In recent years, Barbadians have had to face the challenge of a financial environment characterised by either very low or even negative returns on savings in financial institutions especially banks. This scenario one suspects must be negatively impacting consumer behaviour as well as creating a drag on Barbados’ economic performance. A couple recent news events triggered a few random thoughts in the mind of a curious blogmaster.
Governor of the Central Bank Kevin Greenidge raised the alarm recently that “over 28 per cent of defined benefit plans remain unfunded, with an average funding rate of 84.1 per cent. That must be addressed. Couple this with a declining birth rate, and the long-term sustainability challenges become clear.” What are the relevant state owned entities doing?
The other news that piqued the interest was the collapse of TKY pyramid scheme which reportedly resulted in many Barbadians losing thousands of dollars. The blogmaster is unsurprised those responsible will walk away all the way to the bank – see FTC Must Prosecute Kirk Brown
Why ‘intelligent’ Barbadians would give currency to the saying that a fool and his money are soon parted? We must ponder if there is a deeper reason many are willing to risk putting hard earned money into pyramid schemes like TKY. The blogmaster wonders if such behaviour can be traced to the downside associated with low and negative returns on savings and less risky investment opportunities in Barbados.
One of the impacts of low or negative returns is the bite into savings. When the interest earned on savings accounts barely keeps pace with inflation—or worse, when consumers incur charges that effectively result in negative returns—the purchasing power of those savings diminishes over time. For example, if a savings account in Barbados is less than 0.5% interest rate in an environment with about 4% inflation, the real return is effectively negative. The blogmaster suspects the hunt for greater returns on savings and good investments is part of the reason some are prepared to engaged in risky financial behaviour.
Barbadians who have historically relied on traditional banking products for savings maybe experiencing frustration at the minimal growth in returns on savings coupled with fees. This dissatisfaction could be leading to erratic and irational behaviour by some when making financial decisions.
Human behaviour is typically based on greed, some Barbadians therefore may abandon tried and trusted conservative saving strategies by turning to riskier investment options. In a country where too many Barbadians have been described as financially illiterate this shift in behaviour has severe consequences, especially for individuals at the lower end. As people chase higher yields on investments one can expect more TKY incidents.
A behaviour we must also monitor is financial decision making leading to relying on debt to fund living expenses. Haven’t we been seeing reliance on credit cards and personal loans with the rise of Courts Readycash, Get Cash and other get cash quick entities?
The blogmaster suspects the downside risks associated with consumers earning low or negative returns is not being seriously discussed in the country. In the same way we have become dependent on exports for our survival, we have also become dependent on talking heads to shape information fed to us. Why are we allocating a significant percentage of the national budget to education?
The blogmaster invites you to join the discussion.