Agency credit rating absence and internal credit risk assessment in peer-to-Peer lending

This study examines whether the absence of agency credit ratings on business loan applications impacts their internal credit risk rating at Funding Societies, Malaysia’s largest peer-to-peer (P2P) lending platform that specializes in lending to Small and Medium Enterprises (SMEs). Grounded in signaling theory, it hypothesizes that unrated loans are more likely to receive lower internal credit risk ratings due to increased information asymmetry. Using a hand-collected dataset of 907 short-term working capital loan applications from funding societies and employing a partial proportional ordinal logistic regression model, the findings reveal the opposite effect: Loans without agency credit ratings were more likely to be categorised into lower internal credit risk categories after controlling for loan-specific and macroeconomic factors. The results suggest that the presence of an agency credit rating does not reduce credit risk; instead, it appears to function as an endogenous marker of borrower risk. Additional results indicate that greater firm age and firm size are significantly associated with higher internal credit risk, while industry affiliation has a significant effect on internal credit ratings. The study contributes theoretically by extending signaling theory to fintech-based credit markets and practically by underscoring the value of robust internal scoring systems.