-sized enterprise) can use the funds for business development. Meanwhile, lenders receive interests in the form of loan principal and interest. However, it is worth noting that this is a new and growing financial service, so it is crucial to be aware of the risks in MSME Financing Platform.
Risk 1: Default Risk
The loans on MSME Financing Platform platforms may be riskier compared to other business loans in Indonesia. Financial institutions may not advance loans to these MSMEs for several reasons: (i) incomplete financial history (or the business has only been operating for a few months), (ii) in a business category the banking sector is unfamiliar with, or (iii) has not satisfied the requirements of a financial institution.
We use a risk-based approach that is summarized in our Modalku Scoring Grade to determine interest rates for each MSME loan. We only disburse loans if we have strongly assessed that an MSME and its owner have the capacity to repay its loan. Of all creditworthy MSMEs, some can easily repay all loan installments regardless of market conditions. However, some are more sensitive to late repayments if there are unexpected changes in the market (even if they have the capacity to repay loans when market condition is fair).
Like other alternative investments, higher risk means higher potential interests. We place a higher interest rate to riskier MSMEs as compensation for the risk that lenders must bear.
If a borrower has missed a loan repayment deadline for 90 days or more, our team will consider the loan as defaulted. This does not mean the borrower would never repay his loan, but we would consider other methods regarding the funds, such as restructuring the remaining loan.
Risk 2: Limited Transparency Related to Borrower’s Business
When a MSME Financing Platform platform executes a crowdfunding process to gather funds, the platform can only inform lenders of the business’ industry (Example: manufacturing, food & beverage, etc). The name of the business is not provided. Modalku also follows this practice.
We do send detailed factsheets to lenders, which includes our assessment of MSME borrowers. Fact sheets contain important information you should consider before you decide to fund a new MSME. You can also contact our team for more information about certain borrowers. We would do our best to accommodate you with the information you need.