Under the bonnet of... National Bonds
DEMAND for National Bonds, the Sharia-compliant saving scheme in the UAE, is on the up, with the number of bondholders jumping almost 10% in the past year.
There are now around 612,000 bondholders, up 9.3% on a figure of 560,000 at the end of 2009.
Bondholders receive annual profits and are entered into a monthly prize draw. Profits from its Mudaraba fund were 3.78% for 2010, figures just released show. This is slightly higher than the 3.54% bondholders received in 2009.
The strong year for the Dubai-based savings provider was topped off by it scooping the best retail product of 2010 award at the Islamic Business and Finance Awards.
However, these profits are not guaranteed – and neither is bondholders’ capital.
So, what exactly are National Bonds? cashy looks under the bonnet:
Who can own bonds?
National Bonds, licensed and regulated by the UAE Central Bank and 50% owned by the Dubai government, is a savings scheme open to UAE nationals, residents and non-residents over the age of 16. Minors can also own National Bonds, provided the bonds are purchased by a parent or guardian.
How much does it cost?
Each bond costs AED 10 ($2.72), and the minimum purchase is AED 100 ($27.23) every time you buy bonds.
There are no transaction fees for buying bonds, and accounts can be closed without penalty. However, if you want to cash in your bonds, you can only do so after an initial 30-day holding period.
What are the benefits?
Islamic law prohibits the payment of interest, so National Bonds distributes annual profits from its Mudaraba fund. Profits in the past four years have averaged 5.1% a year.
In addition to this, bondholders have the opportunity to win 22,250 prizes every month. There is one prize of AED 1 million ($272,261) on the last Saturday of every month and 5,135 prizes on every Saturday in different prize categories: five prizes of AED 10,000 ($2,723), ten prizes of AED 5,000 ($1,361), 20 prizes of AED 1,000 ($272), 100 prizes of AED 500 ($136) and 5,000 prizes of AED 100.
Another benefit to being a bondholder is that those aged 12 months to 70 years are automatically entitled to life Takaful (Sharia-compliant life insurance) coverage up to a maximum value of AED 125,000 (£34,033) at no extra charge.
Can I add bonds automatically?
In September last year, the National Bonds Corporation (NBC) enabled customers to take out a standing instruction order agreement with banks in the UAE. This allows people to instruct their bank to transfer a fixed amount of money at regular intervals to another account.
The National Bonds standing instruction order allows banks to automatically use a set amount each month to buy bonds on behalf of their customers – making regular saving easier.
A standing instruction order can be arranged at all banks in the UAE, with the service being offered free-of-charge at Abu Dhabi Commercial Bank, Dubai Islamic Bank, Sharjah Islamic Bank, Al Hilal Bank, Abu Dhabi Islamic Bank and Emirates Islamic Bank.
Is my money safe?
Under Sharia principles, guaranteeing capital or returns is prohibited.
However, Mohammed Qasim Al-Ali, chief executive of NBC, says: "Needless to remind everyone that customers of Lehman Brothers lost their money despite the AAA credit rating and capital guarantees. Our customers are comforted that their money is safe with National Bonds."
He says this is due to five reasons. Being Sharia compliant, it operates in "ethical and socially responsible manners". NBC is partly-owned and supervised by the government of Dubai. National Bonds is licensed and regulated by the UAE Central Bank. It is regularly audited by “two reputable international auditing firms”. And, lastly, the investment strategy it uses is low-risk.
What does it invest in?
The company has previously focused on investing in the beleaguered property sector, but said last summer that it planned to diversify its investment portfolio.
Its chief executive says: "Real estate is one of the many asset classes that NBC invests in. The investment decisions take into consideration the different market conditions and investment opportunities before allocating the funds between the different asset classes. In all cases, such funds are deployed in low-risk assets."
What do the experts say?
Sandi Saksena, a financial planner at Million Dollar Round Table, says the scheme "seems to be marketed more like AED 10 for a lottery ticket then a serious investment".
She warns: "Potential investors should be aware that the projected distributable profit for the bondholders, which is mentioned in the company’s prospectus, can’t be read as any sort of guarantee."
However, Al-Ali says likening the scheme to a lottery ticket is a "common misunderstanding".
"According to Sharia principles, gambling is prohibited," he tells cashy. "The draw prizes which are distributed by National Bonds are part of our reward program to our loyal customers, and are, by the way, paid from NBC’s own resources and not from the Mudaraba fund."
Where can I buy bonds?
National Bonds certificates are available to buy in nearly 560 outlets nationwide including Emirates Post offices, exchange houses and banks. For more information, visit nationalbonds.ae or call 600 522 279.
Pic credit: FreeDigitalPhotos.net
Do you own National Bonds? What do you think of the scheme? Tell cashy by commenting below...