Make finance easy to understand for benefit of investors

By RUFUS MWANYASI

Last Sunday night, one of the most critically acclaimed films, The Big Short, landed the best adapted screenplay Oscar.

Reviewers Rotten Tomatoes had its critics rating it at 87 per cent while Moviegoers ranked it at 90 per cent — clearly showing that the movie deserved the win.

The film, which chronicles how a group of traders come to understand the impending housing implosion, and discover a novel way to make a bet on it, was based on Michael Lewis’s book of the same title.

Personally, what’s powerful about the movie was how it managed to simplify a series of complex financial trades.

It was interesting to see how the directors cleverly made use of a lot of celebrity cameos and diagrams to demystify the world of mortgage-backed securities and exotic financial instruments. Needless to say, the movie succeeded on this score.

Now, what’s the point for this Hollywood introduction? Financial literacy, which is my focus in today’s article.

Mounting evidence shows that on average, the general public is financially illiterate. That may sound harsh, but unfortunately that is true.

Investors are either going to make less savvy financial choices and/or avoid making important financial decisions at all.

A few examples prove this; Did you know over 26,000 Kenyans lost Sh4.2 billion to pyramid schemes back in 2008? Did you know that Kenyans were amongst the 51,700 investors swindled in the Madoff Ponzi scheme (according to the US Justice Department fund)?

Did you know that less than three per cent of the population is invested directly in the stock market? It’s possible that a deep lack of financial know-how may have led to all this.

So, how can we move forward? The answer: Demystify finance. Operators of equity markets, for instance, need to explain why in the long-term the stock market outperforms the bond market or why high mutual fund sales fees does not mean high performance?

Particularly, emphasis should be made on how the information is provided and how people can be motivated to want to learn as opposed to simply making information available.

Demystify finance

And here’s where I think we can learn from The Big Short movie. Take for example, in one scene, a trader explains the housing market’s vulnerabilities using a game of Jenga while in another, the pretty-faced Selena Gomez visits a Las Vegas casino to explain collateralised debt obligations.

Fun, right! And all this went a long way in making financial instruments easy to understand without boring anyone to tears. My point: A little creativity will go a long way to help demystify finance.

As a nation, this shortfall on financial knowledge should matter. This is because people are increasingly being compelled to make important financial choices and also because the world has become increasingly complex.

Therefore, for a start, investors who don’t know much about finance should engage the relevant regulators, the Capital Markets Authority (CMA) for financial markets, Retirement Benefit Authority (RBA) for retirement matters, Insurance Regulatory Authority (IRA) for matters insurance and the Central Bank of Kenya (CBK) for matters banking.

Conversely, the regulators should come up with interesting ways to demystify finance. Remember financial ignorance is expensive and can be ruinous.

Mr Mwanyasi is the managing director of Canaan Capital.