Using gold to obtain secured loans

Besides allowing investors to buy and sell gold via the HelloGold app, the company aims to solve another problem faced by the middle class — the lack of access to personal credit.

Lee says that according to a World Bank report, less than 20% of the total loans globally are disbursed by financial institutions to individuals and that between 15% and 25% of the total loans globally are unsecured loans. The statistics indicate that the middle and lower middle class, who earn moderate salaries and have car loans and mortgages to pay, are facing difficulties in borrowing from banks for investment, business or emergency purposes, he adds.

“Based on my understanding, six out of 10 people in Malaysia apply for a loan and most of them are not successful. The rejection rate is very high. You can get a car loan and mortgage. But if you want to get a loan for other things, it is very difficult,” says Lee.

“The strict credit scoring itself has disallowed many from borrowing even though their credit history is not poor. So, they have to resort to legal moneylenders with 15% to 20% interest rates. And if you are unlucky, you have to resort to illegal lenders.”

HelloGold allows investors who buy gold using the mobile app to use it as collateral when taking out a loan from banks it has partnered with. They could borrow up to 70% of the gold’s value depending on their income level, credit history and other parameters that the banks set. “So if you have RM1,000 worth of gold, you can borrow RM700 without having to sell your position in gold,” says Lee.

He says HelloGold app users will be able to borrow from the bank because it is provided assurance that the company holds gold bullion in Singapore. And if the borrower defaults on payments, the bank can sell the gold on the international gold market.

“When you borrow, the bank knows that the gold is stored by us in Singapore, and it knows that the gold is safe and not going anywhere. And because gold prices generally go up over time, they can give you better interest rates compared with money lenders or unsecured loans,” he adds.

“This is unlike hire purchase loans where you buy a motorcycle and the value of the bike depreciates over time. And if you cannot pay them, they will probably have to take your motorcycle back and there is an actual cost [in doing so]. However, the bank also looks at the borrower’s credit history to decide the loan amount and interest rate.”

Another advantage of the HelloGold app is that users will be able to transfer gold to other users of the app fast and free of charge, says Lee. “This is another thing you cannot do by opening a gold investment account with banks. You would have to sell your gold position, get the cash and buy again in another account.”

Having seen how SPDR Gold Trust Fund, the world’s first gold-backed exchange-traded fund (ETF), has taken off globally, Lee is confident that HelloGold will be a success. He believes the innovation will not only attract the younger generation to put some of their money in gold but also appeal to older investors who usually buy gold through banks and jewellers.

“Everyone bought gold the traditional way before the first gold-backed ETF was launched. They bought it through banks and jewellers. Many financial services firms did not believe the ETF would be successful. Very few retail investors had even heard of the WGC when it was launched in 2004. However, it raised US$1 billion worth of gold under management by the second day. Today, it has US$40 billion,” says Lee.

“In total, the gold-backed ETF industry now holds about US$70 billion worth of gold on behalf of investors. This shows how innovation has and will continue to drive people’s demand for gold.”

Lee chose Malaysia as the first market in Asia for HelloGold because it is a key Islamic financial hub that allows the company to structure its shariah-compliant business properly and be familiar with Islamic finance rules and regulations.

He says the country also has the right demographics and income profile. “There are seven million people who match the income profile we are looking at. We are targeting 31,000 of them to buy gold with us.”

Once the mobile app takes off in Malaysia, Lee will set his sights on other Asian countries such as Indonesia, Thailand, Vietnam, China and India. His ultimate goal is to enable the global mass market to save with gold through the HelloGold app.

How does the HelloGold app work?

Before HelloGold mobile app users are able to buy investment-grade gold via their smartphones, they will have to register by snapping a photo of their identification card, uploading it through the app and providing some personal information.

“It will not take more than five minutes and the users will be able to trade gold anytime, anywhere, through the app,” says CEO Robin Lee.

He adds that the gold will be bought from and sold to users directly by HelloGold Sdn Bhd. The minimum investment amount will be RM50 and capped at RM10,000.

How much gold will the users be able to own with RM50? Lee says this is determined by the exchange rate of spot gold to the US dollar. For instance, the gold price was US$1,332.92 per ounce, or about RM172 per gram, on Aug 20. Hence, HelloGold users who buy RM50 worth of gold on this date will own 0.29g of the precious metal and its value will depend on the prevailing spot gold price.

Lee says the company also charges a percentage of the spread on top of the spot gold-to-US dollar exchange rate. “The spread we charge depends on the volume of gold we buy from the bullion providers. The spread will be lower if the volume is larger,” he says, adding that the spread charged will be competitive compared with those charged by local banks for their gold investment accounts.

Chris Gan, senior vice-president of the Singapore Precious Metals Exchange, says local banks charge about 3% spread for their gold investment accounts on top of the spot gold-to-US dollar exchange rate. “Banks also usually earn another 3% to 4% spread on the currency exchange side as they are also in the business of foreign exchange.”

HelloGold also charges a 2% annual fee, mainly for the storage of gold.

Those who want to redeem physical gold will need to have at least one gram of gold in their holdings. For instance, if a user buys RM50 worth of gold as at Aug 20, he will have to buy another RM122 worth of gold to claim one gram of physical gold from the company. The user will also have to pay for the postage, packaging and insurance fees.

Stringent auditing process

To assure HelloGold app users of its credibility, the company will adhere to international best practices when managing its gold bullion stored in Singapore. Robin Lee, CEO of HelloGold Sdn Bhd, says Bureau Veritas — the London Bullion Market Association-approved third-party auditor — will audit its gold bars annually. The auditor will ensure that the gold bars held in the vault tally with the records of the company.

The auditor will also conduct random tests on individual gold bars to verify the bar number and refiner codes. “On top of that, a random sample of gold bars will be weighed and tested to ensure that the bars are 100% gold,” says Lee.

HelloGold users will also be allowed to inspect their gold in the vault owned by third-party bullion dealer and storage provider BullionStar in Singapore. The users can opt to pay an audit fee of S$99 to have direct access to the documentation of the gold bars and see the physical gold in person.

Lee says users will have product fact sheets that include the daily bar list that details the individual bars held by the company. “Our customers can compare this bar list with HelloGold’s own daily custody list that shows the gold owned by each of our customers. This will provide them assurance that we have sufficient gold held in the vault. Our customers can also see their customer ID and the record of gold held under that ID.”

He adds that the gold held by the company is currently insured up to US$150 million. The insured amount will be increased if the business takes off.

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