Are you literate, finance-wise?

By Bernard Otabil

Alan Greenspan, the American economist and the former Chairman of the Federal Reserve of the United States from 1987 to 2006 was spot-on when he said: “The number one problem in today’s generation and economy is the lack of financial literacy”. It is not that statements made by him are often challenged and therefore his comment about the lack of financial literacy makes him an instant star. No. Not at all. This is a man who served under four US Presidents and indeed, at one point held sway over which direction the global markets will go, just by his pronouncements. Greenspan now works as a private advisor and provides consulting services to firms through his company, Greenspan Associates LLC. Many still pay thousands of dollars to listen to him.

Rather, what is important about the statement made by Greenspan is that the current global financial crisis has taught all of us that indeed, we know nothing about the behaviour of the markets. But, of course, not everyone will learn from this bitter lesson. Even though Greenspan’s comment can confidently be said to be aimed at the under-privileged in society, in actual fact, it equally applies to the privileged. Take the case of the sub-prime crisis for example. The sub-prime crisis was the underlying factor that caused the global market meltdown. Financial markets struggled because instruments, mostly junk loans that were not worth the paper the contracts were written on were traded as instruments of real returns. Of course, we all know that in the hazy world of derivatives, you are not always sure what you are “deriving” from the underlying instrument. But some finance experts believe they have the magic wand to make things happen, so they talk with accuracy.

Therefore, they have even attempted to give meaning to what happened in the sub-prime mess, trying to take out the fact that we are not as financially literate as we think we are! Some say the products were sold to “unsuspecting investors”, but given the sophisticated nature of the contracts, you must certainly have some knowledge before you can dabble in such deals. Wrong knowledge, it would seem at this point! Lack of financial literacy, as Greenspan would describe it. The other school of thought is that some believe that even for the discerning investors, they were deceived by the mathematicians, those described in the finance world as “quantitative gurus”, who had “mathematically” managed to give value to those worthless instruments. And they enjoyed global appeal because the so-called ratings agencies had given their seal of approval, by giving them high ratings, effectively saying they are good buys. The rest of the story, as we often say, is history.

Let us now fast-forward to our own country- Ghana. Have you ever wondered why despite all the numerous banks and laudable financial sector reforms in the country, about 80 per cent of the population still remain unbanked? Have you also considered why the number of people taking up insurance products is less than 5 per cent of the population? These are indeed worrying questions, but frankly, not surprising. As has been identified quite correctly by the former US Treasury boss, our generation has really come under severe strain, mostly fueled by the lack of financial literacy.

The lack of financial literacy in our country has caused widespread problems for many. It is envisaged that not only have people taken up the wrong type of financial products because they are not financial literates, but they have also ended up in debts because of this. This is indeed troubling. This development has increased poverty levels in the country and contributed to the large unbanked population. Consequently, since insurance and banking are somehow linked (a financially sound society will always appreciate insurance services to secure and protect its future), the two financial services sectors have stalled. It should be our pressing desire to ensure that we educate the masses on the true nature of finance. But a note of caution though. In our pursuit of such initiatives, we should strive to ensure that the products are jargon-free, and even the small prints are clear enough for people to understand. Financial products miss-selling is possible because people do not understand the products well enough. We should avoid all this, and the financial institutions do have a major role to play to ensure that people appreciate their services. It is only through this process that we can have a better society- and I mean financially.

Bernard Otabil is the editor of Graphic Business, a business newspaper published weekly by Graphic Communications Group. You can get a copy on Tuesday from your local vendor.