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Low interest rates can lead to unsophisticated investors taking on excessive risk

My opinion of the risk disclosures made by Yielders Ltd on their website.

Posted 5 May 2022

As someone who has been investing in equities and equity linked products for nearly 50 years, I am very aware of the risks, and accept them knowingly.

However I have concerns that unsophisticated investors sometimes take on excessive risks. That risk is particularly acute with the current low interest rate environment. I made this the theme of my April column in the magazine "Islamic Finance News."

You can read it below.

Low interest rates and the search for yield

The global financial crisis was followed by a long period of very low, sometimes negative, interest rates in the major currencies such as US dollars, euro, sterling and yen. The consequent derisory return on bank deposits led many to seek higher returns by investing in other assets.

Investing beyond bank deposits is of course reasonable. In my own case, 75% of my family’s net worth is in equities. However, problems arise when someone unhappy with bank deposit returns fails to fully appreciate the risks of other investments.

I regularly meet people who directly compare bank deposit returns with the rental yield on property investment. While they formally acknowledge the risk that the property might fall in value, or that the tenant may cease paying the rent, their behaviour indicates that in practice they disregard such risks.

The issues here are identical for conventional and Islamic finance. In both cases, investment in real estate should never be compared with bank deposits or profit sharing investment accounts.

I met Irfan Khan, the Founder and then CEO of Yielders Ltd in mid-2018 when we both spoke in London on a panel about Shariah compliant fintech. He explained that his company organises investment in real estate in fractional units. As their website explains, you can invest as little as £100.

Their website contains the standard risk disclosures. The page describing how their offering works has the following line at the end, between the text and the footer: “*Past performance isn’t a reliable indicator of future performance.”

The footer on every page reads as follows:

“RISK WARNING: Investments in property and unlisted shares carry risk and you may not receive the anticipated returns and your capital may be at risk. Yielders Limited is directly authorised and regulated by the Financial Conduct Authority (745636) Yielders Ltd. Company Number: 09757611 'Yielders Read More..”

Clicking “Read More” reveals the following additional text:

“'Yielders does not provide any advice in relation to investments and you must rely on your own due diligence before investing. Please remember that property prices can go down as well as up and that all figures, rates and yields are projections only and should not be relied on. If in doubt, please seek the advice of a financial adviser. Yielders Investments are only available to certain specified persons who are sufficiently sophisticated to understand the risks.' Close”

I assume these disclosures satisfy the UK regulatory requirements.

However, my personal opinion is that the website has too much focus on returns, and not enough focus on risks, compared with what I consider appropriate.

I could not see any information about how many customer transactions (either by number or by value) they have undertaken.

From the UK’s Companies House registry, I downloaded the accounts to 31 December 2020. The available exemptions allow the accounts to not disclose a profit and loss account for the year. The accounts are unaudited since the company is not large enough for an audit to be mandatory and the shareholders have not required an audit.

I was dismayed by the balance sheet. There are accumulated losses of £753,000.

Although shareholders’ funds are positive at £880,000, the largest single asset is a debt receivable of £579,000 for share capital issued but not paid, which is unusual to see on a balance sheet.

There have also been several recent management changes, including the departure of Irfan Khan as a director in August 2021.

Mohammed Amin is an Islamic finance consultant and former tax partner at PwC in the UK.


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