Risk Statement
Overview
Nester is an Islamic Finance peer-to-peer (“P2P”) financing platform. Like all P2P investments, there are risks associated with investing. We have set out the key risks below. It is your responsibility to assess whether making a Murabaha Contract is suitable for you, with particular regard to your risk appetite, investment term and your personal financial circumstances. We are not advising you on the appropriateness or suitability of any Murabaha Contract on our Service. We recommend that you take advice from an independent financial advisor if you are in any doubt as to whether making an online Murabaha Contract is suitable for you.
The risk of default
Your capital is at risk and you may not get back what you invested. There is always a risk that the Buyer does not fully pay the Murabaha Instalments due under a Murabaha Contract, even though the Buyer’s obligation to pay is secured against a Property. Potential returns may also vary, and you may not get the return you expect. This should be taken into consideration before deciding to invest.
Buyer risk
We do our best to accurately assess the risk of each investment and undertake due diligence on the Buyer before we place an agreement on the platform. It is important to understand however, that we do not sit on the Board or Governing Body of any Buyer and are not party to their operating decisions regarding the development. We make reasonable endeavours to track and monitor that the funds are spent exactly as set out to us when the agreement is made, but cannot guarantee this. There is therefore a risk that the Buyer does not use the funds as they should, negligently or otherwise, which could affect their ability to repay your investment and return in part or at all.
Previous financial performance of Buyer does not also guarantee future returns, as there may be unforeseen circumstances that may hinder the Buyer’s ability to pay in the future.
Liquidity risk
Investments made through the Service are illiquid, which means that you won’t be able to rely on selling your Murabaha Contracts should you wish to withdraw your funds before all the Murabaha Instalments are due to be paid
Even though Nester enables Investors to offer your Murabaha Contract for sale in accordance with the novation process specified in Clauses 6.7 to 6.9 of the Nester Service Terms, there is no guarantee that another Investor will agree to that novation, in which case you would have to wait for a willing Investor or hold the Murabaha Contract to maturity.
If a Buyer is struggling to pay, it may also take longer than you expect to receive your capital or any return that may be due.
This means you should not invest money via the Service that you may need to access quickly or if your circumstances change. Investing in a Murabaha Contract is not the same as depositing funds into a bank account, for example.
Diversification risk
If you choose to invest into a single Murabaha Contract (or only a few Murabaha Contracts) via the Service, you could lose a higher proportion of the total amount you invest through the Service (or receive a lower return), than if you had spread the total amount you invest over a larger number of Murabaha Contracts. This holds true for all investments, not just Murabaha Contracts. We therefore recommend that you consider spreading your investments over a larger number of Finance Requests on the Service (and over many different types of investment generally).
Platform risk
As with all businesses, there is a risk that Nester will fail or choose to wind down. The management of Nester has controls and procedures in place, detailed in its Wind Down Plan, to ensure an orderly wind down of our business should we decide that was the most appropriate course of action. If we did take this decision, we aim to use the income we earn over the life of the Murabaha Contracts and the Firm’s capital to fund an orderly wind down. We regularly review this plan and our financial forecasts to ensure that we will have enough funds to manage this process.
Even if Nester were to fail or cease trading and the Wind Down Plan did not function as planned, the Murabaha Contracts and Security Documents would remain enforceable, and the Murabaha Instalments would be due to you from Buyers. There is however a risk that outstanding Murabaha Contracts would not be appropriately managed or administered in the period before they ultimately mature. This could mean that it takes longer than you expect to receive your capital, and it may also reduce your return. If another firm, for example an insolvency practitioner, had to step in to manage this process, you might also lose some or all of your regulatory protections.
Any uninvested funds held in the Nester Client Funds Account by the Payment Service Provider for you will be returned to you as soon as is practicable.
No FSCS cover
Neither the Service nor your investments in Murabaha Contracts is covered by the Financial Services Compensation Scheme (FSCS). This means that if Nester were to fail, become insolvent or cease to trade, you would not be able to claim compensation from the FSCS.
