Finbond Mutual Bank fixed term deposit rates – Great deal or incredibly risky?

There was an article in today’s (23/02/2013) Personal Finance around the rates that Finbond were offering on their fixed term deposits. The rates they are offering are way out there compared to the other more established banks (Absa, Capitec, FNB, Nedbank), to the tune of around 3% pa in some cases. Does this represent a good deal for you as a consumer looking to save some cash?

Well, it’s not a simple case of yes or no. Like any financial decision, you need to decide for yourself whether the increased expected returns are large enough to compensate you for the increased risk that you are taking on.

There is a tendency for individuals to compare all of these fixed term investments and consider them as risk free. This is not true. With a fixed deposit, there is always some risk (even if it is very small) of the bank becoming bankrupt and not being able to pay you back the money you invested with them (think Northern Rock etc). The fact that rates are guaranteed does not make them risk free. The guarantee is only worth as much as the person making the guarantee.

It’s important to remember that Finbond is a brand new bank with almost no history. Compared to the more established banks, you should expect a higher return on their fixed deposit rates just for the mere fact that they are new to the industry and don’t have a proven track record.

Secondly, it is very important to consider how Finbond will invest the money deposited with them in order to generate the returns that they are guaranteeing. Finbond’s website explains that they use the deposits to provide micro loans to the lower LSMs. They charge their clients the maximum permissible rate of interest (5% per month). The high expected returns that they generate here means that they can pay higher rates of interest to those who deposit money with them.

Consider that the global credit crisis of 2008 all stemmed from the sub-prime debt crisis, and you should have your first concern with depositing your money with Finbond. The other banks may make less risky investments with your deposit and, therefore, should be able to offer you a lower interest rate on your deposit.

Now, I’m not saying that the Finbond fixed deposits are a bad option. If they are able to manage the risk of lending to high risk individuals appropriately, and the levels of interest they charge are appropriate for the high risk of default, then there is a massive opportunity here for you as someone deciding where to place your fixed deposit. There is also anecdotal evidence to suggest that the lower LSMs honour their debt more in this country than abroad (but again, that’s anecdotal).

So, Finbond or not? It all comes down to whether you feel that the increased returns they’re offering you are worth the increased risk. That being said, they really are a massive outlier compared to the rest of the market.

A final point. They charge their clients 5% per month. That really is an outrageously high amount (I’ll make no comment on whether it is the appropriate amount though). Are you able to sleep at night knowing that your interest is being earned off individuals who really are paying incredibly high rates of interest on their loan?