Fast little loans
If you have R100 000 or more to invest and you’ve decided on a fixed-term deposit account, you may be considering entrusting your money to Finbond Mutual Bank, South Africa’s newest bank.
Finbond markets its fixed-term deposits as “the ideal savings and investment account for investors and pensioners requiring a high, guaranteed rate of return in the current environment of depressed low yields and declining interest rates”.
The bank is offering 8.75 percent on deposits held for six to 11 months, and 10 percent on deposits invested for between 49 to 60 months. These rates are up to three percentage points higher than those offered by other mutual banks, and also beat the rates offered by the mainstream banks and RSA Retail Bond rates. (See tables)
For example, Finbond’s lowest rate (8.75 percent) is higher than Capitec’s highest rate (8.50 percent for amounts of more than R100 000 invested for between 49 and 60 months).
Finbond’s offering applies to all investors, irrespective of age. Mainstream banks typically offer their best rates to investors aged 55 and older. But even these rates are not as high as those offered by Finbond.
Some consumers have contacted Personal Finance and/or their financial advisers, suspecting there must be a catch to this offer.
Ina Wilken-Jonker, chief compliance officer at Finbond Mutual Bank, says there is no catch.
According to Finbond’s website, the bank is able to pay depositors superior returns because of the high margin that the bank earns in its micro credit division.
The bank’s micro credit division owns 171 micro finance branches countrywide and charges its clients – those in the “under-banked and under-served market” – five percent interest a month for short-term loans.
“This is the maximum allowed by the National Credit Act (NCA). Given this higher margin that Finbond earns in its micro credit division, it is able to pay depositors a superior above-average rate of return,” Finbond says on its website.
The NCA defines a short-term loan as any loan of less than R8 000 that is payable over no more than six months.
Theo Vorster, an independent financial planner at Galileo Capital, says there’s nothing untoward about Finbond: “It’s a well-capitalised company in a well-regulated sector, but there is still a level of risk that you, as an investor or depositor, need to be comfortable with.”
The risk is that the bank uses your savings to issue loans to “sometimes uneducated and desperate people and charges them very high interest rates because of the risk of default”, Vorster says. He says it’s a pity that it’s so costly to service this market.
According to Finbond’s website, for the 12 months ended February 2012, the company granted short-term loans of R378.7 million and received cash payments of R536.3 million from micro finance clients. The bank’s micro finance division has a credit client base of 330 000, with 25 000 to 35 000 active monthly clients.
Kokkie Kooyman, a fund manager and expert in financial shares at Sanlam Investment Management Global, says that at the moment Finbond is overcapitalised. However, its bad debts as a percentage of loans is high, plus it is entering a very “crowded market”. But Kooyman says this doesn’t necessarily mean it’s a risky concern. “Its loans seem well covered by deposits at the moment, and its loan term is fairly short, so from that point of view depositors are covered.”
Finbond received its banking licence from the South African Reserve Bank in July last year and is a member of the Banking Association of South Africa. It is also registered with the Financial Services Board as an authorised financial services provider and with the National Credit Regulator as a credit provider.
The company started trading in 2003 and in June 2007 it listed on the Johannesburg Stock Exchange’s alternative exchange, the AltX. (The AltX provides smaller companies not yet able to list on the JSE Main Board with access to capital.)
When you invest money with Finbond Mutual Bank, you are automatically issued with one share for every R1 000 that you invest. For example, an investment of R200 000 would entitle you to 200 shares.
However, irrespective of the number of shares your investment buys you, you get only one vote at shareholder and member meetings. And as a shareholder, you won’t necessarily earn dividends. It depends on which investment you opt for.
You would choose to earn interest or dividends, depending on your tax circumstances.
If you go for a straight fixed-term deposit account, where you invest for anything from six to 60 months, you receive interest, not dividends. The interest you earn – which could be anything from 8.75 percent to 10 percent – will be taxed at your marginal income tax rate. This is likely to suit investors with a lower marginal rate or those who have not used their interest exemptions.
But if you want to earn dividends, you have the choice of acquiring indefinite-period paid-up shares or fixed-period paid-up shares.
In both cases, “dividends are paid out of profits made by the bank, but the depositor has no right to share in the profits of the bank beyond the contracted dividend rate,” Wilken-Jonker says.
In other words, you’ll receive dividends, but they are not based on the profits earned by the company. The dividends are based on the prevailing dividend rate.
In the case of indefinite-period paid-up shares, the dividend rate is 9.50 percent, and it fluctuates, based on the prevailing rates. In the case of fixed-period paid-up shares, the dividend rate is 10.75 percent and it is guaranteed. But conditions apply. With the indefinite-period paid-up shares, there’s a minimum investment term of 18 months. After being invested for 12 months, you need to give six months notice if you want to redeem your shares. After the 18-month period, three months’ notice of redemption is required.
With the fixed-period paid-up shares, the investment period is five years. If you want or need to redeem your shares before the maturity date, Finbond may in its sole and absolute discretion allow you three months’ written notice, but only after 18 months from the date of acquisition.
With both share options, dividends withholding tax of 15 percent applies.
Despite recent actions by the South African Revenue Service (SARS) to shut down schemes that convert taxable interest to dividends that were tax-free and are now subject to lower dividends tax, GBS and VBS also offer dividend-paying deposits.
Wilken-Jonker says Finbond does not believe SARS will have any problems with Finbond doing the same.
WHAT IS A MUTUAL BANK?
A mutual bank or a mutual savings bank is a bank set up for the benefit of depositors.
When you deposit funds in a mutual bank, you are issued with shares and this entitles you to vote at shareholder and member meetings. However, you won’t necessarily be a recipient of profit-driven dividends, as you would if you were a shareholder in a retail bank.
There are only two other mutual banks in South Africa: GBS Mutual Bank (formerly Grahamstown Building Society, established in 1877) and VBS Mutual Bank (formerly Venda Building Society, set up in 1982).
According to Finbond Mutual Bank, “the purpose of the mutual bank is to stimulate savings by creating a safe place to deposit money and to offer benefits, such as interest on deposits and dividends on mutual bank shares, and to invest conservatively for the purpose of generating profits”.
The institution most frequently identified as the first modern mutual savings bank was the Savings and Friendly Society organised by the Reverend Henry Duncan (1774-1846), in 1810, in Ruthwell, Scotland. Duncan established the mutual bank to encourage his working-class congregation to save.
These first mutual savings banks were designed to uplift the poor and working classes to teach low income individuals the virtues of thrift, and self-reliance by encouraging them to save and allowing them the security to save their money.
The Finbond website states: “Mutual Banks have historically been conservative in their approach. This conservatism is what allowed mutual savings banks to remain stable throughout the turbulent period of the Great Depression, despite the failing of some commercial banks.
“Because mutual savings banks are run very conservatively, they tend to be insulated from some of the volatility of the market. Unlike other banks, they weather financial crises much better, and may continue to return a profit when other institutions are failing.”