Sat, 23 Jun 2018 02:00:14 -0400
Making money from lending moneyBY DENNISE WILLIAMS
Need a “smalls” till pay day? Well there are enough people in need of a short-term consumer loan so that it is a proven business which makes money.
The Jamaica Association of Micro Financing (JAMFIN) reports on its website that its members have an annual turnover of approximately $3 billion per year. So what about the average investor? What is the pathway to making money by lending money?
Whether you love it or hate it, the loans business is real, and it makes a lot of money. And whether you want to start the business yourself, buy shares in existing business or lend money online, there are ways for you to profit from this established trend. And so our team of experts have tips and ideas to put things into perspective.
Dino Hinds, director of lending company Micro-Financing Solutions, notes that many people have the idea to jump into microlending as a quick way to earn money and do not consider the real world business implications of the business.
“Microlenders have gone a far way in filling the gap for the over 60 per cent of Jamaicans who are considered un-bankable. Simply put, the regular commercial banks do not want the business of that segment of the market as they are considered too risky.
“Companies like Access Financials, JN Small Business and others have however been quite successful playing in that space. This has led to many smaller players entering the market and trying to replicate the success of these companies.”
That said, “The successful microfinance companies are normally led by experienced financial professionals. These individuals would therefore know about credit risk, understand how to assess potential customers and how to build a successful company. Microlenders service the segment of the market that has the most risk. It is important therefore to manage the bad debt portfolio – to ensure that is within industry levels is also important.”
So experience in the financial sector and the ability to manage bad debt are key elements of success in the microlending industry.
Hinds also notes, “it is very important that the company you are looking to invest in has the proper systems in place to manage and track a loan portfolio”.
Beyond Jamaican shores, for individuals looking for both high returns and US dollar exposure, online lending is a US$500-million business that has attracted investors. Websites like microplace.com; kiva.org, lendingclub.com, prosper.com and zopa.com are online lending sites that promise returns of around five per cent on sums of as little as US$25.
Crowd fund lending (or “peer-to-peer lending”) is where regular people pool their capital and lend it to others.
But if Jamaican investors choose to risk their money to earn higher returns online, attorney-at-law Robert Taylor advises extreme caution.
“My general recommendation is that if you do not understand the concept of crowd funding and its inherent risks, it's a space that you should avoid. Know and understand the underlying business activity that the loan is being used to support so you can assess whether the activity is even viable. However, where you may understand the risk, then risk tolerance and risk appetite are personal indicators which you must measure if you decide to take some measured risk.”
Taylor also notes, “Read the fine print. Many of these loans are unsecured loans, so do not risk more than you can afford to lose. You want to first safeguard return OF PRINCIPAL before return ON PRINCIPAL. And determine track record; your initial investment should be a small sum that exposes you minimally. Thereafter, invest incrementally until some track record is established and you have a better feel for the space.”
Returning to the Jamaican space, Dr Carolyn Hayle of The UWI notes that financial technology or 'fintech' is an exciting career option that allows persons to profit from the microlending industry in an innovative way.
“Taking on this career requires first an undergraduate degree in any field with some coursework in general finance or economics. Then combine this with at least some basic experience with a programming language. Recently, the National Commercial Bank Financial Group has hosted an innovation challenge and these skills were highlighted, so this is a good degree to pursue. I have searched the Internet for this combined offering in Jamaica and I have not found it. But Boston, Massachusetts, Brandeis University is offering it online. The investment would be US$3,550 to get a fintech degree. And for Jamaica, I think people should move on it now and be ahead of the curve. It is thought that this will be the new way of banking.”
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