BSE official, Marlon Yarde.

Yarde: Public need to know effect of inflation on savings

Current savings rates must be shown in comparison to the domestic rate of inflation

THERE is a need for persons to know the effect which inflation can have on the money they have in commercial banks.

This suggestion was made by Marlon Yarde, General Manager of the Barbados Stock Exchange. He said that advising the depositors about the impact of inflation on savings is a task which the BSE and other regional stock exchanges should take up.

Yarde recently addressed the 12th Investment and Capital Markets Conference in Jamaica. The event was organised by the Jamaica Stock Exchange.

The BSE official stated that the prolonged experience with traditional banking services had [largely] conditioned our people to rely on saving, through either bank deposits or pension contributions, as the primary mechanisms for building wealth.

According to him, “Prospective investors must learn and understand why the conventional method of saving, while noble in its intention, may not be enough to augment their wealth accumulation goals for the future… Current savings rates must be shown in comparison to the domestic rate of inflation.”

The BSE official contended that “we the citizens of the region have been exposed to traditional banking features for, at a minimum, 100 years, and it is this prolonged exposure that impacts the way citizens both view and settle their financial affairs.”

He reasoned therefore that the ordinary saver must be taught that “the amount one can purchase with a dollar today may not be the same as the amount one can purchase with that same dollar in the future. I’m not positive, however, that the wider public is aware of or has grasped this concept.”

Reviewing the operations of five banks with an extensive history operating in and around the Caribbean, Yarde observed, “Though their first West Indian branches were established in the 1920s, FirstCaribbean had an 1830s start through its heritage organisations Barclays PLC and CIBC.

“NCB and Republic Bank started as regional outposts of The Colonial Bank of London, in Jamaica and Trinidad & Tobago respectively.

“Similarly, RBC and Scotiabank launched their presence in the Caribbean in the 1880s.”

Observing the historical experience, he said, is important “because of its unique effect on the psyche of our people, and, ultimately, on their decisions to save using traditional channels versus investing via the stock market.

“While it is clear that traditional banking services have had a fairly lengthy head start on the region’s capital markets, I believe the explanation of one topic – inflation – can go a long way towards encouraging the participation of the investing public.

“Forget the high-flying language. We in the capital market community must develop concepts that showcase the impact of
inflation on savings over five, ten, maybe even 20-year time horizons.”

Products which are available to combat the erosive effects of inflation, he outlined, are stocks, investment funds, derivative securities and laddering bond maturities.

Yarde said that the comparison between interest rates and inflation will likely go much further towards encouraging a change in investment behaviour, rather than legislated incentives.

“The offering of ‘incentives’ is generally tossed around as an all-encompassing solution to this issue. Well-crafted legislation that is in tune with contemporary and prospective market needs can provide a business-friendly environment that both enhances performance, while forming the framework of recourse for dispute resolution… There is some evidence, however, that the presence of incentives alone may not be predictive of investment behaviour,” he concluded. (JB)

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