Is crowdlending the answer to (some of) Africa’s poverty problems?

The migration crisis

Maybe I am opening a can of worms here, as this is a discussion which may involve a combination of feelings and politics, which can be a dangerous mix. But I will try to view this aspect through both an investor’s glasses and with a strong desire for solving the poverty issue in Africa.

An issue which urges millions of migrants each year to pursue the dream of making a living in Europe and sending money back to their families.

And just to keep things straight: this article is not about refugees from Syria or other unpeaceful places. It is solely an idea about how to solve the sub-Sahara poverty problems and lifting the population out of extreme poverty. Poverty which forces the population to seek their fortune elsewhere but home – and that is often in Europe.   

As of writing, we are in the middle of the EU Parliament election. One big issue which is being discussed is the “migration problem” from Africa and the Middle East and how to secure the borders from being overrun by migrants.

Unfortunately, the discussions are mostly focused upon border control and how to keep the migrants out of Europe. To me, it should be more focused on how to eradicate the reasons which force the migrants to seek job opportunities in Europe.    

I realize that creating jobs is not only about money. The majority of the African states have limited institutional capabilities that can deliver the services needed for having a functional private and public sector. And with services, I mean education, juridical security individuals and companies, etc.

In general fighting, poverty requires direct policy interventions and I am not an expert on that issue. Building up the needed capacities is not a subject I can include in this post. Hence I will focus upon creating private owned businesses or expanding existing in order to create more jobs and thus giving the inhabitants in these countries a possibility to make an earning which can secure their families.

Creating job opportunities through crowdlending investments

My thoughts on this topic are how this development can be supported? Naturally, the EU countries can donate a huge amount of money but this will not make any long-lasting effect. And they can’t just subsidize some businesses or companies. That would be unfair competition for those companies which are not being subsidized.

Why not let the market talk and start investing in businesses in order to support the private sector in these countries? I have limited knowledge about the business environment in, say Nigeria, Ivory Coast, Ghana, and similar countries and I don’t know how to approach these markets.

But with crowdlending, an investment window has opened and through this, you have the opportunity to support small scale businesses to grow. Obviously, it’s an investment and my goal is also to earn money on my investments. 

Through my Grupeer account, I found an investment opportunity in Nigeria. The loan originator is Finsputnik, and the customer is Bosak Microfinance Bank. Boask has a bank license in Nigeria and has since 2009 provided microloans to, mostly women, living close to the poverty line.   

As the average loan to these women has a value of € 88 we are obviously talking small scale economic activities. There are five different loan types and most loans are aimed to buy trading goods for re-selling. Furthermore, they have finance loans, auto technician support loans, etc.

Finally, they also provide 6% savings accounts for their clients and healthcare insurance.

I invested in a short term loan – only three months. As mentioned this was my first investment in a 3rd world country so I just wanted to see how it falls out. I expect to earn money on this but I also hope it can help entrepreneurs to build and expand their businesses and maybe even creating a few extra jobs.

Maybe I am just being naïve here but I hope it can help these people to make some earnings and support their families. And according to this article from 2017, it seems there is evidence that it actually helps.

“But why don’t you just give them your money instead of earning interest?” you might want to ask. As I have mentioned in another post I am not super rich which means if I gave away an amount of money I could only do this once. With this, I can invest and re-invest when the initial loan has been repaid – and earn money at the same time.  

I realize I can’t save the world but less can do.

Your money should work for you….

……not the other way around.

This is a wise quote I am happy to have learned – but unfortunately learned in rather high age (I’m not that old, only 42).

I grew up learning that “you should work to earn your money” and thus I have always done. It hasn’t exactly made me rich, not that I’m poor, but I am certainly not rich either. Guess I could place myself in the middle-class box, in which 70-80% of the Danish population belongs. That again can be divided in lower and upper-middle-class but let’s just call it middle-class to keep things straight.

Why have I not become rich? Basically, because I have spent most of the money I have earned through the years! Yes, it’s that simple.

“What has the money been spent on?”, you might want to ask. Well, traveling in Europe, Asia, America, etc., cars, motorcycles, restaurants and bar-visits, clothing and obviously house-rent, food, daycare institutions for my children, and other normal, but expensive, household expenditures.

