Productivity: less speculation, more responsible investing
Speculation: arguably the underlying cause of the subprime lending crash we saw earlier this year. With over $500 billion written off by financial companies worldwide, the Debtor Finance Committee of the Banking Association maintains that this debacle could have probably been prevented had financiers and traders sought to support productive behaviour as opposed to speculating in the extreme. By using money gained from brands to finance productivity as opposed to investing in very speculative type financial products, financial institutions would have not only ensured this money was secure but would also have gone a long way in building the economy responsibly.
In a country like South Africa where socio-economic development is a priority, it is critical that financial institutions facilitate home loan and bond provisions. The resultant relationship between home owner and bond provider is of utmost importance in ensuring ongoing bond repayment, and needs to remain intact. What we have seen happen in the USA is as a result of bonds being sold as bundles to others on term based financial instruments instead of being invested by financial institutions in more “responsible” products. Not only the “selling” of the bonds to others by the original financier been problematic, but on-selling the bonds to others again, in different countries, is what has disturbed this critical relationship between the bond applicant and his chosen financier. This is what has in fact caused the crisis.
That being said, selling of bonds is something that does also occur in South Africa. In our case, however, we have seen buyers of these bonds acting far more responsibly, and not selling them off overseas readily as the Americans have done.
The issue of financial responsibility – with the consequences of a lack thereof being amply demonstrated by recent events – is a critical one. While bonds are a huge form of “income” to a financial institution, this type of investment power brings with it a concurrent amount of responsibility; one that cannot be abused. It also brings with it invaluable opportunities to actively provide the finance so desperately needed in South Africa to encourage productivity.
Choice of appropriate financial instruments in which to reinvest money is therefore critical. One has to consider products where returns are guaranteed and risk is mitigated – yet where one will simultaneously encourage business and economic opportunity in our country. Debtor finance has been proven to do exactly this; that is why the Debtor Finance Committee of the Banking Association has been so actively advocating use of the products especially in the context of assisting developing and more developed businesses.
With many start-up businesses in desperate need of working capital, redirecting “speculative” investment capital into tools such as thoughtfully chosen debtor finance products, will not only secure the investment in terms of risk assessment performed by the financial institution, but additionally create an unlimited model for the future growth of the enterprise. In this way one therefore creates an investment that will not only generate returns but jobs as well.
The subprime crisis should give all financial institutions in South Africa and, indeed across the globe, pause to consider how exactly and where exactly they are reinvesting their clients’ money. Instead of simply being drawn into the “money-spinning” financial tools, we as the financial services industry should rather choose to invest in productivity, that generate jobs as well as profits.
