Derivex??

Some loans are just pie in the sky
Author: Noel Whittaker
Date: 24/02/2005
Words: 700
Source: NCH Publication: Newcastle Herald
Section: Business
Page: 53

NOTHING gets the adrenaline going more than the thought of money being given away, and judging by the talk in the internet chat rooms, the offer of interest-free loans from a company called Derivex has really touched a chord.
And why wouldn’t it after all, if you could borrow $500,000 or so, free of interest, and deposit it in one of those online savings accounts offering a safe 5.25 per cent you could give yourself an easy income of $26,250 a year.
We all know there is no such thing as a free lunch, so how does it work and where’s the catch?
Unfortunately, I am, along with several financial analysts and TV journalists, still trying to find out. I’ve spent hours reading the material on their website, and have spoken, or should I say listened, to Derivex’s CEO, Trevor Cohen, for more than half an hour on the phone, but am still none the wiser.
Their old website made sense. It appeared they were using Islamic principles to make loans because it claimed they were able to offer zero rates of interest in exchange for a fixed claim over future income and capital.
The figures quoted were 25 per cent of net residual capital value and 75 per cent of net residual income value.
There is nothing particularly new in this. The Koran forbids the charging of interest and there are many highly reputable Islam-based organisations that make interest-free loans on the condition that the borrower and the lender both share in any profits or losses arising out of the deal.
When I asked Cohen to elaborate on this participation in the profits he claimed that this particular website was two years out of date, and that the new loans worked on different principles entirely.
Now the loans are supposed to work like this. They lend, say, $500,000 interest-free, and the borrower pays this back over 20 years in equal instalments at 5 per cent of the amount borrowed.
This creates a guaranteed 20-year cash flow to Derivex which they reckon they can use to borrow up to $1.6 million on various money markets.
They maintain they can invest this money to return at least 9 per cent per annum, which would be sufficient for them to show a hefty profit on the transaction.
Of course, this raises some interesting questions.
Who will lend $1.6 million against a future cash flow of only $500,000?
What is their skill in investing money to achieve a consistent 9 per cent per annum, and if they are so good, why offer loans interest-free? They could make much more profit if they charged even 4 per cent.
Derivex were going to launch their product late last year but put it on hold after ASIC asked for more information.
ASIC is particularly interested in interest-free loans because last year its Pie in the Sky winners were two so-called interest-free loan schemes that persuaded more than 400 Queensland investors into investing $4.6 million.
The hapless investors were told that if they bought a car through a car buyers’ club, and borrowed a little extra from their financier and invested it offshore, the high returns would repay their car loans.
You can guess what happened. The offshore investments were duds.
ASIC executive director of consumer protection Greg Tanzer said: “It’s high time that people realise that loans without interest are just pie in the sky.”
At date of writing the market was still waiting for Derivex to prove they can do what they claim. Their launch date continues to be delayed and requests from reporters for permission to do a story are refused.
I have long believed you should never go into a deal you don’t understand and remain as sceptical as ever.
Judge for yourself. Just go to http://www.derivex.com.au/company/ and click on How It Works. Just allow plenty of time you’ll need it.
Noel Whittaker is joint managing director of Whittaker Macnaught Pty Ltd, AFSL Number 246519. Email [email protected]. This advice is general in nature and readers should take their own expert advice before making financial decisions.