Q&A with CMMB Securities

Q. Why do most finance houses ask to hold a security of almost the same amount I want to borrow? If I want a $20,000 loan, they either want me to have a fixed deposit of about $15,000 or they hold something else of that value. If I had the amount I wouldn’t need the loan.
Earl, Santa Cruz

A: At first glance it may not seem to make sense. But there is a reason for this practice. Banks in Trinidad and Tobago find it extremely difficult to assess the creditworthiness of individuals. This is not a fault of theirs, it is due to a lack of available financial records. Only if an individual has had a long standing relationship with a bank can that institution make an informed assessment given that person’s credit history. If a customer approaches one bank for a loan, but had a good banking relationship with another bank, this credit history is worth almost nothing.

A bank may tend to use euphemisms on a credit report in describing a customer who has had a checkered history, but whose connection is still valuable to that bank. Because of this lack of an independent credit bureau, banks tend to be extremely cautious in lending to individuals, especially the ones who are not their long-standing customers. So for the time being, the only way to get favorable credit terms from the bank is to develop a relationship with your bank over time and stick with them. However, slowly but surely there is going to be an emergence of organisations which can independently provide verifiable information for the banking institutions.

Q. How do I go about setting up something like a fund for my children (aged 11 and 7) so they can get a financial head start by the time they are 18 or 21?
Sasha, San Fernando

A: There are two options which you can consider. Firstly, if you do not currently have a level of savings to start with you may enter into an annuity in which you pay a fixed amount per month. Since your children are relatively young doing this for the next ten years or so would enable you to accumulate a significant amount over time through the power of compounding. As you may know this results from reinvesting your earned interest and receiving “interest on interest”. You need to decide on the amount you want to have in ten years and then set aside the amount per month, which would grow to your target payout in ten years. Talk to a your insurance agent to work out the installment which is necessary. Make sure though that the amount you set aside does not stress your monthly cash flow too much.

While an annuity gives an assured future payout, the rate of return you earn is fixed and relatively low. Therefore the ideal situation would be to start an investment portfolio which, depending on the asset mix, can generate much higher returns than an annuity. However, to do this you would need to have a level of savings to start with. Once you can set aside an amount to an investment portfolio, talk to a qualified financial analyst to work out the investment strategy which is suitable to you. Generally speaking, since you have ten years before you need the funds, you can afford to construct an aggressive portfolio with a high growth rate. This may involve a high allocation towards investments in the stock market where the returns are quite attractive. Even though volatility exists in the stock market in the short-term, over a long period such as ten years there is a high probability that returns would be high. There are brokerage firms in TT in which there are qualified financial advisors who can help you construct such a portfolio.

Q. I noticed recently that Plipdeco opened a Rights Issue. What is a Rights Issue?
Lystra, Palmiste

A: Companies, when initially listing on the stock exchange raise initial equity capital through an Initial Public Offering. In such an offering investors are invited to buy shares at a specified price and depending on the market demand the issue may be oversubscribed or under subscribed. Later on, the company may want to raise more financing probably for expansion. In such a case, the company can raise more funds on the stock market by issuing shares to existing shareholders in a certain proportion.

For example, existing shareholders may be offered three shares for every one owned at a certain price. Such an issue of shares is referred to as a rights issue in that existing shareholders have the option to exercise their rights to buy more shares in the company. In the case of Plipdeco, one new share is being offered for every two shares held at a subscription price of $7 per share. In other words, for every two shares you hold you have the right to buy one share. So if you have 100 shares you would have the right to purchase 50 shares. The issue opened on June 16, 2003 and would be closed on July 11, 2003. Correction : In last week’s Business Day,  the Q&A addressed the issue of home equity loans to pay off credit card debt. The first line  read,  “That might not be a prudent thing to do...”. It should have read, “That might be a prudent thing to do. .” The error is regretted.

Questions can be sent to PO Box, 1830, Wrightson Road, Port-of-Spain. Email: cmmbsecurities@mycmmb.com