A culture of saving benefits more than just the individual

With an unabated borrowing trend that has seen close to 55 percent of commercial bank loan assets sitting unsecured as household debt, Batswana continue to tread a thin line when it comes to indebtedness. Even though the debate around savings seems to have been discussed at length,   the reality is that saving has more far reaching implications than merely the interest of the individual.

Even though household savings have more than tripled from P3billion to P11billion over the last 10 years from 2003 to 2013 (according to the Botswana Financial Statistics report of September 2013 published by Bank of Botswana), World Bank statistics indicated that only 16 per cent of Batswana made savings in the last 12 months as opposed to 31 in Mauritius, which has similar living standards as Botswana.
According to the BoB annual report only 20 per cent of a total of P45 billion deposits are from the household sector and more than 55 per cent of P27 billion held bank assets was advanced to households.
Experts argue that to reverse this worrying trend, the culture of saving should be inculcated at an early age among Batswana.

University of Botswana economics lecturer, Dr Emmanuel Botlhale said at a macro level, savings are needed for investment in order to grow and develop the economy. If there are no savings, this is will put a damper on investment because the investors will not have access to capital. At a micro level, the benefits of saving for a rainy day cannot be overemphasised.

“Largely, due to consumerist lifestyles, some individuals and households tend to have a high marginal propensity to consume. In some instances however, some people earn low wages; therefore, any additional income is spent on consumption, particularly food hence, the high marginal propensity to consume. It is only that the urge to spend overpowers the desire to save in most instances. In most instances, the savings are not enough for a rainy day, particularly, for those who are forced to live hand-to-mouth. At the same time, one cannot have sympathy for those given to consumerist life styles that fuel exaggerated and unsustainable consumption,” he said. Dr Botlhale proposed that the teaching of a saving culture must be included in the school curricula at primary level.

Naledi Modisaatsone of the Macro-economics, Forecasting and Planning Unit at Botswana Institute for Development Policy Analysis said for an individual, saving is essentially a way to move resources over time.
Modisaatsone, who recently completed a paper on what drives private savings in Botswana, says Botswana compares favourably and appears to be doing better than some countries in terms of public savings. Notwithstanding the favourable position of the country’s national savings, the disaggregation of savings in Botswana into public and private components indicates that almost 75 per cent of total national savings is in the hands of the government while only 25 per cent belongs to the private sector. She advances that Botswana’s significant economic success has resulted in the growth of people’s personal incomes over the years.

“Our study has shown that although people’s incomes have increased over time, it has not been matched by an increase in private savings. Private savings in Botswana have lagged behind the Sub-Saharan Africa median rate by about 3.5 per cent. Botswana needs to substantially enhance its private saving rates without necessarily reducing its current public savings. This is so because the mainstay of the economy is a non-renewable resource base. Inter-temporal welfare maximization suggests that optimal saving rates, consistent with maintenance of current consumption rates in the post-resource boom era, could be as high as 50 per cent of the GDP. Therefore, enhanced private savings would be required for bridging inter-generational gaps and for maximizing economic welfare,” she opined.

According to Modisaatsone, the results from the study show that the prevailing low interest rates on bank deposits is a major factor that negatively affects private savings in Botswana. Therefore, “an effective mechanism for increasing interest rates is needed if the present effort to increase private savings is to achieve any measure of success. We have also established that dependency ratio exerts a negative pressure on private saving; this implies that the working class is not able to save because they are taking care of the young and old family members-living them with very little to save.”

She said that financial development has proven to positively influence private savings and is  very important in a country like Botswana, which has gone through a financial liberalization process, that is; elimination of credit ceilings, easing of entry for foreign financial institutions, development of capital markets and enhanced prudential regulation and supervision.
“Liberalizing domestic financial markets, particularly done by strengthening the domestic banking sector, has improved efficiency of financial intermediation and hence investment, and positively contributed to private savings in the country,” she said.

Representatives from some commercial banks have stressed financial literacy as imperative for households as they tend to have more debts hence reducing the saving rate. Standard Chartered Bank Corporate Communications Manager, Itumeleng Ramsden said high income earners are more price sensitive than low income earners, hence deposit interest rates is one of the factors that might promote savings.
On the policy front, she said there is opportunity to tighten the rules to restrict individual debts and also promote savings with the current increase in disposable income.  She explained that, “looking at investment outside financial institutions, e.g. acquiring property, individual investment needs to vary. Low income groups generally save less and would on a general basis need to borrow to finance their investment. High savers would not always finance their investment needs through their savings. It may be more beneficial to use somebody else’s money than own funds, thus borrowing might be the better option. This would be highly dependent on risk tolerance and return on investment (ROI). The idea is to minimize one’s financial risk and maximize return on investment.”

Stanbic Bank Marketing and Communications Manager, Ruth Modisane responded that the financial world that consumers must navigate has changed significantly and grown more complex, increasing the need for financial literacy and raising questions regarding consumers’ financial capability.

As a result, she said “there is need to advocate for requirement to have financial literacy courses in every level of schooling; the earlier the better. Making savings products available when and where people can save, that is, where they have ‘free’ money (financial inclusion for the unbanked), and further financial industry has to continue developing and providing products that can better suit the needs of savers.”

Arguing on BIDPA’s recommendation of an effective mechanism for increasing interest rates, Modisane said logically, a lower interest rate produces two effects with opposite signs. “On the one hand, because the reward for savings is lower, people would save less. On the other hand, because interest income is lower, people feel poorer and may choose to consume less and save more. While the net effect appears ambiguous, both experimental evidence and statistical analysis of people’s actual savings choices overwhelmingly suggest that the first effect dominates. That is, a lower interest rate leads to fewer saving,” she said.

In the long term, she said “low household saving rate may cause national savings to be insufficient to support the level of investment necessary to sustain a high level of long-run economic growth without excessive dependence on foreign capital.”