The headline for this week, “Patience is a strong virtue in finance”, is actually a direct quote from the headline of the August 19, 2016, edition.
Yes, almost 10 years ago, but it is still relevant today and, perhaps, will remain relevant for years to come. Why? You will soon find out!
I went back to this headline this week, mainly due to a statement from the Securities and Exchange Commission (SEC) to the effect that a company that calls itself Mekanism Marketing Ltd., and was taking deposits from the public, was not licensed to engage in deposit-taking activities.
Also known simply as Mekanism, the company, according to reports, is promising unrealistic interest rates to attract customers.
Even though this is an old trick some charlatans use to dupe people of their hard-earned savings, oftentimes, it succeeds. And this is partly due to greed on the part of some investors.
Some of these greedy bargain-hunting investors ignore all the basics in risk management in finance and just “go for it”. That should never be your approach when trying to grow your money.
Remember, as I have repeatedly stated here, that risk pervades finance much the same way that gravity pervades physics.
So, much the same way that planes, to some extent, are able to defy the force of gravity and fly around, finance experts are also able to navigate, skilfully, through the maze of financial risks and return handsome rewards for investors.
All this is done with a strong commitment to professional judgement. Professional judgment involves understanding the risk/return dichotomies, and that the higher the risk, the higher the returns you would expect!
So, if you are taking low risk, why would you fall for the high interest Mekanism is offering? It all boils down to patience when dabbling in the field of finance.
As I explained in the referenced article I wrote 10 years ago, sometimes the headline news on the financial sector is not interesting reading because of the activities of charlatans.
You find column inches of newspapers filled with stories about scammers swindling hundreds of poor people of their hard-earned savings. In radio discussions and television programmes, too, issues of fraud have often dominated discussions.
This is certainly not good.
Savings and capital mobilisation initiatives, at the last mile level, spur economic growth as it helps those excluded from the mainstream financial sector to find some form of communal help through micro savings, borrowing and financing activities.
Strong savings and borrowing culture have been the main drivers of economic transformation in most developing countries.
Studies have also shown how the rural poor in countries like the Philippines and Bangladesh have been able to use the small loan concept to increase their economic activities and therefore their well-being over time. In those studies, it wasn’t difficult to find how a small help of just US$100 dollars could stabilise a family of three for several months.
The susu culture (out of which we have several savings and credit schemes) is one such century-old financial arrangement that ensures that even without a formal banking arrangement, individuals can pool resources to grow their businesses and also acquire items of higher value, which they couldn’t have done easily on their own.
Now read this slowly: Using the susu system of the past did not involve any form of interest payment to contributors.
It was only a system that helped people to develop the habit of savings and the discipline to stay true to their promise of making sure that they made their contributions to the pool regularly.
So, in a pre-arranged format, members’ contributions are moved around, each member having their turn as contributions are put together. It was communal, it was fun, and with an expected end.
Contributors get excited when it is their turn to receive the lump sum, even though every cent of what they receive is what they themselves contributed.
Within the Susu culture, members appreciate the discipline and the financial focus it offers. And it calls for patience. They waited for their turn and did not chase high-return instruments.
In all of this, the watchword is patience. You have to be patient to have your turn of the pooled funds, and be patient to stay when you have had your turn, so that others can have their turn too in full. How nice.
But the beauty of this interesting culture is now marred by a few unscrupulous people who are hell-bent on destroying the credibility of the financial system, whether formal or informal.
Sadly, some of the supposed “formal “financial services providers have brought more pain and trouble, when it was rather supposed to protect and promote the old communal system better.
But let me now address the problem of those who, out of greed, patronise the sweet promises made by scammers.
That is, most seem not patient enough with their hard-earned cash, eager to triple or quadruple their savings overnight!
The truth is that there are no quick fixes in finance.
Reaping where you haven’t sown is dangerous in all human endeavours and even more dangerous in finance.
For instance, how can you explain, if the person is not involved in the game of creating their own money, that they can take 500 cedis from you and promise to pay you 6000 cedis in six months!
That is what some of the fraudulent institutions were promising people in the past.
In fact, if indeed such an easy way of making a good fortune existed, then how come many are still struggling to find avenues to invest their money?
The clues are there, and so commit to seeking the truth about financial schemes before you sign up for them at all times. This way, you will always keep your money safe and free from scammers.
And as an indication, be cautious when dealing with companies offering abnormally high interest on deposits.
You must ask further questions when the deposit interest rate offered to you is abnormally higher than the Government Treasury Bill rates.
If the rate is too high, it should be a signal that the potential risk is high too. Remember the rule of thumb- the higher the return, the higher the risk! This is already explained above.
Institutions must be properly licensed to engage in deposit-taking or undertake any investment activity on your behalf. In the past, we also had reports on the activities of institutions that fraudulently described themselves as microfinance.
First of all, they were neither banks nor licensed deposit-taking institutions, and, therefore, were not permitted whatsoever to take money from clients for safekeeping, let alone promise interest payments on the deposit.
For instance, a microfinance institution licensed by the Bank of Ghana would display a licence of authorisation to engage in that business, and would have the word “microfinance” as part of its name.
Your role here is very simple. Just make sure that you only do business with licensed institutions. You bear the risk when you make cash deposits with an unlicensed institution.
Be patient when seeking returns on your investment, and take all the necessary steps to ensure that your risks are well mitigated.
There are risks you cannot ignore in finance, but you can certainly mitigate those risks if you adopt the right attitude in your risk estimation.
Source:
www.graphic.com.gh
