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Financial Literacy

Investment Clubs: Have they run out of fashion?

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How many times have you had to bite your finger at the disappointment of passing up a business opportunity for which you were financially ill prepared to take advantage of? Occasions probably too numerous to count I am sure.

Compounded to your seeming frustration might also have been the fact that a purposeful walk into any of our Nigerian banks lends no reprieve as most would gladly dance naked in the simmering Nigerian heat or unforgiving torrential downpours than take a second look at your well prepared business plan. Your savings just won’t cut it, plus, it also seems, unfortunately, like other avenues of independent fundraising in a bid to benefit from that seemingly ‘hot’ business opportunity looks abortive from every angle.

Well, maybe there is one angle you failed to consider, and guess what, it’s one that enjoyed huge popularity at some point in the Nigerian business space. A casual discussion about it with a friend once lent the near heated response, “Investment Clubs are dead abeg! Let’s think of something else…” he said to my utter wonderment. Really? I mused, are Investment Clubs really dead or did we just see it as a passing fad which we were only too glad to drop at the first sign of ‘bump ahead’ we came by?

And now we scratch, unsuccessfully so, too far down the ‘well of opportunity’ for fundraising solutions that stares us right in the face? Hmmm, maybe it’s one or the other or it’s neither, but did you know that the Paris Club for which Nigeria and several other African and global nations always enthusiastically run to for financial aid is actually an informal group of 22 creditor nations, with no official global statues, who give concession–based loans to mostly poor nations.

And are today owed monies to the tune of half a trillion dollars by more than 50 global nations? I can’t even begin to imagine what could happen to the global economy if this group ever decided they needed all their monies, plus agreed interests, back. In other words, it would be bad news for the world, and good for the creditor.

Believe it or not, the Paris Club is one of the highest forms of Investment Clubs there is in the world today, and though there may be others, such as the London Club – a private group of creditor banks that also loan monies to countries and other banks, the Paris Club is one of the oldest, most successful and popular Investment Clubs in the world.

Of course, there might never be anyway that you or your entire village could together ever match the kind of investments that has seen Paris Club rise to the pinnacle of global financial prominence as it has today, however, might the idea be one channel to reach your goals of financial independence without the hassle of loan repayments, displeased shareholders, a greedy creditor and/or some form of indebtedness for which you could have future regret? Maybe…

Alright then, let’s delve a little deeper into this financial crevice and reeducate ourselves about this once forgotten money spinner and see if it could have some exploitable hidden gems.

What is an investment club?

An Investment Club is a group of individuals who come together to combine funds mostly for the purpose of investments, and with positive returns as an outcome. These members typically meet on a periodic basis to make investment decisions, mostly through, a voting process and then proceed with their investment objective(s). Investment Clubs are an excellent way of reducing the risk of financial losses, in the case of a bad investment decision, and are also good ways of meeting new friends and learning of new investment opportunities that exist and having a means of easily taking advantage of them.

Although people have been investing in groups for thousands of years, the world’s first investment club was allegedly established in Texas in 1898 back in the Wild West when few investments could be considered safe. Investment clubs were seen as an ideal way of spreading the risk away from just capitalizing in cattle farming, the popular business at the time. And one of the major reasons people, particularly Americans come together in investment club is to learn how to or other ways of investing their own personal monies outside of the group.

It is important that each Investment Club have ground rules, strict laws that must be abided by each and all members, a solid strategic business direction and firm investment objective and procedures otherwise its objective could be defeated from the get–go. Usually Investment Clubs do not have to be legally registered or offer or sell membership slots to interested persons, but most do and since each club is unique, each should, for best practices register at least as a private entity, a social club or find ways to abide by some statue governing the laws of the land which it finds itself.

Investment Clubs can invest in next to anything, both legal or (believe it or not, illegal). But the most popular, legal, vehicles are shares (stocks), mutual funds, bonds, treasury bills, property, junk bonds and direct investment in ownership of companies. However, other Clubs have been known to stake in big oil and gas deals, farming/agricultural projects, next–generation pharmaceutical and/or medical solutions, weapons manufacture and sale, to mention but a few.

How to join an investment club

Joining an Investment Club may require a connection to an existing member or a vacancy in the club, but any group of individuals may start their own investment club. The process includes finding a group of like-minded investors, registering it with state and/or federal government, obtaining a taxpayer ID, and holding regular meetings. The investment club should also open a brokerage and banking account and maintain organized and strict banking and accounting procedures.

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Investment Clubs are commonly formed as partnerships or limited liabilities, and investment income and/or losses are consequently passed through to its members through monetary or physical terms as agreed by its members.

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Contributions into investment clubs

Some Investment Clubs are gender or age specific and members may be required to make an initial minimum investment and then make regular contributions as agreed in its membership terms and conditions. Often, but not always, each member of the investment club contributes the same amount of money and is expected to do so periodically. Members are often always free to invest outside of the club, which makes an investment club a good way to diversify a portfolio.

