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Technology & regulation: How to avoid another ponzi scheme

I am not sure about the education these technology platforms give their users.

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The Trigger

I was driving through the Lekki area of Lagos recently when I saw a large billboard asking the public to “invest” in a certain agricultural technology scheme that invests in pork rearing. The billboard further suggests that anyone who finances the pork rearing scheme will get some guaranteed return in the range of 30% per annum.

Recently, @tosinolaseinde, one of the few personal finance coaches I respect, was explaining how treasury bills interest rates work, on twitter. I was amused at a comment from another user, essentially comparing 11% per annum treasury bill rate to 30% in 11 months from @PorkMoneyAfrica.

I am not sure about the education these technology platforms give their users, but I believe that to a large extent, the information can be misleading.

Over the past year, I have seen the increased proliferation of platforms like these, seeking funds from the public to invest in different schemes including agriculture, fleet of bikes, trucks, amongst others. I think the biggest worry for me is the suggestion that the investment from the public is GUARANTEED and safe.

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Most of these platforms also guarantee returns on invested capital in the range of 20% per annum to over 40% per annum.

I am not saying that it is impossible to earn such returns, but I am sure it is impossible to GUARANTEE such returns CONSISTENTLY. That’s where my biggest concern shows up.

Another miscommunication from some of these operators is the suggestion that the funds from the public is insured, meaning that irrespective of whatever happens, the public will not lose their initial capital because the funds are insured! This communication, I believe, is misleading.

In the course of writing this article, I have spoken to a number of insurance practitioners to understand if they will truly guarantee my capital investment in any business if the business goes south. The response I got was a resounding NO.

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Let me explain this. What you are asking the insurance company to do essentially is to guarantee your irresponsibility. Imagine yourself as an insurer, and the owner of an organization (say FarmerFriend) walks up to you and asks you to insure his capital because he wants to invest in a poultry business.

FarmerFriend will be buying the day-old chicks, FarmerFriend will buy the feed, FarmerFriend will vaccinate these birds, FarmerFriend will essentially rear the birds till maturity and eventually sell to a local restaurant. FarmerFriend wants you to provide a cover in case ANYTHING happens along the rearing process. How much premium will you charge?

The risk the insurer is willing to take, however, is in cases of some unforeseen circumstances, say a fire outbreak, disease outbreak, some natural disaster or other “acts of God”. The insurance will indemnify you. Outside of these events, the insurance company will not assume any risk based on the farmer’s negligence or irresponsibility.

Know your Risk

As part of a participating public, I guess the most important feature here is that you need to know and fairly assess your risk. Like we have all learnt, the higher the risk, the higher the reward. In essence, if your reward (investment return) is 35% per annum in Nigeria, then the risk being taken to “guarantee” such reward is equally as high. This suggests to me that you might also be at risk of losing your entire investment.

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You have to come to terms with this reality. If you are not willing to take such risks, I’ll reiterate the advice from @tosinolaseinde, buy treasury bills and government bonds instead. The risk is lower, hence the reward is lower at about 11% per annum.

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Edge your Risk

Diversification is one of the biggest edging tools in investing. So, don’t put ALL your money in any of these platforms. Mix it all up. Please talk to your professional advisers regarding this.

However, one thing I need you to know and be sure of is the ability of the provider to EXECUTE on his promise. Before you put your money in any of these schemes, you have to be sure that the platform provider has the requisite skill and experience to do the business he is trying to get you to finance.

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Please be sure to know the faces of the founders of such businesses to avoid Mavrodi and his likes. You are placing a bet on these people’s abilities to execute, so don’t just drop your money blindly.

A Peep into these Platforms

I believe FarmCrowdy was the first to introduce sponsorship platforms like these in Nigeria. After this introduction, we have seen follow-on businesses modelled after the same pattern. ThriveAgric runs a similar model. Porkmoney, on the other hand, focuses on just pork production, rather than different farm produce like ThriveAgric and FarmCrowdy. Grain Capital as well focuses on grains production, storage and sales.

There might be some merit in Porkmoney’s strategy, since they learn quickly the inner workings of a particular product line, get better at it and eventually become masters of it. However, when a disease outbreak affecting that specific product line happens, what happens to the business.

