Caribbean Attitudes Toward Finance: Part 1 – Remembering Our Roots.
A fundamental principle of investing is – ‘The Higher risk, the higher the return’. In the Caribbean we have also added to it by saying – ‘If something sounds too good to be true it usually is.’ That being said, people from all over the world continue to take risk and to reap rewards without regret. What makes the Caribbean people for the most part, risk averse? Our culture of paradoxes.
In the past, loans were deemed as bad, very expensive and outside the reach of many. As a result, our economies adopted a save to get what you needed culture. Houses grew in stages. First, the wooden section. Then members of the family would save to buy cement, the children would “head” sand (make trips with a bucket to the river to get ghaut sand), and a skilled person would make concrete blocks using the cement and the sand. These would be left in the sun to bake for a few days, prevented from getting wet initially until they were fully cured. Over time the family members would head stones from the river and some adult or skilled child would spend his afternoons after school pounding stones into gravel. With enough blocks, enough stones and enough money saved more cement would be purchased and bay sand would be headed from the nearest bay until there was enough. Then the real action begins, one Saturday and or Sunday morning, the yard is suddenly filled with what seems like all the men in the village. Trenches for the footings are dug, a set mixing concrete, someone bending steal and next thing you see the foundation for an addition to the house. In tandem the ladies of the abode would cook and depending on the family and the big milestones this could include freshly produced meat cooked up either in souse, goat water or simply bull foot soup. This process could take months but at the end of it with a window made now and a door later, an addition to the house would be completed. Never mind no electricity is in it as yet, that too could come later.
This was the culture of community, of self-help, of today for you and tomorrow for me. It is from this genesis that savings of any earned money included pooled savings with payouts rotated on a set frequency basis. In the Eastern Caribbean this have been called Sous Sous (Sue Sue), partner hand, or Box. The economy was agrarian and persons who had means held wealth in livestock and land in some countries. For the few who had access, having a bank account was a prestigious thing. For the rest money was shared, people knew each other, raised each other’s children and was ok working with each other. Shop keepers would give you goods on trust and make their notes in their little book. Debts were settled.
It was the produce from the fields and sale of livestock that has created many a lawyer, doctor or other professional today. It is with this transition to a new professional class coupled with the prestige of having a bank account that saw the growth in the perception that the safest place for your money was in the bank. As banks sought to market their services, persons were discouraged from the incremental approach for acquiring wealth, to the model of – leave your money in the bank and the bank will lend you to build or to buy and you will have immediate use of the funds. This was also the birth of hire contractors and get it done now. No more self-help. In with work for hire and the death of community. People not as close, knowing less of each other and less willing to help. The prestigious bank book becomes a trophy. The paradox of cultures emerges.
Early Days – Alternative Investment Management Services (AIMS)
In 2002 in a quest to improve returns on savings, four couples agreed to pool resources and invest in the Government of St. Kitts and Nevis’ Treasury Bills. At that time Treasury Bills paid and annual yield of 8% but required a minimum investment level of $20,000.00. The initial combined investment into the Government of St. Kitts and Nevis’ Treasury Bills was $27,000.00.
Over time, other friends and family joined the arrangement. Participants would indicate at the time of Government Circular whether their input would be rolled over, increased, decreased or withdrawn. The new application would then be made adjusted for the change in investment. The pooled arrangement and the continued growth in funds allowed investment by individuals or couples below the minimum required by Government of St. Kitts and Nevis and allowed the investment to continue irrespective of large withdrawals by parties.
The investments were managed under the unincorporated umbrella Alternative Investment Management Services (AIMS) created specifically to provide segregated and independent accounting of the pooled investments. No management fee was charged and the income was allocated fully based on the proportion of the investment in the arrangement. Therefore, all liabilities were always matched equally by corresponding assets.
The expansion of the portfolio beyond joint investment in Securities was by accident. Naturally, information on investment opportunities was circulated within the group including knowledge of persons divesting of company shares, property and information on persons experience with other investment vehicles such as annuities and insurance. It is this sharing of information that catapulted the network beyond joint funding of transactions to new levels but also enabled network participants to stay clear of specific potential investments pitfalls. Therefore, where one member had an experience with a particular financial institution or product, the information was shared with other members in the network. This sharing and discussion enabled individual and collective responses to be made.
