When you lend through MYC4, you are exposed to a number of risks. The risk will affect the return you are estimating to earn. For instance, if you have invested in a loan with an interest rate of 13% you might get a lower return, as the actual return to investors depends on multiple factors, some of them unknown (which involve risk), some others known (and therefore not risky but costly). In some cases you might get a slightly higher return. These factors are listed below.
Currency fluctuation: The currency risk arises because currencies may move in relation to each other – euro against local African currency. Whenever investors or companies have assets or business operations across national borders, they face currency risk and as an investor investing in different businesses in different countries and thereby different currencies, you expose yourself to risk.
Currency fluctations can change the return to the investors depending on the fluctuation of the exchange rate. The investor can gain or lose by the movement of a local African currency in respect to the Euro. To see the currency fluctuations for the different countries where MYC4 operates click here. This risk is the most difficult risk to quantify, as fluctuations can be unpredictable. Click here to see calculated and practical examples on how currency exchange affects the return.
Default risk: There is always a risk of losing your investment if, for example, the hair salon in Uganda or the restaurant in Kenya fails. If this happens the business might not be able to pay back its loan and the investor will lose the money and not get any return. This risk is referred to as default risk. Because of this we always recommend that you spread your investments in a portfolio of several different businesses. The providers are responsible for collecting the advertised collateral and the capital recovered from selling the collateral will be divided accordingly to the investors affected by the defaulted loan. To see more about MYC4’s late repayment and default policies, click here. MYC4 has recently signed a new risk sharing agreement with its providers in which they cover 100% of all loans made through the MYC4 platform, thus greatly decreasing the risk of default. You can read more about our star rating system and risk sharing here.
Withholding tax: this tax is retained from interest earned by the investor every month and paid to the country where the investment is made. Click here to see the tax rates for the countries where MYC4 operates. Withholding tax affects the actual return in the part of interest paid as tax that is not possible to reinvest every month. Click here to see calculated and practical examples on how withholding tax affects the return.
Length of investment (payback period): the interest rate bid is an annualized one. Hence by lending to a business (opportunity) for six months will reduce the actual return.
Processing time for repayments: is the period of time existing between the moment the repayment has been made and the moment when money is transferred to the investors account. The effect is quite small but still relevant as the affected amount is only the interest part that cannot be reinvested for 15 days.
Days from bid closing and disbursement of loan: this waiting period does not make the investor earn any interest on the investment.
Impossibility to reinvest the repayments monthly if the amount on the balance account is less than 5 Euro.
To better understand these factors and what your actual return is you can read the different sections below.
Firstly, the average interest rate is the annual interest rate that investors charge borrowers for lending them the amount of money of their bids.
Secondly, the current calculation of interest assumes that the investor reinvests the interest received monthly from the borrower. However the actual return to investors depends on multiple factors, some of them known (and therefore not risky but costly), some others unknown (which involve risk).
The figures represented on the right column are the repayments received after reinvestment (compounding) of monthly payments.
The lower ROI is due to the fact that part of the interest is taxed (withholding tax paid column) every month and the investor cannot reinvest that part of interest.
In the table below it is possible to see different scenario with different interest rates bid from the investor and different withholding tax rates applied. The result in the middle of the table is the actual return calculated as ROI for the investor.
The impact of currency exchange on the actual return can be a bit complicated to explain. Two illustrations underneath show the effect and explain the impact. The explanation has been simplified, therefore the actual return presented below is an estimation.
The first example assumes that repayments are not reinvested. This results in a lower actual return as and a lower currency loss.
The repayment schedule of a 1.000 EUR loan financed in Kenyan Shillings (KES) at 12.8% will be as follows (initial exchange rate 1 EUR = 100 KES).
However, the average interest rate for investors, which MYC4 presents, assumes that the repayments are reinvested. An explanation of how currency depreciation affects the average interest rate when the repayments are reinvested is a bit more complicated.
To simplify the explanation of how currency exchange affects the actual return, a hypothetical example has been created. The example below assumes that each payment is reinvested at the same currency rate. Realistically, this cannot be done, but the example shows it like this in order to simplify the effect of a 5% currency depreciation and the result of this on the actual return.
Taking point of departure in a similar repayment schedule of a 1.000 EUR loan financed in Kenyan Shillings (KES) at 12.8% will be as follows (initial exchange rate 1 EUR = 100 KES).
The figures represented on the right column are the payments received after reinvestment (compounding) of monthly repayments.
*The Euro value 1015.98 EUR represents the sum of the single payments (of 84.66 Euro/8889.90 KES) and for simplicity they are all converted at 105.00 KES per 1 Euros. However, it is assumed that once the payments are received they are reinvested at the depreciating currency rate. For instance, in month 1, 88.54 EUR is reinvested at the exchange rate 100.41. In month 2, 88.18 EUR is reinvested at the exchange rate 100.82 and so forth.
The difference between 12.8% and 7.51% is slightly more than 5% because repayments from reinvestments have depreciated during the year and cannot be fully reinvested as projected initially.
NB: The calculation of the effect of currency depreciation on the return can be approached with a more comprehensive calculation, which would yield a more accurate number. However, a modest approach was chosen above.
In the table below it is possible to see different scenarios with different interest rate bid from the investor and different currency depreciation and appreciation. The result in the middle of the table is the actual return calculated as ROI for the investor.