Some of the above spendings can’t be avoided. Fine. But when reflecting on my historical consumption it’s hard not to think about what just a small amount of the consumed money could have grown into, if they had been wisely invested. Not that all pleasures should have been skipped, you only live once, but if just some of them can be postponed it’s far more fun to have look on your bank account in a few years.

A few months ago I stumbled over an excel sheet someone shared on a Danish Facebook site for passive investments. It shows what you will miss in retirement if the money is being spent now instead of being invested.

That sheet really opened my eyes and I learned how you can benefit from compound interest if your money is invested instead of being spent.

I’ll use my expenditures on my motorcycle as an example:

I used to ride motorcycles. My first was a Honda VT600 from 1994. That was sold and I purchased a Kawasaki ER6F instead. Not so old school but far more fun to ride. Besides the bikes, I had to spend money on a drivers license for motorcycles, helmet, clothing and other gear + insurances.

For the Kawasaki itself, I paid DKK € 9.105 in April 2010. In November 2016 I sold it for € 3.200. The main reason for selling it was I should pick up my children from the daycare after work. And a motorcycle does not come in very handy for transporting two kids aged one and three – not even for a few kilometers (it’s also illegal). Furthermore, it needed a repair and a few parts were worn and ready for being replaced.

Hence I lost almost € 6.000 on that “investment”. I had fun, and you can’t price everything in your life. But if I could go back to 2010 the money would have been invested instead of being spent – that’s for sure.

If I had placed the € 9.105 in an investment with a 10% interest (not an unrealistic interest in crowdlending investments) the amount would have been more than doubled today, nine years later.

As you can see I have set my retirement age to 43 (if I decided to retire this year) and the market interest to 10%. The question is if you should invest or consume but to me, the answer is pretty obvious.

From € 9.105 to € 21.469 in nine years.

Did the motorcycles I have owned make me happier? I felt it when I was riding them, but still, not really.

I think we all know the feeling of how happy we are when having purchased something. Or at least most of us. I can still have that feeling but I have realized it disappears very fast and I forget about it again. And sometimes I even feel I could have spent the money elsewhere but now they are gone.

The most important thing is to be aware of that. Remember that when you stand with your credit card in your hand. Try to think “do I really need this stuff or am I better off saving the money and investing them instead?”

If you choose the second option I think you’ll experience a much more long-lasting good feeling when you see your investments grow and your money working for you.

When you are on the job, every day is a sprint for earning more money. When your money is working for you it’s a marathon and you should be ready to see your investments from a long term view.

If I had known 20 years ago what I know today I would have been better economically off now. Of course not rich, as Bill Gates rich, but less can do. Let’s take the Kawasaki example again and now call it an investment made in the year 2000, still with a 10% interest. The € 9.105 is 19 years later five-doubled.

From € 9.105 to € 55.685 in 19 years.

As the € 9.105 has now turned into € 55.685 I think the answer to the question: invest or consume is rather obvious. If you have money to both invest AND consume you’re all good and won’t need to bother about this. But if not, then you have to choose and make your priorities.

This is not meant to make you feel guilty about your consumption. Naturally, you’ll have to buy food and clothing, etc. But hopefully, it will make you reconsider your next purchase, which you might not need and invest the money instead.

“But you can’t put a price on everything” you might claim. True, I can’t and I won’t.

But you can’t put a price on economic freedom either.

My way into crowdlending

Until 10 years ago, I was not very focused on investments or savings. I was not even very good to save up either and I considered consuming far more interesting than saving.  

I’m 42 now and since 30 I have saved up through my partly employer-paid pension savings. In Denmark, most people on the labor market have this kind of mandatory savings and in my case, it’s a 6+6. This means that 6% of my pension is paid by my employer and the other 6% is self-paid. The percentage is based on my monthly salary which is fixed.

6+6 is not a very attractive saving for my pension. In my former employment, it was 8+4 (8% paid by my employer) and one of my close friends has a 15% pension paid by his employer.

