Well, no point in arguing. Certainly an overload. There is existence of central banks, retail and commercial banks, Internet banks, credit unions, savings and loan associations, investment banks and companies, brokerage firms, insurance companies and mortgage firms, the list goes on. We may not have all these players in Botswana but their offerings are somehow embedded as our financial markets may not be as advanced as others.
To keep things simple, whenever we have the conversation regarding financial services, I always use the illustration of the financial quadrants. My illustration may be basic but bear in mind that with each financial quadrant the rabbit hole gets deeper as products and services range from the simplest to very complex ones. The main determinant is the strength of the balance sheet (type of assets and liabilities) that a person or company is endowed with and the risk appetite of the individual or company. Although the strength of the balance sheet and your risk appetite set the tone, from a financial services point of view, the needs are the ability to transact, insure oneself or assets against eventualities, invest or save and access to credit (Transact, Insure, Invest and Save, Credit) or just T.I.I.C. Let us briefly unpack each quadrant.
Money in, money out! Financial institutions, mainly banks, enable clients to transact by making deposits into bank accounts, withdrawal of funds at their convenience, making purchases, transfers, and payments. Products such as ATM cards, mobile banking, banking apps and Internet banking are availed by banks to enable these transactions. Some banks have even partnered with merchants of Fast-Moving Consumer Goods (FMCG) and others to allow customers to make withdrawals from the merchants, thus improving convenience and increasing the footprint of banks and their transactional capabilities. Mobile Network Operators also play in this space and provide transactional services to clients through establishing accounts and issuance of debit cards.
Life itself is a risk and anything can happen at any time (God forbid). We also know that certain things can be replaced and some cannot be replaced. Financial institutions such as underwriters (insurance houses), brokerage firms or agents and now banks (bancassurance) do provide a wide array of insurance products where one can insure one’s life, assets and/or property. Property is a broad term and can include anything from your most priced item and your least priced item to a multi-million pula house and business.
Insurance works in the principle of indemnity, which is simply putting you in the place you were in before the loss; no worse than and no better than before the loss. You have heard of some footballers taking insurance exclusively for their legs or goalkeepers their hands (Lionel Messi for GPB 750 million, Christiano Ronaldo for GPB 130 million, Iker Cassillas for GPB 15 million). Music artists and actors also take insurance exclusively for their voices. Life Insurance is also an interesting one because you generally can’t attach a price tag to a person’s life. However, the total cover is determined by the premium amount that one can afford after your insurer has done all the underwriting formalities.
3.Invest and Save
Let’s start with differences between investing and saving and let’s keep it simple. When you save, you simply put money away to use at some point and this is usually short-term (less than 12 months). When you invest, the aim is to grow your initial outlay and the objective is long-term (more than 12 months). The notion of asset classes comes into play here and you ask yourself which investment vehicle fits your profile or appetite. Do you want to invest in real estate, equity, bonds, commodities, fixed income, stock, cash and equivalents or derivatives will determine if you are taking a trip to a local bank, an asset manager, a private equity firm or a local cooperative and so on.
Credit is borrowing from a lender. As life often dictates, there are times when the amount of cash in your hand restricts you from doing certain things and you have to get cash from somewhere to fulfil a certain objective. From a short loan and an overdraft to a credit card, personal loan, vehicle asset finance and commercial loan, the list is long. It depends on the objective. The type of credit and the duration of the loan do matter as well as other embedded costs like insurance. The source of funding also needs to be taken into consideration when acquiring a credit facility as you will need to pay monthly instalments or whatever the arrangement may be with your creditor. Remember, it must really make good sense to acquire debt.
With that, I trust that I have addressed some of the questions, comments and queries that I was asked to talk about and have hopefully made things slightly easier. As I indicated I would, I have only touched on the surface and more can be dealt with in future or handled by different experts. I am always willing to help.
LinkedIn: Gomolemo Kololo Manake