“What do you think about some of the banks that offer high interest rates such as Finbond that guarantees their investments? Finbond has a banking license just like Capitec and it appears that they offer up to 9.5% on fixed deposits,” writes Michael.
Maya replies: You are correct that FinBond is similar to Capitec in that it makes its money from micro-loans which earn a very high interest rate for the bank; therefore it can offer depositors a higher rate than the big four banks. FinBond has been created as a mutual bank which means that it is set up for the benefit of the deposits and according to their 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:
What does guaranteed mean?
A guarantee is really just a promise and is only as good as the ability of that provider to meet the promise, so your risk becomes the entity you are investing with.
How does it make its money?
Micro-loans 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.
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, whereas FinBond still needs to prove it can manage its risks accordingly. Remember with any investment the higher the return, generally the higher the implied risk.
What is the advertised offering?
The advertised amount of 9.5% is for a five-year investment (compared to 8.5% for Capitec). That is a long time for a fixed deposit. If interest rates increase during that period your rate would still be fixed so you should be rewarded with a much higher interest rate for making that commitment.
Is the monetary return worth the risk?
It is important to understand how an additional one percent translates to a higher monetary return. For example FinBond is paying 7% for deposits up to eleven months compared to 6% from Capitec. This effectively means that over eleven months for every R1000 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.
I am a pensioner with commitments.I work hard to have enough capital 5m. to invest for a monthly income, I would like to invest for one year fixed with an monthly income of R30 000+ what should I do?
Finbond advertises higher rates of return and provides a guarantee. Is this realistic? Would it be a safe investment for a pensioner? Is Fedgroup a better/safer option?
I can’t comment directly on Finbond, but I would think it is a higher risk option
I have invested R1.5 million for 5 years at Finbond. Following the failure of Exponent, I am uneasy about the sustainability of the high interest rate I am getting from them. Do I have to worry?
Finbond is not one of the larger banks and it does rely heavily on loans made to lower income earners. The interest rate would be reflecting that risk. You need to decide if the higher rate is worth the risk
what % yield can one expect for an investment of R 1 mil for 1 year at Fedgroup?
They only offer five year participation bonds.
I am a pensioner and would like to invest with Finbond because of the higher interest rate but also scared that because of the higher rate obviously the risk is higher that i might loose my money – please advise
Do you mean Finbond or Fedgroup? I would be a bit nervous of Finbond but Fedgroup is well run.