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Financial literacy: Only if they know how to manage risk, they can win


27 June 2017 12:00 am - 0     - {{hitsCtrl.values.hits}}


Even if Sri Lanka is well ahead of other regional counterparts, in terms of literacy rate, people in the country don’t have much financial literacy, which is an essential skill for being developed individually as well as collectively. Whatever said and done, when it comes to money, people might act foolishly and greedily, resulting in chaotic situations where they lose all the money and endangering the entire financial system.
Recently, many incidents were reported that people were cunningly cheated and financially exploited. By all accounts, high risk always brings high profits but the risk has to be something bearable. Specially, the lack of knowledge is the root cause of the risk. Only if they know how to manage the risk, they can win.
People deposit their hard-earned money in banks and finance companies, which are directly monitored and regulated by the Central Bank of Sri Lanka. There are strictly imposed regulations to make sure that the deposited money is on safe hand. The public is frequently made aware of potential wrongdoers such as pyramid system that defraud money.
Despite all these efforts that have closed the door for any kind of financial crime, it is known that people, who are financially uneducated, are legally misled by some finance companies. Because it takes place with the consent of the depositor, the victim cannot litigate. The situation goes from bad to worse, as it happens legally, depriving the refuge of the law for depositors. Some finance companies have persuaded their financially uneducated depositors to convert their fixed deposits into shares of a particular finance company, implying that the depositors can gain a return higher than that of fixed deposits or saving deposits. The stock market is so volatile and risky by nature that you could lose your money overnight.
A depositor converted his four hundred thousand deposits into shares, the market value of which is now one thousand five hundred rupees. Once it is converted into non-voting shares, which generally have low price and low benefits, the money could evaporate spontaneously. However, they cannot go before the law, as it was done with their consent. 
It is reported that when the particular finance company had to be merged with its parent bank under the proposed merging programme, the rate under which the shares of the parent company were offered to the existing shareholders of the particular finance company, was very low. 
To avoid such incidents, people must be made aware of financial markets, which the public has a misconception about, that it is just like gambling. It is through an improvement of financial literacy that such malpractices can be avoided by making sure that everyone will participate in the stock market. 
(Amila Muthukutti is an economist with capital market experience. He has widely published covering areas of economics and business management) 

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