ECONOMIC FORUM : The critical determinants of Rwanda’s savings model

Financial development is yet another critical determinant of the success or otherwise of a savings mobilization strategy. Rwanda’s financial development was shaped and defined by our colonial legacy like in other African economies. Banks and other financial institutions were set up in urban areas to finance export trade which was the main objective of colonial economy. 

Financial development is yet another critical determinant of the success or otherwise of a savings mobilization strategy.

Rwanda’s financial development was shaped and defined by our colonial legacy like in other African economies. Banks and other financial institutions were set up in urban areas to finance export trade which was the main objective of colonial economy.

After independence however, there was no strategic initiatives to change this misplaced and rudimentally financial set up, except to change  names of colonial financial institutions.

This system was also characterized by many missing financial market, so much so that, calling it a financial system, was an under estimation of such vital institution of economic development.

As pointed out in the previous articles, financial development is so critical to economic development, that all known development models have espoused various forms of financial paradigms to spur the growth of various economies.

Recent financial crisis and its impact on global economy, was, but a reminder to policy makers of the role of financial development in economic development. If there are any lessons learnt by developing economies from this financial crisis, the most important would be to design measures to ensure development of their financial structures and systems, lack of which has only served to keep such economies at the mercy of developed financial systems and their economies.

Financial history is clear, with regard to the path of financial development. No financial systems, has ever evolved on its own. Most were designed by the state, which was to privatize them later on.

State intervention in economic development of various economies is well documented. Singapore, which has seen miraculous transformation was characterized by enormous state intervention, from financial development, to industrial development, even to fish and pig farming.

This changed only recently, when these were privatized. Expecting the private sector a lone to spearhead economic development, is over assumptious model than is yet to work any where.

State leads. State guides, and state implements what can then be transferred to private sector. Period. The logic of such state induced model of development is simple if one bear in mind the risk averseness of the private sector, and its inability to venture into un chattered territories of development.

Nonetheless, financial development influences an economy’s savings performance by increasing the availability of savings instruments, which are capable of intermediating savings.

Financial development improves the quantity, a well as quality of financial intermediation and portfolio choices available to savers, and this in itself may induce  growth in savings, assuming that, other macro economic fundamentals are in place,.

Financial Intermediation in Rwanda

According to one of the fathers of economics; Goldsmith, financial development is defined as a fundamental change in the country’s financial structure, designed to achieve the following objectives: increase domestic savings, improve efficiency by which savings are allocated to both public and private sector economy, broaden the base of ownership of real and financial assets, ensure availability of long-term financial resources, whilst simultaneously minimizing the risk associated with financial instability by lengthening the term of the financial services available through financial institutions, improving operational effectiveness of financial institutions, and improve the terms under which foreign funds are raised.

The level of financial development in a country is measured using the Financial Interrelation Ratio (FIR) which captures the ratio of financial assets to national wealth (GDP).

Accordingly; a higher FIR (greater than unit) is indicative of a developed financial system. On the other hand, a low FIR ratio (less than one half) indicates an economy in early stages of her financial development.

Rwanda’s Financial Structure:

Using FIR as a measures of our financial development, our country gets the lowest ranking of any country in Sub-Saharan Africa at 0.02 or 2% (our financial assets measured against our GDP) against Sub-Saharan average ratio of 0.17 or 17%.

Thus, financial development and by extension financial intermediation in our country, like our savings rates, are a disaster to say the least.

But this has policy implications. Our savings mobilization strategies will have take cognizant of the absence of, or limited intermediation mechanism posed by our under developed financial system.

Much as these strategies are likely to succeed, albeit under very difficult conditions posed by many missing financial structures and instruments necessary for the success of our savings mobilization, especially because of our political will cited in earlier articles.

We nevertheless have to address serious weaknesses in our financial system, if it is to sustain our savings mobilization strategies.

Although our political will has been a very important asset in all our national undertakings, it can not be a substitute of a financial institution in our case. Ideally, it should serve to reinforce it.

What all this implies is that, we should redraw our financial structure, and measures put in place to develop the same, if we are to succeed in sustainable savings mobilization process, as well as our over all development.

There is no known substitute for financial development as means of facilitating savings mobilization, and more so, for the over all development of a country.

A national financial strategy that defines which institutions, markets and instruments (these change with demand and financial engineering/innovation in place) that are necessary to fill our missing financial markets, is imperative.

This strategy should also specify timelines against which the desired financial structure should be in place. Leaving it to market forces is not the best option, for these forces will only work if parties behind them so desire, and this may not necessarily be in national interest, at least for savings mobilization, as it is for our overall sustainable growth, and development.

Ends

Have Your SayLeave a comment