There are also other concerns regarding the religious bias against this specific product line.
We have seen other cases of this crowd funding model.

Max.ng and Gokada are using this model to finance bikes on their platforms. Kobo360 is financing trucks on its platform, using crowd sourced strategies as discussed above.

Ponzi will show up

In many cases, Ponzi schemes are created unintentionally. And I fear that a Ponzi scheme might be brewing.

How do I mean?

When one of these platforms is unable to meet up with its obligations to the first set of investors, maybe because the pigs refused to give birth to as many piglets as expected, or the crop yield was not as expected or maybe people are not just using the app to request bikes or truck goods. Suddenly, the entrepreneur will still have to meet up with his obligation to these investors, so he will use the funds from the later investors to bail out the earlier, hoping that the returns on the new set of investors will even it out.
What if it doesn’t happen, then the spiral continues.

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Like MMM, you’ll start to delay payment until life is fully drawn out of the business, then that announcement, “We cannot meet our obligations anymore.” will come, then twitter goes agog and then the Securities and Exchange Commission steps in. And like with everything in Nigeria, their first action will be to cancel all existing schemes… I’m sure you can relate.

My Point

To the Entrepreneur – Your business is not necessarily tech, stop being obsessed with that. You are a farmer, Okada rider, truck driver or any other business you are in. The survival of your business is largely dependent on your success at those core operations. This cannot be overemphasised.

To the Public – Please don’t be greedy. All that glitters is not gold. Do your due diligence. Be sure that the team you are entrusting your money to, has the capacity to execute on the use of proceeds. If you have any doubt about the ability of the team, please hold your money or buy treasury bills.

To the Regulator – I am not sure what to say to them. But I think some level of oversight is needed. Don’t tar everyone with the same brush, there is a need to understand the business before providing regulation around it. It’s a delicate balance between protecting the public and scaling a business. I’ll end it at that.

Happy Entrepreneuring
@AremoFisayo

4 Comments

4 Comments

  1. Sstarmoyin

    October 8, 2018 at 8:48 am

    Thank you for sharing this, very enlightening. Know the business, know your risks and diversify!!

  2. filliposaga

    October 8, 2018 at 4:02 pm

    Good day Fisayo,

    I always enjoy your write-ups.

    If I may add to it sir, PONZI SCHEMES thrive due to two factors.

    A greedy investor
    A greedy business owner

    However, in my opinion, PONZI SCHEMES thrive due to GREEDY INVESTORS. Reason why I say so?

    I trade fx market and some investors will try to lure you into giving them ASTRONOMICAL MONTHLY RETURNS, even when it is obvious that such profits cannot hold when looking at long term investments.

    Such investors will tell you that:”If the bank can give them 10-20% per annum, why should they invest in you if you can’t give me more”?. It takes a lot of discipline to turn down such mouth watering offers, but again, not everyone has good business etiquette.

    Greedy investors give rise to PONZI SCHEMES. If investors are not in pursuit of GET RICH QUICK SCHEMES, I don’t think Ponzi schemes would thrive, because nobody would patronize them.

    Once again Fisayo, I enjoyed this article of yours, its a must share

  3. Prosper Njoku

    October 9, 2018 at 4:25 pm

    I honestly think the word ‘Ponzi’ can be found everywhere if you look at it holistically. The problem here is the bad foundation that’s been laid by our moral lifestyle, level of education/judgement, ignorance and a junk of irresponsibility from our government, plus the unconscious negative agreements from media agencies through which people are ensnared into very fraudulent schemes. For one, it’s a game by same people against same people and for same set of people. In Ponzi game no one [both investor(s) and the owner(s)] is/are innocent. What I don’t buy is the mentioning of a particular name, the article would have been best without name or a touch of few schemes – there were varying Ponzi schemes before MMM- but after MMM, thousands of its leaders and guiders started their own Ponzi and people fell for it. There are still a handful of them operating in different forms, some as bitcoin mining, cryptocurrency investment, agricultural investment schemes, etc. Good analysis though.
    Thanks.

