ECONOMIC FORUM : Rwanda’s Savings Model: Its critical determinants

Early works on the role of financial institutions and savings mobilization by nations were advanced by Mckinnon (1973) and Shaw (1973) who both emphasized that, the crucial role played by financial deepening (measured as a ratio of M2 ie broad money to GDP) in increasing the rate of domestic savings, is not only through the availability of financial instruments that meet varying needs of savers with regard to risk/liquidity/maturity trade off, but also through lowering of cost of intermediated capital, and making such capital  accessible to various investors.

Early works on the role of financial institutions and savings mobilization by nations were advanced by Mckinnon (1973) and Shaw (1973) who both emphasized that, the crucial role played by financial deepening (measured as a ratio of M2 ie broad money to GDP) in increasing the rate of domestic savings, is not only through the availability of financial instruments that meet varying needs of savers with regard to risk/liquidity/maturity trade off, but also through lowering of cost of intermediated capital, and making such capital  accessible to various investors.

Financial intermediaries in a financial system are in a better position to reduce the selection, as well as the monitoring costs on behalf of mass savers, minimizing the overall risk’s exposure of such savings, while at the same time generating a reasonable return on savings.

Furthermore, research done by Killick and Martin (1990), Fry (1989), Bhatt (1986) and Fernando (1991) found out that, proximity to bank branches and appropriate financial instruments available, as well as cultural values, do influence the rate of savings in an economy.

Empirical evidence on bank branch approximate indicates that, this substantially raises the rate of savings. An expanded bank branch net work serves to expand the savings catchment area.

This encourages savings, by not only reducing the transaction costs of obtaining deposits on the part of banking net works, but also travel, as well as opportunity cost of time spent to go to the bank on the part of savers.

The above research then found out that, savers increase their savings at a rate of around 60% if bank branch net work is 1 km a way, 40% if the same branch was 2 km away, 20% if it was 4 km away, and 8% if these bank branches were 15 km.

Above this range, savers tend to dis-save and rather consume most of their incomes.

Status of Rwanda’s Financial System

As pointed in earlier articles, Rwanda’s financial system is shallow and so fragmented that, our savings mobilization strategy will have to manage this constraint. A financial system is not just a few scattered banks, with a make up capitalization.

A financial system is a spectrum of financial institutions ranging from retail banks (as in our case) merchant banks (whole sale banks), investment banks, insurance companies, building societies, discounting houses, hedge funds, venture capital funds etc… that serve the needs of the economy by availing adequate financial resources for the production of goods and services.

Based on the above definition of a financial system, Rwanda’s financial systems is comprised of two segments; retail banking and a few insurance companies.

Such fragmented part of the financial system, can by no means, finance an ambitious growing economy as ours.

This as pointed earlier, will call for a re-thing and thus reorganization of this system so as to position it to finance our development agenda.

We have to remember that, our current financial system, was not designed by our colonial regime to spur our development. It was simply designed to finance trade between Belgium/France and colonial Rwanda.

The structure of our banking system was, therefore, not designed to foster our development, but rather constituted by classical exchange banks, which concentrated mainly on the financing of external trade; this being the central objective of colonial governments.

(no wonder then that, banks to be found in Rwanda are replica of what is found in Burundi and to some extent DRC, by name and even capital structures).

Thus, such scattered financial system, lacked the necessary structures of a broad based and an all embracing financial system, that could be remotely expected to spur our development.

Gockel (1995) observed that, bank branches were established in towns, and only where expatriate enterprise or government was to be found.

Nonetheless, post colonial Rwandan policy makers did not address this financial structural problem, (unlike other colonial structures) and indeed will pose a serious challenge to our savings mobilization strategy.

Indeed our local banks still open their branches in towns and trading centres where it is argued, there are reasonably enough depositors to ensure profitability of these branches.

Banks have a social responsibility, in addition to profit motive, and one would have expected our banks to be innovative enough so as to reach masses of population even through mobile banks, which has not taken root in our banking sector.

The idea of Umurenge Sacco, will need to have strong intermediation if it is to be sustainable, and this makes the opening up of a Cooperative Bank, even most urgent if our grass root savings mobilization strategy is to succeed, and it should.

Other banks however, will need to embrace the government strategy of savings mobilization, for it is in their best interest to do so.

Lessons from East Asia

Capital accumulation theories advanced by many researchers, presupposes the existence of an organized financial system to mobilize and later alone, allocate the savings so mobilized.

And although growth of East Asian economies can be attributed to three factors: growth in capital, growth in labour and technical progress, nonetheless, capital (according to available research) accounted for between 48% to 72% of East Asian growth. Research done by Meier et al. (1994:24) with regard to Asian development, concludes that, financial development, combined with low rates of inflation and rapid growth, encouraged savings mobilization and increased their savings (some economies notably Singapore had to use forced savings of up to 50% of income earned by her citizens, to build a base and a large pool savings, from which massive investments were derived).

Researchers in East Asian development have thus concluded that, governments’ (in East Asia) commitment to better domestic savings mobilization strategies through financial development, led to massive increase in aggregate savings. We do not have to re-invesnt the wheel.

Ends

 

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