Friday 28 March 2014

Financial illiteracy

An epidemic is defined as “a widespread occurrence of an infectious disease” or of an “undesirable phenomenon”.

As a nation we face more than one of them. One of the most undesirable phenomena we have is financial illiteracy. While we can all read, write and do basic maths very few of us are financially literate. Very few of us.

At Consumer Watchdog we’re in a position to comment with some authority. We have a constant flow of people approaching us with money troubles. Some are with store credit and hire purchase, others with bank loans and a great number with financial scams. Almost all of the problems had at least some level of ignorance at their core. The victims aren’t stupid, they just didn’t know how finance works and as a result they end up in deep trouble, some of them losing vast amounts of money.

Store credit and hire purchase are a very good example. Most consumers genuinely don’t understand how buying on credit works. They don’t understand, for instance, what will happen if they fail to regularly make the payments required by the ghastly 2-year hire purchase scheme they signed. They certainly don’t know what happens if their goods are repossessed. They don’t understand that their debt won’t go away after the repossession, that in fact it will almost certainly increase. They often don’t know that the store will sell the goods as second hand for a fraction of their purchase price and will knock that amount off the balance they owe but meanwhile they’ll add on fees, penalties and interest to what’s left. They can end up owing several times more than the original purchase price and they won’t even have a sofa, bed or fridge to console them.

What happens when you buy a P3,000 sofa on a 2-year credit deal but
after a year you lose your job, stop making payments and it's repossessed .
They don’t understand this because nobody told them. The store certainly didn’t.

The same goes for car loans. We heard from a consumer who said:
“I got a car using a car loan. I got retrenched and I approached the bank about my financial position and they advised me to return the car. Five years later they told me that there was a shortfall when they sold the car and while I awaited an explanation they started talking money from my account. They take 500 month end and 800 mid month.”
He wanted to know what could be done. Unfortunately the answer is probably nothing. Even though the bank took way too long to contact him, he probably does still owe them money. The amount they got when they auctioned the car was probably less than the amount he owed them and the loan agreement he signed contained a clause saying they could take money from any account he had with them without asking permission. We might not like it but that’s how banks operate.

Do I need to mention scams like Eurextrade? Hundreds of educated, sophisticated people threw enormous amounts of money into that Ponzi scheme and they’ll never see it again. They might have been smart but they certainly weren’t financially literate. If they had been they would have known that the promised returns of nearly 3% per day were just a fantasy. They would have noticed that Eurextrade never even attempted to explain how such money was being generated. They would have known how Ponzi schemes operate.

The good news is that there are ways of becoming better educated about money. We do our little bit here in Mmegi and in the media but we’re not alone.

NBFIRA, the Non-Bank Financial Institution Regulatory Authority, are doing their best as well.

NBFIRA recently concluded a nationwide financial literacy campaign. They were in colleges, shopping centers, youth centers and on the radio and TV talking about their role but also doing their very best to inform the public about their rights and responsibilities in financial matters.

NBFIRA is a rare thing: a regulator that aggressively regulates. They’ve shown over the last few years that they’re not afraid to do their job and protect the public. You’ll have seen their notices in the press warning the public about insurance companies, brokers and micro-lenders who aren’t playing by the rules. They even had the courage to take on the Eurextrade scheme and various suspicious stock market trading companies with warning notices in the newspapers when they suspected people were being abused.

The industries they regulate also really respect them. I spoke to a senior manager from an insurance company recently and when I mentioned NBFIRA his expression changed immediately. No, he said, he did NOT want to get on the wrong side of NBFIRA.

They’ve also been enormously helpful on every occasion we’ve contacted them with a story of abuse by micro-lenders. Nowadays we don’t even deal with the loan sharks ourselves. We just say “Phone NBFIRA right now” and often within minutes the victim has been invited to see them. Within hours their problem is being resolved and a misbehaving loan shark is being held in chains in NBFIRA’s dungeon.

The bad news is that we have a long way to go before we can consider ourselves a financially literate nation. The good news is that we have a financial services regulator that takes its job seriously and that is doing its best to protect and educate us.

The bad news for NBFIRA is that they need to maintain the momentum they’ve already developed. They’ve achieved a lot but we want more. We want limits on how much interest they can charge for a start. Then they can start work on store credit and hire purchase. That should shake certain stores up a bit!

(They don’t really have a dungeon. But they should.)

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