  4. Olusina

    July 3, 2019 at 5:00 pm

    But it seems the writer of this article omitted to mention the existence of agricultural insurance products! ! Deliberately or ?
    Living itself is a risk

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Currencies

DEVALUATION: CBN updates website to official rate of N360/$1

The central bank of Nigeria has devalued its official exchange rate from N307/$1 to N360/$1.

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CBN website states oil price is still $61, Naira under pressure as Nigeria records poor export earnings, 4 key sectors the CBN plans to pump money into

Just as Nairametrics reported, the Central Bank of Nigeria has devalued its official exchange rate from N307/$1 to N360/$1. The apex bank has now reflected this change on its website signaling a confirmation. The bank is yet to issue a press release to this effect.

The CBN has now officially devalued by 15% moving from N307/$1 to N360/$1. Depreciation at the “market-determined” I&E window is 5% having moved from N360/$1 to N380/$1

Devaluation: Nairametrics reported yesterday that the Central Bank of Nigeria (CBN) sold dollars to banks at N380/$1 in a move signifying a devaluation of the currency. Banks trading at the Investor and Exporter (I&E) window bought dollars at N360/$1 from the CBN on Friday, March 20, 2020. The I&E window is the official market where forex is traded between banks, the CBN, foreign investors, and businesses. The central bank typically buys or sells in the market as part of its intervention program.

The CBN has updated its website with the official exchange rate.

Nairametrics also got hold of a letter from the CBN to banks informing them of the new exchange rate for dollars flowing from the International Money Transfer Operators (IMTOs). According to the CBN, IMTOs will sell to banks at N376/$1 while banks will sell to the CBN at N377/$1. The CBN will sell to BDC’s at N378/$1 while the BDC’s will sell to end-users at “no more than” N380/$1.

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Single Exchange Rate: A report yesterday also suggested that the CBN also planned to move to a single exchange rate policy for determining the price of the dollar. A senior central bank official who does not want to be identified, said, ‘Today we allowed the rate at the importer and exporters (I&E) window to adjust in response to market developments.’

The central bank has now made an apparent u-turn after it had initially that the “market fundamentals do not support naira devaluation at this time” detailing reasons why it did not need to devalue.

Falling oil price: Oil prices fell to under $20 on Friday before climbing back up to settle at $23 per barrel. Nigeria’s Bonny light trades at $26 while the benchmark Brent crude trades at $29 per barrel. In response to the crash in oil price, Nigeria’s announced a cut to its 2020 budget by N1.5 trillion as it faced the reality of a potential drop in its revenues. Nairametrics also has information that state governments are getting jittery about their ability to sustain salary payments as a reduction in their federal allocation “FAAC” is anticipated.

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Career tips

Investment options for salary earners

Investment options for the salary earners
#Investing #Entrepreneurs #Investment #Salary #Wages

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Investment options for salary earners - bank loan

Recently, one of the readers of my articles asked to know what investment options are open to salary earners. A salaried individual is like everyone else except that he or she has a fixed monthly income. This implies that their investments and expenses have to be managed strictly according to their fixed monthly income.

Since salary is assumed to be the only source of income for the salaried, it is advisable that such an individual fortify himself financially before investing so that adverse investment performance will not have untold effect on him and his family. Therefore, if you are a salaried prospective investor, you need to:

READ: Where to invest N500,000 right now

Get life insurance

Most families in Nigeria are single income families so much such that if anything bad happens to the income earner, the family gets shattered, at least financially. Again, given the risks inherent in capital market investments, it is only prudent to have a life insurance as a first step in one’s investment journey. It is very baffling to see many investors very deep into the market, yet they do not have life insurance.

[Read Also: Understanding the risks in bond investing]

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Life insurance is and should be a basic part of any financial plan. Life insurance is a protection for loved ones against financial hardship arising from the death of a breadwinner. This is even more important today than ever before with high cost of funeral expenses, college education and medical bills. So, the first investment option for a salaried individual is to get a life insurance.

Prepare for financial emergencies

Life is full of surprises, emergencies do happen, jobs are lost without notices, and even good investment opportunities emerge sometimes suddenly. There is, therefore, the need for a cash reserve to help weather the financial storms and emergencies when they come calling.

