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The perils of financial illiteracy

By Omagbitse Barrow FCA
22 March 2017   |   2:05 am
I got my first lesson in financial planning, when as a 9 year-old I snuck into my dad’s Samsonite work briefcase to “pinch” some of his biros to add to my growing collection of pens.

I got my first lesson in financial planning, when as a 9 year-old I snuck into my dad’s Samsonite work briefcase to “pinch” some of his biros to add to my growing collection of pens. I stumbled across his pay slip, and was absolutely amazed at its contents.

Of course I cannot remember the exact figures, but I recall that his take home pay as an Assistant Director in a Federal Ministry looked so small that after assuming a similar salary for my mother, I wondered how they were able to make ends meet.

I decided that I will become a “lower- maintenance” child, and make less demands and have less expectations of my parents financially. Since then I have come to learn that one of the biggest problems in our society today is that people are not honest and truthful to their spouses and families about their actual income and then resort to all means – mostly foul to live a false life, contribution to the culture of corruption that is pervasive across the country.

It is very common for someone to be appointed to a top Government job and his/her people start immediately expecting the person to “perform”. This is because most people are unaware of how small the salaries of public servants are, and the public servants themselves are not helping matters, by assuming life styles that are certainly beyond their income, instead of cutting their clothes according to their cloth. Hence, there is a strong relationship between the lack of financial literacy and the canker worm of corruption.

There are many other perils that individuals and society suffers on account of a lack of financial literacy, and as we build up to the #globalmoneyweek2017, an annual celebration that takes place in the last week of March each year to highlight the importance of financial literacy and offer financial planning education to the public, it is important that we pay some attention to the things that can potentially go wrong when individuals and an entire society continue to suffer from very low levels of financial literacy.

Another daddy related story happened when my father had retired from the civil service. After almost one year of an arduous wait for his gratuity to be paid, he gets a phone call from a certain Engineer Yinka Davies from NNPC offering him a mouth-watering opportunity to invest in some multi-million-naira bitumen supply contract to NNPC.

My dad, not suspecting foul play was initially excited, and was almost thanking God for the timing of the payment of his gratuity – just in time for him to take advantage of this huge “bitumen” opportunity.

He was not conversant with the financial management paradigm that challenges you to probe further when something looks too good to be true. Thankfully, he soon learnt that Engineer Davis was a fraudster, working on a tip-off from the same people who processed his benefits and was able to secure his hard-earned retirement benefits. Unfortunately, many are not so lucky!

Benjamin Graham, the grand-father of value investing (an investing approach that looks at the fundamentals of an economy and a business) warned in his classic book – “The Intelligent Investor” that 1) his book would only become popular during periods of stock market crashes and recessions (It was a street hawkers’ delight in 2008 in Nigeria) and 2) that investment bankers, fund managers and the stock exchanges will have themselves to blame for not adequately educating their customers about the vagaries (ups and down) of the stock markets.

As a young investment banker, I read this and promptly alerted my supervisor of its dangers, and this caused us to put a disclaimer on our client statements’ newsletters, contract notes and subscription forms to the effect that “stock prices go up and down, and that past performance does not guarantee future performance in the stock market”.

I also remember a gentleman, a young banker (who should have known better) who came in to purchase our mutual fund in about March 2004. He was so excited about the return achieved in the previous year that all efforts to get him to invest only a part of his funds in the mutual funds and place the rest with a commercial bank proved abortive. My concern: he said he needed the money to “double” by January so that he could pay his school fees in a British University that he had just gained admission into, and I tried to explain the vagaries of the market to him. He insisted, invested, and in 8 months had lost significant value after the market crash following bank consolidation that was announced a few months later.

The examples of sub-optimal decisions that people have taken regarding managing their personal and business finances over time will consume volumes if you allow me to go on. From the wonder banks of the 1990s to the more recent Ponzi schemes (MMM) of the 2000s.

From the subprime loans in America to the pump and dump in the Nigerian Capital Market in 2008, to the tremendous capital destruction that takes place when many people lose their life investments to fraudsters, and even legitimate entrepreneurial ventures that could have been better managed.

Financial literacy is very important, and when a society does not pay enough attention to it, the society suffers. Thankfully, with the #GlobalMoneyWeek2017 coming up, a lot of attention will be paid to educating children and the youth, women, entrepreneurs, and the general public on the importance of financial planning and prudent financial decisions.

Barrow is a Chartered Accountant and author of “My Fun Finance Stories”, and “110 Money Facts”

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