Club meetings are usually held monthly but some Clubs meet more frequently, and most meetings involve reviewing existing investments, taking deposits for new investments, selecting new investments opportunities, and on some rare occasions, as a festive gathering. Members personally research existing and potential investments, and the group is often able to conduct more thorough research as a team than each member could do individually. A majority vote is normally required to buy or sell an investment, making it one of the safest investment options known to man…

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To be continued…

About the Author

Whenever he is up nights, faffing around the internet gathering material for detective novels he is not sure when he’ll ever publish, Brain Essien, likes to play investment and brand strategist in the mornings and website architect/builder in the afternoons. On the weekends he likes to throw on a few bouncing apparels and gadgets and go bounce people out of their own parties if they become a handful. Besides that, he loves reading detective novels, building muscle, daredevil racing, video games, shad

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Nairametrics frequently publishes articles from experts such as financial analysts, economists, researchers and investors. We also feature articles from guest writers and bloggers who wish to push their views and opinions through our platform.To get your articles on Nairametrics, kindly send an email to [email protected] and we will publish it within 24 hours of approval by our editorial team.

1 Comment

1 Comment

  1. Kenny

    April 25, 2020 at 11:26 am

    Direction for loan for farming

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Personal Finance

How interest rates impact your wallet

It is imperative to understand how interest rates impact our wallets.

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How Interest Rates Impact Your Wallet

In the financial world, the interest rate plays a huge role in any financial transaction. Interest rate is the proportion of money a borrower pays for an asset or any form of debt. It is the return or interest paid to the financial service provider.

In Nigeria, interest rates are by financial institutions and the Monetary Policy Committee (MPC) assigned by the federal government to keep interest rates at a moderate and stable price level for proper economic growth.

When it comes to interest rates, either increasing rates or declining rates, the economy gets influenced in many ways. Rates of interest ascertain economic performance. Lower interest rates are a sign of a slow or poor economy as interest rates are changed to enable cash flow.

Higher interest rates are, in turn, viewed as an indicator of a healthy economy with favorable cash flow. Interest rates can slow down or improve an economy. It is necessary to examine the various aspects of our financial life influenced in different rate scenarios to understand how interest rates impact our wallets;

Some ways interest rate can impact your finance are:

Saving Culture

Many factors influence how an individual saves, but a decline in interest rates tends to discourage saving because the reward is affected. A higher interest rate makes it attractive to save money as it enhances increased return. Thus, a change in interest rates influences an individual saving, which is an essential part of financial planning.

Loans

How you will be affected by a change in interest rate depends on if you are inclined to borrowing or investing. Because the interest placed on loans will be less, lower interest rates offer more opportunities to borrow or acquire cheaper loans, which means it favours the borrowers. People are discouraged from getting loans to invest in their businesses because a higher interest rate translates to a higher borrowing cost.

Expenses

Lower interest rates allow companies to acquire less costly loans that impact the price of the goods they sell. As far as expenses are concerned, people will have more funds to spend on goods and services.

Income

Interest rates can have an impact on the income people earn by affecting economic growth. Slow economic growth will influence the level of income earned. With substantially less income, people will have less cash to survive on.

When setting financial goals and making meaningful decisions regarding one’s finances, understanding the impact interest rates have on one’s life can help.

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How MSMEs can get easy access to finance

MSMEs must take the following steps for loan readiness.

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How MSMEs Can Get Easy Access to Finance

MSMEs are considered the backbone of the Nigerian economy. In 2019, they made up 90% of all registered businesses, contributed more than 50% of the country’s nominal GDP, and employ 84% of its labour force. Despite this, MSMEs were the recipients of less than 5% of all credit granted by the banking industry.

One reason for this is self-selection by MSME owners. Many MSMEs refuse to apply for loans from banks due to a fear of rejection and a belief that banks charge exorbitant fees and request hefty collateral before giving loans to MSMEs. Now more than ever, in this era of cashflow-based lending and low-interest rates, this harmful myth is costing businesses access to finance that they need to scale.

Another reason is the MSMEs’ lack of loan readiness. Unlike large companies, small business owners do not prepare themselves before applying for loans. This causes them to make many mistakes that discourage banks from lending to them due to a fear of non-repayment.

In order to overcome this hurdle and join large businesses in taking advantage of the low-interest climate, MSMEs must take the following steps for loan readiness:

1. Maintain financial records – Research shows that 69% of MSMEs in Nigeria do not keep detailed financial records. As a business owner, you must ensure that funds pass through your business account. Your business’s financial records as reflected in your bank statement will help your bank determine your repayment capacity. This is important, whether you want a collateral-free or collateral-based loan.

2. Use narrations for transfer into personal accounts – Again, always use your business account for business funds. However, if funds must be paid into your personal account for any reason, then ensure that those payments have a narration that reflects the purpose of the payment. For example, Two shirts purchased. This helps isolate business funds from personal when computing your turnover in order to determine your loan amount and repayment capacity.

3. Know what you want – Always know exactly how much you want and what you want it for. If your account officer asks you how much you want and you say “any amount you can give me”, they automatically assume you have no plan for the money or a plan for repayment. Before approaching your bank, determine how much you need and how much you can repay per month, using your monthly income.

4. Have a repayment plan – Always have a plan for repayment. Know how much you can afford to part with per month. Note however that your repayment plan might not align with that of the bank. Banks prefer not to take more than 33% of your monthly income in loan repayments, so your loan repayment period will probably be dependent on how much you can pay per month. Regardless, a well-thought-out repayment plan will build confidence in your repayment ability.

5. Engage your account officer– It is important to have an engagement with your account officer before applying for the loan. Instead of just writing a loan application letter to the bank and waiting for a response. Armed with your financial statement and your knowledge of how much you need and for how long, visit your account officer and have them work with you in getting your loan.


Ese Atakpu is a writer and banker.

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