READ: SEC issues pre-notice on cancellation of certificates of 157 inactive CMOs

Cash reserves do not only provide for emergencies, they also help to ensure that investments are not liquidated prematurely or at inopportune times to cover unexpected expenses. There are no hard and fast rules on what the exact amount of the required cash reserve should be, but most financial experts and planners will advise that an amount that equals about six months of living expenses be set aside.

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So, as a salaried person, your next investment should be to have a cash reserve. A cash reserve should not necessarily be in a savings account or under the mattress; it could be in an interest-bearing money market account, money market mutual funds with low to zero luck-up period or another form of very liquid investment that is readily convertible to cash without loss of value.

[Read Also: Understanding the risks in bond investing]

Know your risk appetite

As a salaried and fixed income individual, your risk appetite is most likely going to be low as well as your risk tolerance, although your extended family profile could change all that. You need to know or understand your risk tolerance before you engage in any capital market investment.

Your risk tolerance will and should drive the type of investments you go into. Your risk tolerance depends on your psychological makeup, your current insurance coverage, presence or absence of cash reserve, family situation, and your age among others.

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READ: Here’s what will happen to Nigeria’s insurance sector in the short to medium term

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Talking about family situation, it is reasonable to think that a married individual whose children are still in school will be more risk averse than an unmarried person. On the other hand, older people have shorter investment time horizon within which to make up for any losses. the reason for this is because the older you get the less time you have to work to recoup on losses.

In that case the risk tolerance of an older man will be less than those for younger folks. Again, the more cash reserve and insurance coverage you have, the more your propensity to take risk. Now having known your risk tolerance based on the underlying factors, you can then define your investment objectives

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[Read Also: Important tips on how to profit in a bearish market]

Set your Investment objectives/goals

Having met those essentials above, you are now ready for a serious investment plan or program. A good investment plan starts with investment objectives. Investment objectives are the force that determines what you invest in. Investment objectives range from capital preservation, to capital appreciation and constant income generation.

Capital preservation as an investment objective implies that you, the investor, aim at minimising the risk of loss by maintaining the purchasing power of your investment. So, if you are risk averse or you will need money from your investment soon for children’s education or for building a house or you are nearing retirement, this should be your objective.

READ: CBN debits banks N216.1 billion for CRR compliance

Investors whose aims are to see their investment portfolios increase in real terms over a period of time are better suited for capital appreciation as an objective. This is better for investors that are more risk tolerant and those with more potential to recoup on losses along the way.

If you are already retired or nearing retirement, and therefore depend on your retirement plan supplemented by investment income, you need an investment that generates income rather than capital gains. In that case, your investment objective should be current income generation. It is always good to have investment goals stated in terms of risk and returns.

[Read Also: I-Invest generates over N2 billion transaction in less than 6 months]

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Decide on asset allocation

Armed with the knowledge of your risk appetite and investment objective, you are now ready to decide on what to invest in, and how much to invest in any asset class. This takes you to asset allocation decisions. Asset allocation involves dividing an investment portfolio among different asset classes based on an investor’s financial requirements, investment objectives and risk tolerance.

A right mix of asset classes in a portfolio provides an investor with the highest probability of meeting his/her investment objectives. Asset allocation is the most important investment decision an investor can make in a portfolio because it demonstrates an investor’s understanding of his or her risk preferences and return expectations.

READ: How to build a profitable Mutual Fund Portfolio

It is good to strive for a diversified portfolio. Unfortunately, the Nigerian market does not provide a lot of asset classes for optimal diversification, but diversification can be achieved across sectors or industries within the few asset classes in the Nigerian stock market.

Decide on how to invest

There are different ways to invest in the capital market. You can invest directly by making the stock selections by yourself, thanks to the online stock trading platforms that abound the world over. This implies that you have what it takes to conduct the required research and analysis of the companies whose shares or stocks you wish to buy.

[Read Also: How I Would Invest My Mother’s Retirement Funds]

It also implies that you have what it takes to know when to sell or add to existing positions. Another method is to have someone “do the heavy lifting” for you. In this case, that someone, often times called fund manager or portfolio manager, does the research and analysis and selects shares that suit your investment preferences, investment objectives, risk tolerance and appetite as well as your investment time horizon.

