Savings through Behavioural Economics Approach

Savings depend upon individual choices and preferences.

Savings, are crucial for economic growth of an economy. In developing countries low level of savings and high consumption due to low level of income level and high demonstration effect is reported.

Savings depend upon individual choices and preferences based on their perception about future. It is also connected to behaviour of households/consumers. Application of behavioural economics to study consumer’s behaviour and applying strategies to motivate them to save will help in enhancing savings among developing countries.

 

Saving Behaviour in Africa

 

In Africa savings rates are around 17 per cent of GDP which is very low as compared to 31 percent on average for middle income countries. Reasons of low savings in Africa are dual, on one hand low level of formal financial inclusion in Africa, and on other hand it is due to overseas investment by wealthy Africans.  Around 80 per cent of Africans are without bank accounts or access to formal financial services.

 

Africa is estimated to lose hundreds of billions of dollars in domestic revenues annually through capital flight, tax evasion, the repatriation of profits by transnational corporations and high debt repayments. Again at the same time, the continent’s large informal sector holds considerable financial resources that are not deposited in savings accounts or pass through other formal financial channels.

According to FinScope 2016 – an assessment of the landscape of financial access in Rwanda- About 86% of adults in Rwanda save. RSSB  in Rwanda  administers social security through medical insurance, pension administration and occupational risks and health insurance. RSSB covers less than 6% of Rwanda’s workforce, largely public and private sector salaried employees.

Gross National Savings for Rwanda in year 2015 is 11.244 per cent. This makes Rwanda No. 140 in world rankings according to Gross National Savings (% of GDP) in year 2015. The world’s average Gross National Savings (% of GDP) value is 17.53 %; Rwanda is 6.29 less than the average.

Enhancing savings through behavioural issues will be a good solution for the whole continent. Some countries like Tanzania has enhanced savings among low income Tanzanians using behavioural economics.  A behavioural economics experiment in Tanzania increased customers’ savings by 11 percent using SMS messages about the balances of better savers.

Behavioural Economics and Savings: Global Scenario

Financial institutions performance depends on deposits and savings of customers. Many times households open accounts but don’t deposit or save leading to dormant accounts. Dormant accounts can be a huge problem for financial service providers.  It affects their financial sustainability. In Bangladesh Grameen Foundation’s Microsavings worked with CARD Bank found that 58 percent of its new Matapat savings accounts were never used. People wanted to save, signed up for the account, but they never made transactions.

Grameen Foundation worked with Behavioral Economics experts, ideas42, to address this issue.  They studied savings behaviour of clients and bottlenecks that affected their savings. Through a successful pilot they succeeded to raise the balances in the Matapat accounts by 37 percent and increase the number of initial deposits that were higher than the required minimum by 15 percent.

Most developed countries have some type of national pension or benefits system (i.e. the United States’ Social Security system) to help supplement retirees’ incomes. To deal with behavioural issues of employees so that they will not opt out, in UK and US automatic enrolment is a cornerstone of pension policy. A defined contribution in pension scheme inviting people to pay money into a pension with tax advantages and matching contributions from an employer is not enough to convince all people for enrolment. Automatic enrolment reverses the default, deducting pension contributions from payslips.

Another approach used in US is “Save More Tomorrow”, whereby people make an advance commitment to redirect part of their pay rises into the pension. At a 50/50 ratio, for example, a 2 per cent pay rise becomes a 1 per cent pay rise and a 1 percentage point increase in pension contributions.

Recommendations

African countries are having low level of saving rate and high consumption rate. Embracing saving culture is a way to increase wealth and sustainable economic development. Savings behaviour is affected by psychology of people. People attach more importance to present than future. To enhance savings of people there is need to change focus of people towards future through use of behavioural economics. There is need to push informal sector in savings by awareness and attitude change.

 

The writer is a Kigali based economist and consultant.

 

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