Financial literacy! what is it? Why do we have Insurance? What role does banking play in our society! Why should I invest my money? Life Insurance only gives out money when someone dies, what’s the use? You may have battled with the following pressing questions in attempting to figure out the roles played by various financial services in our society.
Most of my work for the past 7 years has been directly linked to Insurance, Banking & Investments. Based on my experience and having been privileged to work with almost all sectors within the financial services industry both locally and internationally, i’d like to share key things we need to know about the roles played by the most common financial services in our economy.
1. The central bank is a hub and regulates banking, investments & insurance:
The central bank is at the hub of it all, they formulate policies that govern the rest of the financial services on how to conduct business. The central bank determines interest rates for loans they also ensure financial services adhere to set policies and govern service delivery quality levels to all citizens. Without this, commercial banks, insurance & investment firms could be able to make their own decisions on interest rates and decide how they deliver their service with no guidelines at all. That could be very disruptive to an economy.
2. Commercial banks, credit unions & micro-finance allow citizens to access money:
Why don’t we just open bank accounts with the central banks, that is where the money is coming from right? Not so fast! It sounds good but to maintain order it’s not possible for every Jim and Jack to maintain an account at the central bank. If this happened, we risk monopolizing the banking sector. Service delivery and other areas could be heavily affected and the impact to us is equally damaging. Imagine having just one bank in every country. That means all competition and innovation are shattered just like that.
3. General insurance allows us to safeguard our assets:
Imagine driving your new Mercedes Benz that you recently purchased with your own money or if you’re like others you’ve managed to convince the commercial banks to finance your car either way, you park your car and quickly rush into the shop to buy groceries. Upon returning, the car is not there anymore, it’s gone! Just like that! you reach to your pockets to inform police but Oops, you forgot it in the car, not to mention the laptop that was in the car boot. This is devastating, in times like these, it is the duty of general insurance to assist in giving you money to replace your lost valuables. That is why it is a good idea to get the best insurance on your car, home and all your assets or liabilities (people out there always battle on whether cars and homes are actually assets or liabilities, lets just present it like this for now).
4. Pensions & life covers – help us have a form automated long term investments:
I hate pensions! they are here just to eat our money. Why can’t they give us the full salary? That is the perception that most of us have. Let’s understand that pensions are long term savings or investments that are meant to protect us and make sure we will be able to survive after retirements or unexpected job loss. Unless you build a good business or investments that will still be capable of generating massive income, then we will run out of money after retirements. Pension is there as a form of investment to cushion us when the unexpected happens. Life policies have also evolved and are now flexible, we no longer have to wait until death for beneficiaries to benefit from your investments.
5. Investment firms and the stock exchange, flexible & uncertain:
While long-term investments are good, others feel impatient to wait for so long to access their money, that is why we have investment firms and the stock exchange. You need to understand that investment firms and the stock exchange provide the short to medium term or even long-term investment goals. They can be very good as they are flexible and accommodate for both the patient and the impatient. We can easily break our investments quickly into money than other forms of investments. Its too tempting, wait until you know that investing on the stock exchange is risky and you need to fully understand how it works before fully investing money else you risk loosing all your hard earned money in the blink of an eye. That’s a topic for another day!
I hope the article has been very helpful in introducing you to various financial services. It is quite useful to understand the roles played by various financial services to be able to manage your personal finance and make good investment options out there.
If you have any comments, feel free to leave your comment below to contact the author and give your feedback.