This route is most suitable for investors that lack the knowledge and time for the required research and analysis. If you decide to go this route, mutual funds are the best bet for you.

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Business News

Atiku kicks as Buhari spends $3.7 billion in foreign debt service since 2015

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Budget: FG completes just 31.7% of constituency projects, Nigerians react to President Buhari's signing of Finance Bill 

The Buhari led government has spent about $3.7 billion in foreign debt service since 2015, one of the highest from any democratically elected government. The highest single-year foreign debt service was in 2006 at $1.79 billion.

About 68% of Nigeria’s foreign-denominated debt servicing is in commercial Eurobonds issues over the last two years. The loans range between 5.1% and 9.2% per annum. Nigeria’s external debt stock stood at $27 billion in June 2019.

Rising debt service: The Buhari administration has so far spent about $1.1 billion in foreign debt service this year. In 2018, the government spent about $1.4 billion in debt service, more than 3 times the $444 million it spent servicing foreign debts in 2017. The rising cost of debt service is a direct attribute of the government’s reliance on foreign loans as a means of funding government expenditure.

Debt service since 2003. Source: CBN. Nairametrics Research (C)

Foreign Loans: Nigeria’s fallen revenue following the crash in oil price has allowed President Buhari to rely mainly on foreign loans to fund government expenditure. As of June 2015, Nigeria’s foreign loans were about $10.5 billion mostly made up of multilateral and bilateral loans.

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However, by June 2019, total foreign-denominated loans were $27 billion with $10.8 billion made up of Eurobonds. Commercial loans which include Eurobonds and Diaspora bonds make now make up about 42% of total foreign borrowings.

[READ ALSO: Babatunde Fowler attributes FIRS success to technological innovation (Opens in a new browser tab)]

Critics of the government have complained about the government penchant for debts believing that it could put the future of younger Nigerians in jeopardy. Supporters of the government, however, believe the borrowing was necessary to invest in critical sectors of the economy particularly infrastructure.

Recently, Director-General of MAN, Segun Ajayi-Kadir expressed worry about Nigeria’s rising debt.

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“….the rising debt profile of Nigeria continues to be a cause for concern, especially the capacity of government to effectively service it and, at the same time, meet the bursting needs and aspiration of the citizenry going forward.” 

“Already, our budget projections for 2020 anticipates a debt service sum of 2.45trillion, an amount higher than the 2.14 trillion earmarked for capital expenditure. 

“And even though our debt-to-Gross Domestic Product (GDP) ratio, which currently stands at 28 percent, is still below the average in Africa, our revenue-to-GDP ratio remains low.”

The Finance Minister Zainab Ahmed however, believes the current debt profile is sustainable, comparing it to our GDP.

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“Currently, Nigeria’s debt is at N25 trillion; that is about $83 billion. And at $83 billion, we are just at 18.99%…so 19% debt to GDP. I hear people say Nigeria has a debt problem. We don’t have a debt problem. What we have is a revenue challenge and the whole of this government is currently working on how to enhance our revenues, to ensure that we meet our obligation to service government as well as to service debt.”

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[READ ALSO: Babatunde Fowler attributes FIRS success to technological innovation (Opens in a new browser tab)]

Former Vice President and defeated PDP Presidential aspirant, Atiku Abubakar during the week piled criticism on the government’s borrowing.

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“I have said it time and again. The business of government is too serious to be left in the hands of politicians. We must all ask questions because if they throw away the future, it is not going to be their future they are throwing away, it will be all our futures.

“The fact that Nigeria currently budgets more money for debt servicing (N2.7 trillion), than we do on capital expenditure (N2.4 trillion) is already an indicator that we have borrowed more money than we can afford to borrow. And the thing is that debt servicing is not debt repayment. Debt servicing just means that we are paying the barest minimum allowable by our creditors.

What this means: Nigeria’s rising foreign debt profile should be a worry to investors and businesses and must be watched closely. The country’s ability to repay these loans will continue to be harder as it increases especially now that it is costing about 9%. The immediate risk for investors is the exchange rate which could be the first to suffer should the government struggle to repay its loans.

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