Whether or not to invest in Finbond

2013-08-28 10:00

Does the bank really guarantee up to 9.5% on fixed deposits?

Michael writes:

What do you think of some banks, such as Finbond, that offer high interest rates and guarantee their investments?

Finbond has a banking licence just like retail bank Capitec and it appears that they offer up to 9.5% on fixed deposits.

Maya replies:

You are correct that Finbond is similar to Capitec in that it makes its money from microloans, which earn a very high interest rate for the bank.

Therefore, it can offer depositors a higher rate than the big four (Absa, FNB, Nedbank and Standard Bank).

Finbond has been created as a mutual bank, which means that it is set up for the benefit of the deposits.

According to its website, when someone “deposits funds in a ‘mutual bank’, she or he essentially buys an ownership stake in the bank and is entitled to vote at shareholder and member meetings”.

Before investing in any new product, there are several things to keep in mind:

1 What does guaranteed mean?

A guarantee is really just a promise and is only as good as the ability of that provider to keep the promise. So your risk becomes the entity you are investing with.

2 How does it make its money?

Microloans carry a higher level of risk than a home loan, for example, and if Finbond is not managing their risks properly, they could suffer severe losses which would affect their ability to repay their depositors.

3 How does it manage its risks?

Capitec has an excellent risk-monitoring system. They also hold enough cash at all times to meet their daily call money for balances under R10?000.

Capitec has a long-term record and Finbond still needs to prove it can manage its risks accordingly. Remember that with any investment, the higher the return, generally the higher the implied risk.

4 What is the advertised offering?

The advertised amount of 9.5% is for a five-year investment (Capitec: 8.5%). That is a long time for a fixed deposit.

If interest rates increase during that period, your rate will still be fixed. So you should be rewarded with a much higher interest rate for making that commitment.

5 Is the monetary return worth the risk?

It is important to understand how an additional 1% translates to a higher monetary return.

For example, Finbond is paying 7% for deposits up to 11 months (Capitec: 6%).

This effectively means that more than 11 months for every R1?000, you would receive R9.10 more from Finbond than Capitec. You need to decide if that is enough of a premium for the risk taken.

The best strategy would be to consider a deposit with them as higher risk than a traditional bank deposit and allocate your funds accordingly.

In other words, don’t put all your eggs in this one basket.

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