TOO HIGH INVESTMENT INTEREST RATES REVISITED

I ALREADY ELABORATED IT SEVERAL TIMES, BUT RECENT EVENTS MAKE IT NECESSARY TO REPEAT AND REPEAT THE SAME ISSUE. IF THERE IS AN INVESTMENT WHICH SEEMS TO BE TOO GOOD, IT IS SURELY TOO GOOD.

IN THE LAST WEEKS, THE “MENZGOLD SAGA” DOMINATED THE MEDIA LANDSCAPE IN GHANA. OBVIOUSLY, THE ORGANISATION OFFERED INVESTORS UP TO 120% INTEREST PER YEAR, IF THEY PUT THEIR MONEY INTO THE COMPANY’S COFFERS. IT WOULD INTEREST ME TO KNOW HOW THIS COMPANY WANTED TO DO THAT. THE PRICE FOR GOLD ON THE INTERNATIONAL MARKETS DID NOT RISE SO MUCH TO JUSTIFY SUCH AN INTEREST RATE. MENZGOLD SURELY OFFERED A PONZI SCHEME.

A PONZI SCHEME MEANS BRIEFLY THAT CUSTOMERS ARE PAID THE INTEREST FROM MONEY THAT COMES IN FROM NEW INVESTORS. CONSEQUENTLY, THERE IS NO OR ONLY AN INADEQUATE INVESTMENT FROM THE SIDE OF THE DEPOSIT-TAKING FIRM. IF NOT ENOUGH PEOPLE PUT THEIR CAPITAL INTO THE SCHEME, IT COLLAPSES. INTEREST, AND FURTHERMORE, THE PRINCIPALS OF EXISTING DEPOSITORS CANNOT BE PAID ANY LONGER. THE COMPANY CHEATS THE CUSTOMERS BY LEADING THEM TO BELIEVE THAT THE MANAGEMENT INVESTS THEIR MONEY SUCCESSFULLY.

THAT IS NOT TO SAY THAT EVERY HIGH OFFER OF INTEREST RATES PAYABLE IS A PONZI SCHEME. MANY MICROFINANCE INSTITUTIONS (MFIS) FOLLOW A DIFFERENT, BUT SOMEWHAT SIMILAR PATTERN. THEY PROMISE YOU HIGH INTEREST RATES FOR FIXED DEPOSITS UP TO AROUND 40% PER YEAR. ON THE OTHER HAND, THEY DISBURSE LOANS FOR, AMONG OTHER THINGS, CARS FOR DRIVERS WHO WANT TO RUN A TAXI. FOR THESE LOANS, THE MFIS MUST TAKE BETWEEN 50% AND 60% INTEREST A YEAR. THAT IS TO BE ABLE TO PAY THE HIGH DEPOSIT INTEREST RATES AND TO MAKE A PROFIT FOR THEMSELVES.

IF THE LOAN CUSTOMERS DEFAULT ON THEIR LOAN PAYMENT, THE WHOLE BUSINESS COLLAPSES. THE MFIS CANNOT PAY THE HIGH INTEREST RATES ANYMORE. THE SAME RESULT COMES TO HAPPEN IF CUSTOMERS SIMPLY DON’T TAKE ANY LOANS BECAUSE THE INTEREST TO PAY IS TOO HIGH.

YOU CAN SEE THAT IN BOTH CASES THE DEPOSIT INTEREST RATE IS SO HIGH TO ATTRACT CUSTOMERS TO ENABLE FINANCIAL INSTITUTIONS INTRODUCE A DUBIOUS KIND OF BUSINESS.

A LAST EXAMPLE THAT HAPPENED TO ME TWO DAYS AGO. I WAS OFFERED A FIXED INCOME INVESTMENT THAT WOULD GIVE ME 3%-8% INTEREST A MONTH. THIS WOULD OVER THE THUMB BE A RATE BETWEEN 36% AND 96% INTEREST A YEAR. WELL, FIXED INCOME INVESTMENTS ARE MOSTLY GOVERNMENT OR CORPORATE BONDS. THE RATE OF RETURN DEPENDS ON THE QUALITY OF THE BOND. THE LOWER THE QUALITY OF THE BOND, THE HIGHER THE INTEREST RATE (JUNK BONDS). BUT EVEN THE WORST JUNK BONDS DON’T OFFER AN INTEREST RATE BETWEEN 36% AND 96% PER YEAR. YOU WILL SURELY LOSE YOUR MONEY IF YOU INVEST IN SUCH OFFERS.

IT IS CLEAR THAT IT IS RATHER DIFFICULT TO FIND A PROFITABLE INVESTMENT IN AN ENVIRONMENT WITH AROUND 10% INFLATION. BUT RURAL AND COMMUNITY BANKS WILL GIVE YOU AROUND 12% INTEREST FOR A 1-YEAR FIXED DEPOSIT.  THERE YOU WILL ALSO PAY CONSIDERABLY LESS INTEREST FOR A LOAN, IF THE NEED IS. YOU MIGHT ALSO GO FOR A REASONABLE MONEY MARKET FUND OR EQUITY (STOCKS) FUND. THERE YOU MIGHT EVEN GET A LITTLE BIT MORE THAN WITH THE RURAL BANKS – IF YOU ARE LUCKY.

NO MATTER WHAT YOU DO, ALWAYS KEEP IN MIND THE ADVICE GIVEN AT THE BEGINNING OF THIS ARTICLE.

IF AN (INVESTMENT) OFFER SEEMS TO BE TOO GOOD, IT SURELY IS TOO GOOD! DO NOT FALL INTO THE TRAP!

 

 

 

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