When one looks at Rwanda, one can see there is plenty of money swilling around but there is a need to develop a savings culture. We have gone through the initial phase of nouveau riche spending, now we need to take stock. In order to develop a savings culture in Rwanda, we will need to take a three-pronged approach. Firstly on a national policy level, secondly the banks need reform, lastly on an individual savings level.
In Rwanda, property is still the main investment vehicle, this is driving land prices to sky-rocket as speculators take loans to buy vastly appreciating land.
A market crash will leave thousands of investors in debt, unless they diversify their investment portfolio. What mothers say is true “do not put all your eggs in one basket” limit the risk by spreading it across several sectors.
Our government has to reward savers with more incentives, such as tax breaks, higher interest rates, guaranteeing all savings held in our banks, and generally rewarding savers as opposed to borrowers.
As a nation, we need higher banks deposits to stabilise our currency and reduce inflation. The insurance companies are key to this, Sonarwa, Corar, Soras, and the banks have got to be persuaded to invest their premiums in investment vehicles in order to underpin the savings market.
The banks have got to get past their basic function of deposit and withdrawal; right now they have 80% of frontline staff struggling to deliver basic services, hence the long queues.
A more efficient gate keeping system would free up staff to deliver more extensive services, and develop a customer-based mentality. The banks have to increase the interest rates they give to long-term savers, if you owe them money then they can charge you 18% and yet they will give you only 6% interest if you are lucky.
Then there is the most important part – you the saver, people have to undertake a personal decision to save long term. The first step is financial literacy, do not be blinded by the big words and abbreviations, be informed.
Even in highly-educated countries you find cases of ignorance, 33% of Australians did not understand the concept of compounded interest in a survey taken recently.
The benefits of saving are numerous, and Rwandans needs it more than most.
Financial position – it improves your financial position in the short-term, reducing your outgoings. The first step is creating disposable income by prioritising your spending, cutting out unnecessary expenditure and accumulating this money.
It gives you protection – we live in a country where a relative can suddenly get sick and you will need money. Have life insurance, a family health plan and an emergency fund in order to protect your investments and savings from sudden shocks.
Tax planning – tax is often the biggest single slice off the household budget, it is both beneficial to the government and citizens to have tax breaks for savings.
Any income lost to the Revenue in income tax is reconciled by capital gains tax and eventual tax on spending. Trust funds, educational funds and charities are a good way for people to reduce tax while planning for the future.
Investment for goals – having a long-term goal is essential in developing a personal savings culture. We all have goals we want to achieve, be it educating our children or buying a new car.
Retirement savings – this is something most people put off until it is too late, it should be started the minute a person starts work. A person saving $1,000 a year into a pension will only have around $60,000 after compounded interest to live on for some 20 years of retirement.
So one should save above the minimum premium, in order to retire securely.
There is a need to restrict spending with higher taxes and import tariffs, but we also need the carrot of higher interest rates for savers and tax breaks for savings.
Our current consumer boom might all be for nothing unless we stop buying disposable useless goods and create a disposable income to invest. Next week we talk about risks in investment.