SPV Risk
Most property developments are structured through a special purpose vehicle (“SPV”), which is a company set up specifically for the project and has no other trade. This means it has no other income or assets to draw on to make repayments under the agreement. The use of the SPV makes the investment higher risk, as there is no recourse to a wider development company or group if something in the project goes wrong. To offset this, we require personal guarantees and security for the finance agreement but as noted before, your capital and return are at risk.
UK Property Market
The ability of the Buyer to repay the Murabaha Contract relies on their ability to sell or refinance the property, which in turn relies heavily on the UK and local property market. Should there be a downturn in either of these markets, this may affect the ability of the Buyer to repay your investment in part or at all.
Covid Risk
The Covid pandemic continues to have wide reaching consequences for many aspects of the economy, including supply chains. Buyers may encounter unforeseen issues which result in delays to the project or sale/ refinancing of the property which could affect their ability to repay the agreement and your investment.
Development and planning risk
Certain projects may require planning permission before the development can go ahead. There is a risk that the plans may not be approved as they are or at all by the relevant planning authorities, which could delay or restrict the project and therefore the Buyers ability to repay your investment.
As noted within the risks relating to Covid above, unexpected issues can also arise with development projects that could delay the project or trigger additional expense that may affect the payment of your returns.
The Nester Service
Our Service enables you to invest in Murabaha Contracts with Buyers who have made Finance Requests. your investment may either be as the initial Investor or by replacing an outgoing Investor through a process called novation.
The Buyer’s obligation to pay the Murabaha Instalments under the Murabaha Contracts is secured against Property. This security is held through Security Document(s) provided by each Buyer to the Security Trustee, who holds the benefit of that security as trustee for the Investors. The type of Security Documents in each case are described on the relevant Finance Request. As part of our Service, we also arrange for the repayment of the Murabaha Instalments, including the final capital due, under your Murabaha Contracts. If the Buyer misses a payment or only partially pays the amount due to you as the Investor, we may arrange for a Collections Agency to take steps to procure the payment. If there is an Event of Default the Security Trustee will enforce the Security Documents and the relevant proportion of any sums recovered will be paid to each eligible Investor, subject to a deduction for the costs of recovery.
For a full explanation of how the process works, please see the Nester Service Terms. For more information on Murabaha Contracts, please see the “Principles” section on our “FAQ” page.
How do we assess a Finance Request?
Before allowing a Buyer to make a Finance Request on the Service, we assess each Buyer’s creditworthiness and ability to afford the Murabaha Instalments payable under the Murabaha Contracts. We and the Security Trustee also carry out certain Due Diligence on the Property that the Buyer will use as security, as explained in Clause 5 of the Nester Service Terms. We establish a risk rating for the Finance Request according to the estimated level of potential bad debt, which is communicated to Investors, along with the methodology we use to determine the risk rating here.
We use the due diligence undertaken and the resulting risk rating to determine the stated return under a Murabaha Contract.
What are the expected default rates?
The expected default rate for each set of Murabaha Contracts with each Buyer that are available via the Service is specified here along with a summary of the assumptions used in determining expected future default rates. The actual default rates are given here.
Your estimated rate of return is stated on your Investor’s dashboard taking into account fees and default rates on the profit you receive. The amount of income tax payable by you on profit (income) received is dependent on your individual circumstances and may be subject to change in the future.
How do we collect an overdue debt?
If the Buyer misses a payment or only partially pays the amount due under your Murabaha Contracts, you authorise us or a Collections Agency, acting on your behalf, to contact the Buyer to attempt to collect an amount equivalent to the outstanding payment and any additional fees and charges due.
In the event of the occurrence of a default, the Security Trustee will enforce all or any of the Security Documents and the relevant proportion of any sums recovered by the Security Trustee will be paid to you, subject to deduction of the costs of recovery (including legal fees and expenses and those of any manager, receiver or administrator appointed by the Security Trustee) from the gross proceeds recovered.
The net amount recovered will be apportioned to you according to the proportion of the total Murabaha Contract amount that you provided.
It is possible that the proceeds recovered (if any) as a result of any recovery and enforcement activity may not be enough to cover the Buyer’s obligations to you.
Where are my uninvested funds held?
Any funds waiting to be invested via the Service, withdrawn or disbursed to Buyers are held by the Payment Service Provider in the Client Funds Account.