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03/12/2014

Thematic Citizen Loan: an interim assessment (1/2)

A lot has been written about the Belgian government's « thematic citizen loan ». Many columnists speculated on its failure and expressed their doubts about the attractiveness of the promoted tax advantage which was considered as low (15% withholding instead of 25%). The financial sector too was not so eager to commercialize the product. However, since its start on January 1st, 788 million euros have been collected through the government's initiative. Febelfin published the program's first results last Friday March 7th and noted that "despite the low monetary rates, the Thematic Citizen Loan did find its public".

The Thematic Citizen Loan in a nutshell

The purpose of the loan is to use collected funds to finance the "real economy", which means SMEs, social economic projects or other "socially responsible" projects approved by the government. Typically, schools, rest homes and hospitals are possible benefiters of the collected funds. A separate accounting treatment guarantees a correct use of the collected funds. While the Thematic Citizen Loan was initially scheduled to run only until January 31st, today there are still ten financial institutions offering the product: The "big four" Belfius Bank, BNP Paribas Fortis / Fintro, ING and KBC, but also Bpost Bank, CBC, Crelan, Record Bank, VDK Spaarbank and Argenta.

Michel Vermaerke, Managing Director at Febelfin, said the Thematic Citizen Loan is a "welcome expansion of the supply of current savings (...). The financial sector is looking forward to achieve this broad societal commitment and is satisfied to find that the program knew how to be appreciated by a part of the population, despite the ECB's low interest rates."

The Thematic Citizen Loan from a bank's point of view

While each bank stays the only decider of the use of the collected funds, the projects invested in need to be conforming to the legal framework, giving a list of "socially responsible" investments. Other constraints are that the "minimum investment" for investors should not be more than 200 euros, the minimal investment horizon should be at least 5 years and the funds reinvested not later than one year after inflow. This implies that the funds may be used for short-term financing during the first year, as long as the investment is ‘safe'.

Question marks for the banks are the existence of projects eligible for financing with Thematic Citizen Loans funding and the profitability of those credits. While the first might not be a problem given the struggle of many SMEs to contract bank financing, the second one depends heavily on the revenue potential of those projects. If the credits granted to "approved projects" do not generate high revenues, banks will not want to stimulate investments in the Thematic Citizen Loans. They will thus keep rates relatively low, knowing that higher credit revenues can be achieved by collecting funds eligible for more lucrative credits by using "traditional" products like term deposits and certificate of deposits. However, banks are supposed to offer rates that are in line with the market according to the regulation on the Thematic Citizen Loan. Consequently, offering discouragingly low rates is not an option.

What motivates the investor: a (slightly) higher net return, guaranteed deposits but less flexibility

The Thematic Citizen Loan benefits from a reduced withholding on the interest revenues of 15%, instead of the 25% withholding rate which applies to certificates of deposits and term deposits. In terms of taxation, it thus situates in between these two products and the savings accounts of which the first 1,880 euros are exonerated of withholding. The yearly tax savings obtained from the Thematic Citizen Loan on an investment of 1,000 euros at a yield of 2.5% would thus be 2.5 euros, or 10% of the 25 euros yearly revenues. After 5 years and assuming the revenues are not reinvested, the total tax saving would be of 12.5 euros compared to an investment in a more "traditional" product.

Rates are thus not spectacular when compared to the alternatives but rather in line with market rates, which means extremely low. They are approximately equal to rates on comparable certificates of deposit or term accounts. Some internet banks also offer comparable products with a much higher rate, while being protected until 100,000 EUR just as well.

In terms of flexibility, the Thematic Citizen Loan is the less flexible than the above-mentioned products. It can of course not compete with the flexibility offered by a savings account, which gives the investor immediate access to his deposits, but also certificates of deposits and term deposits have a major advantage in comparison to the Thematic Citizen Loan. Early termination of a term deposits is possible if one is prepared to pay the inherent costs, while certificates of deposits have a secondary market, allowing for reselling of the asset as one pleases. The collected funds on Thematic Citizen Loans however cannot be resold in the first 5 years after issuance. This restriction should help to achieve the goal of a stable funding for longer term projects.

Sia Partners

 

 

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