However, I figured that pension savings alone would not be enough to secure my retirement. I do not own my own house meaning I have nothing to sell when I grow old. Furthermore, I was also focused on fast spin-offs in order to have more money to spend on consuming. I considered various options like stock market investments and real estate investments.

Soon I realized that buying shares were the only type of investments I could afford as I had not much money to spend on this. I did not make any thorough market analysis but decided to invest on my feelings. I support the Danish football club AGF Aarhus and figured I could earn money on buying shares. In 2009 they were placed No. 1 in the Danish Premier league and I was very optimistic about their future.

Two years earlier their shares were priced € 2.3 per share and that was during a period without winning any trophies. In 2009 the price was € 0.6 per share so in my mind I could foresee the prices would reach the skies if they won the premiership and with this, in my mind, I purchased 2,000 shares.

Anyone who has a little knowledge about the history of Danish football knows how that season ended: AGF was relegated and guess what happened with the share price? Yes, that dropped significantly. Now they are worth € 0,04 per share and the only reason I keep them is shareholders receive two free tickets to a home game per season (the price for two home game tickets is € 33 meaning it will take approximately 36 years for the investment to achieve a financial break-even).

20 years of AGF shares price in DKK. The price went from DKK 35 (€ 4.7) in March 2000 to DKK 0,28 (€ 0.04) today – enough said

A few years later I decided to give stock investments another try. I bought shares in the Swedish companies Anoto Group and LifeAssays and a year later they were worth almost nothing.  This time I did not base my investments on my gut feeling – I actually did some investigations regarding the companies and everything looked promising but the result was the same: I was unable to beat the market.

I was still determined to keep on investing, but I had enough self-awareness to realize that I was not to be the new Gordon Gekko.

Alternatively, I decided to invest my money in ETF’s (Exchange Traded Funds) instead of stock picking. Hence I started to add funds to the June app provided by Danske Bank and so far I have been satisfied with the outcome. The investment is split between shares (60%) and bonds (40%).

The 2018 stock market crash, however, convinced me that I should spread out the risk on other types of investments. I kept reading investment blogs and articles and one day I stumbled over the concept FIRE.

I had never before heard of it and I was fascinated by that focus on savings and investments. The first blog I read was (Danish site) and this fellow inspired me with his ideas and wealth formula:

  • Earn more
  • Consume less
  • Invest

This was also the first time I heard about crowdlending as he has made some investments through Mintos. Crowdlending is only a small part of his investments but I found the concept interesting and I was eager to learn more. This leads me to Jørgen Wolf’s and a new world opened up to me.

The crowdlending concept gave me an opportunity to diversify my investments and thus spreading out the risk. As of writing, I have no plans about buying real estate property so it is still very important for me to save up and invest in order to generate a passive income.

As I see it I am now both diversifying my savings/investments in three groups:

  • Mandatory employer pension
  • ETF investments
  • Crowdlending

Moreover, when it comes to crowdlending the risk is furthermore spread out on various investment types as business loans and project developments. I haven’t said I have found the safe road to wealth, glory and prosperity with this but I find it hard to see how the investment can be more diversified – except for adding bitcoin investments to my portfolio.

What I have learned from investing in shares and crowdlending is it must be viewed from a long-term perspective as it is the combination of your savings and compound interest that make your money grow.

Forget about shortcuts to fast spin-offs and accept that time and interest will work for you.

It is my sincere hope young people will read this and start investing their money – the sooner the better. I will definitely learn my children about savings and investments – a lesson I never learned when I was a child or young man.

What is crowdlending?

Well, crowdlending is basically the democratization of financing loans to companies or private persons. It gives individuals the opportunity to invest in a wide range of loans. A world, which previously had very high barriers unless you could provide a large start-up amount for your investments – often thousands of Euros.

On the new investment platforms, you can start with amounts as low as € 10 and earn passive income from day one.

What are the benefits?

  • High returns – often up to 13%
  • Simple investments
  • No capital barriers
  • Due to buyback guarantees, these kinds of loans are relatively safe
  • The cash flow is rather predictable and regular on a monthly basis

Types of investments?

  • Business loans
  • Development projects
  • Real estate loans
  • Personal loans

It is also known as peer-to-peer lending, or P2P in short terms. It has been made possible due to a few different factors: The rise of the Internet and with that we have seen the development of fintech services as www-based money transfer platforms and now crowdlending platforms.