Prior to 2006, credit-worthy friends borrowed money from Alex Straun on a short-term basis. However, in 2006 when requests started exceeding personal liquidity Mr Straun canvassed persons participating in the pool arrangement for interest in matching such requests. The response was positive and overwhelming. It was agreed that such loans would be originated based on a central counterparty model, where all funding would be done to Alex Straun while a single aggregate amount would be lent to the borrower by Alex Straun. In that way, individual lenders did not need to keep track of the number of borrowers themselves. Consequently, the AIMS network was used was used to manage loans granted through the arrangement. From the initial success of both the pooled investments and the loan syndications, an informal network of investors was formed. The new arrangement was called “People to People – Full Circle”. There were no solicitation or advertisement of the network. Persons accessed the arrangement through strict referrals.
In 2006, most loans were granted on the following terms:
- Loans were granted on either an amortised basis or a term basis
- Borrower Finance fee of 0.5% (0.005) was charged
- Only high credit worthy participants were allowed to borrow on term
- Maximum term period was a year.
- Interest was not rolled over in any investment.
- Invested Funds were specifically matched against request.
- Maximum time for an amortised loan was 3 years
- Average maturity in portfolio was 3 months.
People II People
In 2006, in light of the sudden increase in volumes of transaction, it was recognised that the central counterparty approach while reassuring to some, would pose a physical constraint for the solution to grow and achieve full potential. In addition, it was felt that the central counterparty model too closely resembled banking business. Given that a key objective of the network was to enable individual decision making but collective action, it was decided to mimic the auction process for securities as practiced by the Eastern Caribbean Securities Exchange. Moreover, the internet presented the opportunity to overcome physical and time constraints by being available to persons 24/7 for transacting and accessing information. Using this infrastructure the key objectives were to develop a product that will facilitate the following:
- Create a conduit for a group of people to lend money to each other;
- Develop and utilise a risk assessment model to assign credit ratings to all participants including the continuous use of positive and negative data;
- Be a tool for expanding the network to include person locally and regionally; and
- Be the base for the organic growth of a business model that capitalises on such networks to promote social and financial inclusion.
The business process documentation was developed throughout 2006 and the search for programmers were made in autumn 2006. In January 2007, a competent and confidential programmer was secured. However, it would be an arduous but rewarding seven (7) years of trying to convince the programmer that the solution was not illegal, not wanting to start over, seeing creativity in crafting a practical solution, tapping into collective experiences all while trying to manually manage the growth of transactions. During the period, we experimented with names and domain acquisitions including:
- People to People
- People 2 People
However, in addition to domains not being available there were instance where some variant of the name was being used in a very different context. Notwithstanding, it was felt that the concept of people working with each other was integral to the solution and our core philosophy of “one-one full basket”. Therefore, it was decided that the solution would be named “People II People”
Key Statistics and Growth
Participation in AIMS grew from 8 persons 2002 – 2005 to over 30 persons in 2007. Between 1 January 2006 and December 2007 total loans disbursed exceeded $280,000.00. The smallest loan granted was $1,000.00 and the largest amount granted at that time was $40,000.00. Loan size averaged $10,000.00. Funds under management increased from $32,140.83 as at 31 December 2005 to 194,547.97 as at 19 December 2007.
Between 2009 through 2012 during the British American Insurance and Colonial Life meltdown, a freeze was placed on new entrants to the network. After some settling within the economy, new entrants were allowed between 2013 and 2014. By December 2014, total transactions had exceeded $2.5 million and total assets under management averaged $500,000.00. The number of members in the network numbered 97.
In December 2014, the third generation model for the network started piloting with an initial loan request of $10,000.00. As 10 December 2016, over $1.0 million in approximately 99 loans had been generated on the platform. As December 2016, there were approximately 200 registered and approximately 175 active members on the platform.
From inception to date, there have been four defaults and one sudden death. Recovery was made for three of the four defaults. No recovery was made in the death. It should be noted that throughout our development we have engaged insurance companies on the provision of insurance cover for loans. Given the decentralised model, insurance providers have been challenged in providing cover to the network (not willing to administratively manage a portfolio of individual covers and no central counterparty to insure). Consequently, research has been conducted into the establishment of a self-insurance fund comprising of contributions from the borrowers. It is anticipated that this would be implemented by summer 2017.
In January 2017, the fourth generation of the platform was made available. Throughout 2017, we anticipate implementing additional features including performance analytics. In addition, given continuous request by members to main stream the solution, we will increasingly allow wider access to the platform without compromising our due diligence checks and the integrity of the network.