Patrick Baah Abankwa’s thoughts ….Trust and financial excesses

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Welcome to another week of financial learning, we started a journey toward financial independence by tackling ways of managing financial excesses.

In the past two weeks we have looked at a lack of planning and impulse buying as causes of financial excesses. In the same vein, I discussed a few things that we can all do to overcome the aforementioned challenges.

I will discuss yet another enemy of financial discipline today – lack of trust for financial institutions and regulatory breaches.

The Webster dictionary defines trust as assured reliance on the character, ability, strength or truth of someone or something.

Perceptions of trust can be non-conscious, formed almost immediately, and biased by subtle factors. Trust is essential to relationships in all facets of life — personal, professional and financial.

Trust is a real and important consideration for consumers, who experience it as a feeling that is built over time; or, in some cases, irreparably broken in a single transaction.

According to EY Global Consumer, the foundations of trust are built on fulfilling the most basic expectation that consumers have of all financial institutions: to protect their money and identity.

Almost everyone who uses air in travelling trust airlines to deliver their luggage to the right city, safely, on time and in good shape. We also trust grocery stores to provide safe and healthy food — efficiently, conveniently, and cost-effectively. Many people have also long expected that banks and financial advisors will do the right thing for them.

Any hiccup in the delivery of a banker customer service delivery affects the trust between the two parties. In this particular situation, it is the customer that loses more trust and become sceptical in future transactions.

Findings from EY’s 2016 Global Consumer Banking Survey showed a profound finding of trust. In the report, banks are largely trusted to keep consumers’ money safe. On the other hand, relatively few customers completely trust banks to provide unbiased advice that puts their needs ahead of the banks’ objectives.

The recent financial clean-up in Ghana is fast-becoming a case in point for many people who were negatively affected in the initial stages of the process. Some customers had their funds locked up for months, which affected their businesses and lives.

Some customers had to move from one friend to another just to make ends meet while having an appreciable account balance inaccessible.

Trust, to a large extent, explains some shortfalls in the relationship between savings and formal financial institutions. Trust affects the willingness of individuals to use a particular financial institution based on their subjective assessment of its reliability, according to a report by Dean Karlan in his paper titled ‘Savings By and For The Poor: A Research Review and Agenda’.

Regulatory barriers – often defended as enhancing overall trust in an institution, frequently include requirements such as ‘know your customer’ rules, which can hinder participation in the banking system for the poor.

Guisoet et al. (2004) measures how trust and the development of financial markets are related in Italy by using a large panel survey, and finds that low-social-capital provinces use fewer cheques and hold more cash.

Similarly, Coupé (2011) looks at representative survey data from the FINREP Ukraine survey and reports that more than half of the sample save in cash at home – with those who self-report as having low trust in banks being 10–15 percentage points more likely to keep all their savings in cash.

Dupas et al. (2012) in western Kenya, with a sample of 1565 unbanked individuals, finds reasonable take-up (62 percent) but lower active usage (18percent) of free savings accounts.

A qualitative survey on a subset of study participants finds that low trust in the bank is often cited as a key concern that deters people in their sample from using formal bank accounts.

As many as 15–37 percent of those who did not open or use the free savings account with one of the two participating banks cited unreliability as a concern, and 7–24 percent mentioned the risk of embezzlement by the given bank as a concern.

In contrast, Djankovet et al. (2008) reports on a survey of 4765 Mexican banked and unbanked households, of whom 2182 households did not have a bank account. When asked to pick their main reason for not having a bank account from a list of options, only 2 percent of the unbanked sample mentioned not having confidence in the institution as opposed to 89 percent who stated they did not have enough money and 6 percent who said that they did not want an account.

Distrust for some financial institutions not only affects our savings pattern; it sometimes affects retirement decisions.

The survey of 927 workers without access to a retirement plan on the job asked how trustworthy they find information from their ‘primary financial institution’, their ‘HR representative’, or ‘financial institutions in general’.

The results suggest an association between distrust in financial institutions and the likelihood that workers will choose to stay in a retirement savings plan if enrolled automatically. This was contained in a survey by The Pew Charitable Trusts.

Trust is based on tactical ‘promises’ that banks implicitly or explicitly make relative to transactions or tasks (e.g., that deposited money will be available after a certain period or that a mortgage application will take no more than an hour).

Customers are more easily frustrated when they experience errors than to be delighted through competently processed basic transactions. However, the negative impacts are not as severe as with the foundational or tactical levels of trust, because most operational errors can be corrected fairly easily and quickly.

Many people therefore regard such mishaps as opportunities and resort to financial excesses. The old adage goes ‘in the land of the blind, the one-eyed man is king’.

Yes, I agree that the banking sector went through a challenging moment and is now recovering.

Some banks and other financial institutions have indeed gone into extinction. Not everyone who had their funds locked up has actually received all in full.

While acknowledging the bottlenecks, there are still many ‘standing’ universal banks that did not go down. They stood the test of time and continue to run with proper corporate governance practices and the necessary liquidity requirements.

Link up with them to rekindle your savings and investment journey. As I always say, the first reason for saving and investing is security and not returns.

As we learn from our mistakes, we ought to make the right investing decisions in the future. You cannot eat your cake and have it!

My favourite story-topic when I was in JHS was ‘Not all that glitters is gold’.

This statement is still relevant today as we begin to rebuild trust for our financial institutions.

Trust should not be the used as an excuse for failing to plan toward your retirement.

Trust should not be the reason why you fail to have an insurance policy.

And, of course, trust should not be a block in your quest to attain financial independence.

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