The history behind crowdlending

Before the global economic crises that emerged a decade ago, the banks were eager to finance almost all projects, business loans, mortgage loans, personal loans and so on. There were hardly any hurdles to pass before your loan application had been approved.

Since then a lot has happened. The banks have cut down on loan opportunities and several companies in various businesses have found it hard to finance their investments in building projects, new machinery, etc.

New possibilities emerge

As an alternative to the established financial system, the companies that need an investment financed can approach a loan originator that requests financing on a crowdlending platform.

The originator exercises all documentation, risk assessments and collects all necessary information in general. Once the loan has been approved it will be published on the platform and now you can invest your money in this specific project.

How does the term “democratization” fit into this picture? As mentioned financing development and business projects previously had high initial capital requirements.

Now all individuals can invest in various projects. The loans are financed by hundreds or thousands of people who invest their money in a specific loan. An investment that earns them a passive income.    

Who is involved?

As you can see from the below figure four stakeholders are involved in the financial process:

The lender (that is you), the crowdlending platform (could be Grupeer), the loan originator (SIA Primo Invest and the borrower (the Norwegian contractor).

How does it work?

Let us have a look at this example from the crowdlending platform Grupeer. It concerns a development project in the city of Buvika, Norway and the interest rate is 13%:

The loan originator, the Latvian company SIA Primo Invest, issues the loan to a Norwegian company, and this loan partly finances the building project. This specific loan is worth € 10.000 and the initial loan offer is € 9.500. The interest rate is 13% and the loan is terminated after 11 months and 7 days.

This investment project was a very popular investment and as you can see from the screenshot it is sold out – available: € 0.00

As you might have noticed the loan says € 10.000 but the initial offer is only 9.500. The reason for this is the loan originator keeps a 5% part, which means the remaining 95% of the loan will be financed by the crowd – that is you and I.

Grupeer uses this to make sure the originator has a stake in the project which encourages SIA Primo Invest to only originate profitable quality loans. Will this prevent the borrower or the originator from going bankrupt and lead to the loss of your investment?

No, but Grupeer, the lender and the originator runs a risk in every investment. All involved have an interest in keeping this as low as possible combined with the highest possible yield. Hence, a thorough risk assessment will be achieved by the originator, which excluded the riskiest loaners from gaining access to the lenders’ money.

Furthermore, the loans have a buyback guarantee. This means the originator will buy back the principal amount and interest for the investment period if the borrower’s payment is delayed for more than 60 days.

A preview of the Buvika housing development project in Norway

The borrower, in this case, is a Norwegian company. A contractor that has obtained the right to build two 3-floor apartment houses with a total area of 1.570 m2. The total land area is 3.100 m2 and the apartments are expected to be completed in 2020.

Under the project description, all kinds of additional information can be found: the nearest large city, building materials, when the project will be initiated, etc. 

This project has been financed by 231 individual investors who have invested from € 10 to € 1.000. Investor 1 has invested € 105.00, investor 2 has invested € 10.00, etc.

This is why one can say project investments has become democratized.

How much can I earn?

Obviously, a 13% interest on a € 10.00 loan will hardly make you a millionaire. But if the interest will be re-invested and you add funds on a monthly basis the sum can end up giving you a nice monthly return.

This is on a long term view of course but all investments should be seen in this light. Otherwise, it’s speculation and if that has your interest you are on the wrong site. In general, the sky is the limit as the more you can invest the more you will earn – without working.

How to get started? Follow these few steps:

  1. Open an account with Grupeer
  2. Transfer an amount with TransferWise
  3. Choose the development project or business loan you want to invest in
  4. Press “invest”

Above screenshot is only a very small picture of all the possible investments.

  • From left you have the ID of each specific investment.
  • The name of the loan originator (also named Deal Partners)
  • The initial loan offer
  • Interest rate
  • Term
  • What is available to invest

You can specifically filter the types of possible investments by setting up a minimum interest rate, business type, which country you want to invest in, etc.

What holds you back? Get started today and start earning passive income!