Dubai: Whenever he has spare money after grocery shopping, Jacob Thomas swings by his favourite exchange house and purchases savings certificates from National Bonds.
He buys in small amounts, say Dh100 or Dh150. The retired mechanical engineer, 71, has been doing that for five years now and today he has accumulated about Dh60,000 worth of bonds.
There's one major reason Thomas keeps topping up his capital. He fervently hopes that by some stroke of luck, his investment will suddenly yield Dh1 million.
"The anticipation factor is always there. I won several times but not in large quantities. I still hope that I'll win big. When that happens, I'll set aside 10 per cent of my winnings to charity and invest the rest," Thomas confides.
The thrill of winning has encouraged Thomas to save more than he used to. In fact, he has more money in bonds than in his low-interest bank account. Although he has invested in real estate in India, as well as in stocks and mutual funds, he's more excited about his bonds.
"The idea that I have the chance to win a million dirhams, plus the fact that it's very convenient to do, is what attracted me to this savings strategy."
"Besides, the annual dividend [profit] I get is not bad, compared to traditional savings products. While last year the dividend was a bit low, a little over three per cent, in the past we enjoyed growth of about seven per cent. If I combine all the small prizes I won, plus the annual dividends, I think my capital has appreciated by about 10 to 15 per cent."
Following Thomas' example, his wife, 65, and children also invested in bonds.
"She has about Dh65,000 to Dh70,000 worth of bonds by now. My family members have done the same. I was the one who encouraged them."
Prize-linked savings schemes have been around for some time and have attracted a huge following with savers, particularly those of modest means. The way they work is simple. People purchase some saving certificates or bonds, or open a deposit account. They are then automatically entered into a draw that gives away a bumper prize.
In some cases, these schemes don't offer any interest or profit, and if they do, high yields are not always guaranteed. However, it is the belief that they are more likely to strike rich more quickly that draws people to these products.
Dr Esinath Ndiweni is a lecturer in accounting and finance at Heriot-Watt University, Dubai campus. He says part of the allure of financial schemes tied to lotteries is the prospect of hitting a jackpot, which "far outweighs" the relatively meagre income that could be earned on them. Another major attraction is the fact that these products don't require a huge capital and anyone can start an account for as low as Dh100 to Dh3,000.
Inadequate resources
"Low-income consumers face more uncertainty about their future financial status and well-being due to inadequate resources or pensions at their disposal. This fear about the future propels them to get lured by prize-linked financial products," he says.
"The prospect of winning Dh1 million is a sweetener because it can occur any time during the term of the savings scheme. It is seen as a plus, in the sense that the low-income consumers are trying to save for the future. Apart from the threat of inflation, eroding the purchasing power of the initial investment, interest rates have always been modest."
Many consumers today, especially these who have limited means, are struggling to get out of debt and don't have adequate nest eggs. Providing them some incentives can encourage them to make a commitment to save regularly, and eventually get on the road to solvency.
"Saving money for everything from a short-term emergency to retirement is hard enough, a challenge that low and moderate-income families endure every day. Prize-linked schemes, however, make savings exciting and provide an added incentive in the form of winning unexpected large amounts of money," notes Mohammad Qasim Al Ali, Chief Executive Officer of National Bonds Corporation.
"These incentives help form a habit of savings in people which stays with them in the future whether they are using a prize-linked scheme or not.
Apart from providing annual returns on savings, National Bonds holds regular draws, giving away thousands of prizes to its customers each week. Every month, it gives away Dh1 million to a lucky winner.
Value-added benefits
Al Ali says their offering doesn't just attract people from low-income groups, but high-net worth customers as well.
"Our customer base is spread across a wide range of different income brackets because our offering fulfils the common and basic savings needs of any individual, is affordable to everyone with minimum investment amount of Dh100, and is flexible with the ability to withdraw money after 30 days."
"There is no specific profile of a person who needs to save money. People in lower income brackets save with us because of the value-added benefits they receive such as weekly prizes and Takaful coverage, while people from the higher income brackets save with us because of the security and high annual profits."
Mashreq also grants huge prizes to those who purchase MashreqMillionaire certificates. Unlike National Bonds, however, members don't get profit payouts.
Every year, the bank creates different themes for its prize-linked savings product.
In 2009, for instance, the bank worked around the theme of "creating more millionaires", so it gave away Dh1 million each week.
Last year, the goal was to produce the "biggest millionaire prize", so in June 2010, a whopping Dh10 million was granted to one account holder and in December, another member went away with Dh5 million.
This year, the bank hopes to award Dh5 million every quarter.
Omar Saleem Asghar, head of wealth management at Mashreq, says majority of their certificate holders are from "aspiring affluent and affluent income brackets". He says their product appeal to all segments because it carries no risk and the customer's capital is guaranteed.