National Bonds, the UAE's prize-linked savings scheme, is changing the way it calculates annual returns to discourage participants from investing for short periods.
It hopes the new calculation, being implemented next year, will lengthen holding times. That could help the company manage future cash flow more effectively. Investors can buy and sell their bonds for cash at any time at exchange houses and banks across the country.
"This change supports our objective to better reward the loyalty and commitment of our customers towards National Bonds and most importantly towards their savings as well as their financial and investment planning," said National Bonds.
Under the existing calculation, investors who keep their money in the Sharia-compliant scheme for a calendar year receive the full return for that year plus a chance to win prizes awarded on a weekly basis. Profits last year were 3.54 per cent, meaning an investor who held Dh1,000 (US$272.25) of bonds for the whole year would be entitled to a Dh35.40 return.
Those who invest money for a fraction of the year currently receive a commensurate fraction of the annual return - Dh5.80 for an investor who held Dh1,000 of bonds for two months last year, for instance.
The new calculation is the same as the old one for investors who hold bonds for the entire year, but it imposes a penalty on those who keep money in for less than 12 months.
Investors who hold bonds for less than three months are to get 40 per cent of the return they would otherwise be entitled to. Those who hold them for three to six months will receive 60 per cent, while those who stay in for between six months and a year are given 80 per cent. That means that under the new calculation, the investor who put in Dh1,000 for two months with a 3.54 per cent return would get Dh2.33 at the end of the year rather than Dh5.80.
The new calculation will not apply to returns for this year, which National Bonds plans to announce next month.
The change follows a rising tide of complaints from investors who said fewer prizes were being awarded since National Bonds changed its draws from monthly to weekly last year.
The company made a further change to its draw format in May, announcing a combination of weekly and monthly prizes.
"Rich people invest heavily in National Bonds, and they stand a great chance for the prizes," said John Dixon, an investor in the scheme. "Here also the small investors are losing out."
National Bonds makes investments with the money it collects and shares a fraction of the profitit generates with bondholders through annual returns and prizes. In the past, the company said half of its portfolio consisted of liquid Sharia-compliant assets, while the remainder was in a variety of property and infrastructure projects and stakes in local companies.
Mohammed Qasim al Ali, the chief executive, said in April that National Bonds "did not invest a penny" in property last year as prices plummeted in Dubai.
Returns were 6.03 per cent in 2007, National Bonds' first full year of operations. Savers made 7.07 per cent the following year before profits halved last year to 3.54 per cent.
The company had more than 590,000 investors as of the middle of the year and achieved more than Dh1 billion of bond sales in the first half, according to a statement in July. National Bonds did not give a value for bonds redeemed during that period.