Welcome to another week of financial learning. I believe we are all well and staying safe in these ‘abnormal COVID-19 times!
A wise man once said, there is never going to be enough money to save. Jack Benny, the famous entertainer, once said: “Try to save something while your salary is small; it’s impossible to save after you begin to earn more”.
The above quote has become my mantra anytime I stand to lecture on savings culture and its significance for the individual.
Developing a savings culture does not happen overnight.
We were all taught in primary school that culture is the way of life.
I want to expand this definition by adding that culture is something that we consistently do because we believed it was the right thing growing up.
The culture of savings tames instant gratification by deferring wants to future dates.
One writer said the world is never going to run out of things one can buy.
The benefits of having a savings culture, however, transcends beyond the individual.
It has an enormous effect on the economy and country as a whole.
Developing countries like Ghana and other African countries have been benefactors of the savings of developed countries. Why can’t we also emulate the same attitude to change our situation?
Economic growth is the primary goal of both developing and developed countries.
It refers to an increase in a country’s production or income per capita. Production is usually measured by gross national product (GNP) or gross national income (GNI); used interchangeably, an economy’s total output of goods and services (Nafziger, 2006)
The relationship between saving, investment, and economic growth has puzzled economists since economics became a scientific discipline.
Economics, as a discipline, is divided on the role of savings. Some economists believe that Saving is a personal virtue but social vice.
The assertion stems from the belief that if people start saving, expenditure will also go down.
According to a write-up by the Management Study Group(MSG), since the current system measures GDP and economic growth based on expenditure, a higher savings rate makes it appear like the economy is not growing. It may seem like the economy is about to enter a recession.
On the other hand, many economists do acknowledge that this GDP-based view of savings is incorrect.
They refer to the unanimity in all of economic history. No country in the world has achieved economic prosperity without having a high savings rate.
Right from the United States to China, any country that has reached the peak of global finance has been powered mainly by its high savings rate.
Therefore, Ghana should begin to see the economic opportunities of a savings culture and campaigns that have become the lonely path of a few individuals in Ghana – like my good self and the Paul Mantes and Hayford Kingsleys.
In general, a fraction of income is saved and put into an investment.
An exogenous increase in the desire to save leads to an unchanged level of saving but at a lower income level. If we define both saving and investment as the difference between gross domestic product and consumption, it may tend to be interpreted in terms of a cause-and-effect relationship (Jangili, 2011)
According to Bebczuk, 2000, an increase in savings may stimulate economic growth through increased investment.
Further empirical research by Alguacil, Cuadros, and Orts (2004) and Singh (2009) provided support for the hypothesis that increased savings promote economic growth.
High savings aids businesses
A savings culture in a country brings together a deposit base source for financial institutions to lend from and transact business.
Financial Institutions are intermediaries between people with excess funds(surplus) and those at the deficit end.
The major challenge in developing countries for the youth has always been unemployment. One of the easiest ways of curbing the growing unemployment rate in any country is by expanding the private sector. The private sector expands with capital injections, which usually come through financial institution support or investors.
We all agree that the private sector is the engine of growth; hence, efforts should be geared toward expanding – which has a ripple-effect on the economy.
For many small- and medium-scale businesses, loans from banks offer them opportunities to increase their sales and expand beyond their locality.
The financial institutions that support these businesses also rely on individuals’ deposits in the form of savings and investments.
The bank, therefore, acts as a ‘middleman’ by ‘buying’ deposits at a cost and ‘selling’ them at a markup profit to individuals who need it. The markup profit caters to procedural steps which come with the loan processing and their margin – i.e., administration and perfection of collaterals.
The more deposit they receive, the more available funds they have to sell in loans and advances.
Basic simulation of savings
Let us look at a simple simulation of how a meagre periodic savings culture as a people can boost the whole economy of Ghana.
Ghana’s population is estimated to be 31,072,940 as at the end of 2019, according to the Worldometer report. The country’s yearly population growth rate is 2.15%.
Ghana as a country has a total dependency ratio of 67.4% and 5.3% Elderly dependency ratio. A further breakdown of the dependency ratio shows the following:
Age Bracket | Dependency Ratio (%) |
0 -14 years | 37.44 |
15- 24 years | 18.64 |
25-54 years | 34.27 |
55-64 years | 4.44 |
The above figures indicate that we are offered a brilliant opportunity to inculcate the right savings culture in our citizens who are very young and teachable as a country.
Following up with the population demographics, I want us to look at a simple savings commitment and its ripple-effect on the economy.
If 10 million Ghanaians decide to save GH¢1 monthly, the financial sector will have a whopping GH¢120million deposit by the end of the year.
If 10 million Ghanaians after this article decide to save GH¢5 monthly, the financial sector will get a boost of GH¢600million in the form of deposits.
There are four legs of benefits when we decide to save GH¢1 or GH¢5 monthly.
- The individual who is saving GH¢1 or GH¢5 is developing a savings culture that has excellent benefits. With time, one will start to invest the savings in financial instruments for higher returns. The fund is also kept safely for that day of need
- The financial institution with the deposits boost will begin to lend the funds to Ghanaian small and medium scale businesses which need loans to expand. They will as an additional boost receive these loans at a relatively cheaper cost. The margins on the deposits and loans will lead to the banks recording good profit margins – hence, paying returns and taxes to government.
- Businesses which benefit from these loans due to the savings culture can also expand and increase their workforce. The workforce can be you, me, or a relative. The expansion will lead to high revenues and profit. Businesses will also, in turn, pay taxes and returns to government.
- As a social contract, government will also receive a lot of revenue to engage in infrastructural projects like road networks, schools and medical care – to mention few that we the citizens crave for. There will also be enough revenue to administer social intervention policies.
Developing the savings culture from the above illustration is a no-brainer. We have to follow it judiciously as a country if we want to make any headway.
A country with many people practicing financial mismanagement can never make enough headway to compete with the developed countries.
Ghana Beyond Aid starts with a Savings Culture. Advocacy groups that speak and teach on financial management and inclusion should be given the needed support to send the message to everyone, including those in the hinterlands.
Ghana extends beyond Accra, Kumasi, Tamale and Ho.
Savings Culture Now!!!!!
I wish everyone an enjoyable and memorable week!
The post Patrick Abankwa Baah’s thoughts…Economic effects of a savings culture appeared first on The Business & Financial Times.
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