Patience is strong virtue in finance

Business News of Sunday, 21 August 2016

Source: Bernard Otabil


DKM Microfinance LTDFile photo

Recent headline news on the microfinance sector is not interesting reading. Day in, day out, column inches of newspapers are filled with stories about scammers swindling hundreds of poor people of their hard-earned savings.

In radio discussions and television programmes too, issues on microfinance fraud have dominated discussions sometimes.

What is equally fascinating about the problems of the microfinance sector is that in the past you would find discussions and reports on the sector headlined in the business pages of newspapers or business programmes of radio stations.

But today, to the extent that you will find stories about the sector featured in either the general news section or the crime section of newspapers or radio and television programmes is a pointer that something has gone amiss.

As a century’s old savings/capital mobilisation initiative that helps those excluded from the mainstream financial sector to find some form of communal help, micro saving activities, which later transformed into micro financing as it assumed both savings and borrowing culture, has been a main driver of economic transformation in most developing countries.

Studies have 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 wellbeing 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. They have proved sustainable because the increased income from petty trading serves as a useful addition to household income.

The susu culture (out of which we have several savings and credit schemes) is one such century’s old financial arrangement that ensures that even without a formal banking arrangement, individuals are able to pool resources to grow their businesses and also acquire items of higher value, which they cannot do 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 round, each member having their turn as contributions are put together. It was communal, it was fun, and with an expected end, contributors got excited when it was their turn to receive the lump sum even though every cent of what they received was what they themselves had contributed.

Members appreciated the discipline and the financial focus it offered. It was that exciting.

As you can see, 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 would 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 system. The modernised form seems to have brought more pain and trouble, when it was rather supposed to protect and promote the old system better.

And going through the reports on the microfinance sector in recent times, putting aside the tricks of the fraudsters, there is also another problem that came to the fore; the problem of those who patronise the sweet promises made by the promoters of the scheme out of greed. That is, most seem not patient enough with their hard earned cash, eager to triple, quadruple their savings overnight!

The truth is that there are no quick fixes in finance. Time and again, l have mentioned here that risk pervades finance much the same way that gravity pervades physics and so be prepared to pay a higher risk if you expect a higher return. You may not like it but you cannot wish it away either, so get used to it!

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 GH¢500 from you and promise to pay back GH¢6,000 in six months! That is what some of the fraudulent institutions were promising.

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 it at all times. This way, you will always keep your money safe, free from scammers.

And as an indication, be cautious when dealing with companies offering abnormally high interest on deposit, as savings interest rate which is abnormally higher than Government Treasury Bill rates should be a signal that the potential risk is high.

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.

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