Home' Trinidad and Tobago Guardian : April 6th 2017 Contents BG16 | FINANCE
BUSINESS GUARDIAN guardian.co.tt APRIL 6 • 2017
Lust, gluttony, greed, laziness,
anger, envy, pride: according to
some religious traditions, these
are the seven deadly sins. At a
time when some have undertak-
en a period of religious reflec-
tion and repentance it may be useful to focus
on the deadliest sin as it relates to finance.
Some traditions suggests that money is the
root of all evil. It doesn't take very much be-
yond reading the financial news---both local-
ly and internationally---to see all of the seven
deadly sins playing out to varying degrees in
But money itself is not evil but rather the
actions of people. Yet for these actions to create
an outcome---such as a financial crisis---they
have to manifest themselves into something
In the world of finance there is one particular
action that is very often the conduit for these
seven sins. Stay away from this in principle and
you will be well on the way to a more ethical
and, quite possibly, more fulfilling financial
The deadliest sin in finance is to significantly
mismatch the timing of your funding against
Funding in the form of debt can either be
short term or long term. What you purchase
can either be something of a short-term or
long-term nature. Try as best as you can to
link short-term funding to short-term spend-
ing and long-term funding to longer-term
Avoid at all times the temptation to use
short-term money to treat with a long-term
activity and vice versa. It is, in fact, a simple,
very basic rule, but it is a rule that everyone---
from individuals to large corporations to gov-
ernments---find extremely hard to follow.
If you analyse the financial disasters of this
world---whether it is your personal financial
distress or something on a broader scale---it
more often than not comes down to the mis-
match of funding versus spending.
In fact, the debacles at CL Financial and the
Hindu Credit Union can be traced to this core
issue of mismatching funding against spend-
ing. In both case, they were using short-term
funding to invest in longer- term assets. When
the funding dried up, there was a problem.
When we borrow short-term money to sat-
isfy a long-term objective, when the source
of funding becomes due, we are sometimes
unable to repay.
Alternately, when we borrow money with a
long-term payback period (say five, seven or 10
years) but use it to pay current expenses, this
leaves us with a debt with interest to repay but
no tangible asset coming as a result of this debt.
It is not always apparent that this is a cardinal
error. At the level of the individual you will be
very hardpressed to get long-term financing
on an unsecured basis simply because there are
too many unknowns in such a transaction. It
is a lot easier to get a short-term facility that
However, you pay for this facility with higher
interest rates. An overdraft is an example of
such a facility and, technically, your credit
card is another.
Very often, the fact that you have run into
an overdraft is symptomatic of a much bigger
problem, which is, inadequate management of
your cash flows. This, in itself, may be symp-
toms of lust, gluttony, greed, laziness, anger,
envy, pride. Simply put, you maybe extending
yourself beyond your capability. Sometimes it
may be well intentioned. Other times it may be
in pursuit of something more sinister.
It is, however, easy to get hooked on this
source of financing and, over time, use these
short-term funds to engage in longer-term
Effectively, this locks you into higher rates
and the original issue of poor cash flow man-
agement is exacerbated until such time as you
get into severe financial distress.
Whether it is caused by gluttony, greed or
envy, it may be much better for you to live
within your means than to reach for some-
thing that you cannot afford. If you cannot get
a longer-term loan facility, it is quite possible
that your financial standing is not sufficient
to allow for such borrowing.
The opposite approach also represents a
cardinal financial sin. Many times we are of-
fered long-term loans for short-term expenses.
Loans to play mas, take a vacation, finance an
annual insurance premium, pay for routine ex-
penses for your home are all examples where
you have a longer-term borrowing where the
funds are allocated to an immediate item of
Stretching the point a bit, using a longer term
borrowing to purchase a depreciating asset
such as home appliances or even a car is also
part of this trap as the value of the purchase
decreases over time while you are still paying
Here again it is better to minimise this mis-
match as much as possible especially if, long
after whatever you spent the money on is gone,
you still have a debt based on that spend.
In extreme cases the mismatch between your
sources of funding and what those funds are
used for catches up and bankruptcy is often
The discussion, so far, has centred around
individuals and, to some extent, companies.
What may not be so easily apparent is that
governments also face these same issues.
In the case of countries, it is more a case of
using long-term funding to treat with current
or recurrent expenditures. Countries around
the world have run up huge deficits to fund
their operations. As these deficits mount, the
ability to borrow longer term money has be-
come more and more impaired.
We can look across to Barbados to see how
this story has unfolded. We can look back at
Jamaica to see what happens after a country
is unable to pay its debts. There are budding
examples across Europe and in many emerg-
ing markets challenges will show itself in the
years to come.
Even in developed markets the debt burden
is staggering. It involves piling more debt upon
existing borrowing. As time goes on a larger
portion of annual revenues will go towards
servicing the debt burden. Over time if the
situation is not dealt with, states move to bor-
rowing in order to meet current expenditures.
Borrowing to spend on something that does
not generate a rate of return that exceeds the
cost of borrowing means that over time you
end up poorer rather than wealthier.
Eventually that catches up and while coun-
tries can't technically go bankrupt, they may
have to go through significant adjustments
that can create difficult conditions for its
The mismatch of funding sources with
spending is a financial death trap and is the
deadliest financial sin.
Monitor the State, the companies that you
are associated with and, most importantly,
monitor your own actions to ensure you do
not fall foul of this simple rule. To do otherwise
is akin to dancing with the devil.
Ian Narine can be contacted via email at ian.
The deadliest sin
in finance is to
the timing of your
funding against your
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