ARTICLE
Why Financial Institutions Should Rethink Communication as a Financial Variable
Financial institutions often treat communication as a reputational function. In contrast, capital markets view it as a risk factor.
A substantial body of financial research demonstrates that information asymmetry – the gap between what institutions know and what stakeholders understand – increases perceived risk and, consequently, cost of equity capital. Where disclosure is clearer, consistent, and credible, capital costs decline.
In emerging markets, characterised by structurally higher macroeconomic volatility, regulatory evolution, and perception risk, this relationship becomes even more pronounced.
For financial institutions, communication strategy is not merely cosmetic; it holds economic significance.
Information Asymmetry Is a Pricing Mechanism
In capital markets theory, information asymmetry increases uncertainty which, in turn, amplifies the perceived risk.Consequently, the required return necessitates a higher level of compensation.
Empirical research across emerging markets demonstrates that firms that effectively reduce information asymmetry through improved disclosure practices experience substantial reductions in cost of equity capital, particularly when earnings quality is controlled. When stakeholders gain a comprehensive understanding of institutional performance, risk exposure, and strategic positioning, theynaturally exhibit a lower demand for risk premiums.
This dynamic applies acutely to:
Banks
Insurance firms
Capital markets intermediaries
Development finance institutions
Because their balance sheets are inherently opaque to non-specialist stakeholders.
“Where understanding declines, perceived risk rises. Where perceived risk rises, capital becomes more expensive.”
The Trust Gap Compounds the Capital Effect
Beyond technical disclosure, perception holds significant importance.
Consistent data from PwC reveals that executives tend to overestimate stakeholder trust. Conversely, research conducted by Edelman suggests that trust is becoming increasingly contextual and fragile.
For financial institutions, this presents a layered exposure:
- Technical asymmetry (complex balance sheets, regulatory frameworks)
- Perceptual asymmetry (stakeholder misunderstanding)
- Media fragmentation amplifying misinterpretation
In emerging financial systems, such as Tanzania’s, these dynamics interact with:
- Rapid expansion of digital financial services
- Growth in the formalisation of SMEs
- Regional capital integration
- Heightened regulatory scrutiny
In such environments, ambiguity carries economic cost.
Communication as Risk Mitigation Infrastructure
Most financial institutions are already in compliance with formal disclosure requirements, including financial statements, regulatory filings, investor presentations, and annual reports. However, formal compliance does not eliminate interpretive gaps. Annual disclosures primarily explain results, while quarterly earnings present numbers and rarely provide insights into structural positioning.
In volatile macroeconomic conditions, stakeholders require interpretive clarity:
- How exposed are we to interest rate fluctuations?
- What is our SME risk appetite?
- How are we integrating digital infrastructure risk?
- How resilient is liquidity positioning?
When institutions fail to proactively interpret these issues, external narratives fill the void.
“Silence does not reduce uncertainty. It redistributes narrative control.”
Consequently, communication strategy moves beyond marketing, evolving into a risk mitigation infrastructure.
The Tanzanian and Emerging Market Dimension
In emerging markets, information asymmetry tends to be structurally higher due to the following factors:
- Lower financial literacy dispersion
- Rapid regulatory evolution
- Political and macroeconomic sensitivity
- Concentrated media ecosystems
Financial institutions in Tanzania operate within a hybrid environment characterised by the following developments:
- Increasing mobile money penetration
- Growing SME financing initiatives
- Cross-border regional exposure
- Central bank modernisation effort
Stakeholders, including SME operators and regional investors, require interpretation rather than mere disclosure.
“In emerging markets, narrative stability can influence liquidity stability.“
Long-Form Communication and Capital Signaling
Although formal disclosures are obligatory, interpretive depth is optional.
Long-form communication formats enable institutions to:
- Elaborate macroeconomic positioning beyond headline figures
- Contextualise regulatory adjustments
- Clarify risk appetite frameworks
- Demonstrate executive competence in real time
- Reinforce strategic continuity
This does not supplant compliance reporting; rather, it complements it.
Over time, consistent interpretive presence can:
- Reduce perception volatility
- Strengthen investor confidence
- Improve SME engagement clarity
- Enhance internal alignment
These are indirect drivers of capital stability.
“Capital flows toward clarity.“