LETTER TO THE EDITOR.

Southland Times, Issue 1584, 28 May 1872, Page 3

LETTER TO THE EDITOR.

y THE BUILDING- SOCIETY. tl Sib, — I observe that " Actuary" writes in yom a issue of the 21st inst., "Assuming, for the snke B of argument, that fines, fees, &c, will exactly r equal working expenses, all the money paid up on shares beinrr invested at 8 per cent., there 3 would be a profit of 8 per cent." The meaning f of t.hia is, T think quite distinct, and a 9 an " Ac- . tuary" ought to be?the very best authority on such j subjects, and ho has kindly undertaken to enlighten the public, I ask him to bo good enough to favor me with answers to the following ques- * tions : — : 1. A, a shareholder of the Society, pays his l year's subscription of £10 8s (£2 12s each on 4 I shares) on the first day of the Society's existence ; —say. Ist May, 1872 — and at the end of the ' j financial year he is credited 16s 8d profits : at * what rate per cent, is A's profits ? i 2. B pays his subscriptions fortnightly during s the same year, and is credited 16s 8d on his 4 , shares : what profit per cent, has B derived from his shares ? 3. 0, also a holder of 4 shares, borrows £100 on Ist May, 1872, and on 30th April, 1873, he pays £8 interest : what profit per cent, for the year given does the Society derive on their capital thus lent ? 4. D also borrows £100 on Ist May, and from that date to 30th April, 1873, he pays his interest {SB) fortnightly ': what profit per cent, doea the Society derive in this case ? With your kind permission, I beg to submit my views and conclusions — based on the assumption that entry money, fines, feea, &c, will pay all working expenses — as follows : — First, I hold that if all interest at 8 per cent, accruing on money lent during any financial year of the Society's existence, were paid on the last day of that year, the Society would reap a profit of 8 pt« nent. on all its capital lent that year ; and by parity or reasoning, i Tioia, seoonitty, vnnv ir the interest in the above case had been paid^brtfnightly throughout the year, a profit of 8 per cent, only would have been made on all money lent ; but at the same time I maintain, thirdly, that a larger profit for the year would accrue than in case first, for the simple reason that during the whole year the lending power of the Society was increasing afc a greater ratio than if the fortnightly .payment of interest had not been made; therefore I hold, fourthly, that more than 8 per cent, interest on share capital would be divided for the year in question. I maintain that each borrower will actually pay in interest much more than 8 percent, per annum. Take the case of a borrower of £100. He will require to pay for interest £8 a year till his payments of subscriptions and his "share of profits together equal £100. Allow the period for effecting this to be 8 years, afc the end of 5 years his thare subscriptions (throughout this case I am ignoring profits, as they are an uncertain quantity) actually paid will amount to £52 ; he will then owe the Society only £48, but he will still be paying £8 a year interest ; or, put in another way, at the end o{ the fifth year he will be paying upwards of £16 per cent, interest. At the commencement of his last year he will only owe the Society about £10, but still he has to pay for that year the inevitable £8. Will "Actuary" actually tell us this is only 8 per cent, interest for the year ? In this matter I have not entered into any calculations ; I have written solely on the common sense principle (which applies all round) that if the profit credited A is equal to 8 per cent., clearly that C2-edited B is equivalent to more than 8 per cent,, for it cost less than in the case of A ; and if 0 pays 8 percent, only, clearly the payments of interest by D are to the Society more than equivalent to 8 per cent. All this may look formidable to an intending borrower, but he should not be dismayed, for .the element of profit will (notwithstanding " Actuary's" actuarial calculations to the contrary) consist of more than simple interest, and must most unquestionably put a very different face upon the matter, and I am persuaded that, with due economy and proper management, the result will be alike satisfactory to borrower and investor. To show the numerous differences of opinion on the subject of my letter, I may state I learn that a leading member of the late terminable Society maintains most positively that it has only been paying 7 per cent. 1 calculate it, taking each year's subscription as paid a year in advance, at about 27 per cent. Of course the absolute profit to members is less than the apparent profit, for it is not paid annually to the shareholders, but simply credited them, thus their capital is periodically added to, and unless tlie profits innreu.se in a corresponding ratio, they are comparatively smaller; but as this is common to all Building Societies, the only fair plan is to take in each case the rate of profit on the subscriptions actually paid during any given year. In conclusion, if " Actuary," or any other of your correspondents, will point out any errors or fallacies there may be in my reasoning or statements, I shall esteem it a favor, as I am anxious to arrive at the truth. — I am, &c. O. 23rd May, 1872.