Reluctant savers

Standard Chartered conducted a saving pattern survey of emerging affluent consumers in eight markets of Asia and Africa including Pakistan. The findings of survey at home resonate with the dismal savings culture at broader economic levels.

According to the Race to Save Report, emerging affluent consumers in Pakistan (pre-tax income ranging from Rs40k-Rs500K per month) save 14 percent of their income. The domestic savings in Pakistan were 8.3 percent of GDP in FY16, while the national savings are at 14.6 percent of GDP. This column has repeatedly argued that the low aggregate savings of the country is the biggest impediment in attaining requisite investments; moreover, the country often relies on foreign savings in periods of high growth.

A look at GDP by expenditure shows that 91.8 percent of nominal GDP is due consumption with private consumption standing at 80.1 percent. This is too high a number for an economy that is in search for its lost high economic growth path. This also helps in explaining why the balance of payment crisis emerges every now and then to threaten the economic recovery in the country.

It all boils down eventually to individual preferences and choices; the survey has tried to portray the picture of individual behaviour, and from the looks of it, the irrational and unorthodox savings patterns of emerging affluent is alarming, which should jolt policymakers to look into ways to mend it. Thank you SCB for opening up an avenue of constructive debate!

According to the survey, half of the participants prefer to store cash at home in Pakistan against 15 percent in India and 2 percent in Kenya. These are mind boggling statistics; in the age of technology with bank branches and ATM machines virtually at every nook and corner of mega cities, why someone who has easy access to digital banking would keeps the savings as cash. Is this because of trust deficit between savers and bankers? Are savers fearing tax man catching them? Is it the religious constraint to not keep money in a bank? Do savers prefer to keep savings in foreign currency? Are interest rates too low to lure savers? Do technological interventions lack innovation? Or understanding of simple saving products even by the educated lot is low?

The SCB Wealth management team is keen to probe further into the issue and have plans to expand their study scope to dig deep into the matter of reluctant savers. They think that the timing of study matters as due to decades-low interest rates, the emerging affluent consumer is not keen in saving money; rather, they prefer to spend - 28 percent of Pakistanis prefer to spend their income over savings.

That is not the recipe to move up the ladder. BR Research agrees that timings are not right for savings; but it might not just be the low interest rates that are deterring a savings culture; it’s more of a fear of the tax man, and higher transaction cost of banking for non-filers. Since July 2015, right after the imposition of tax on banking transaction, currency in circulation shot up.

CIC is the money that goes out of the banking system - analogous to keeping cash under the mattress. In FY16 half of the broad money created, went to bank deposits, while the other half was kept under the “mattresses”. The finding of the survey mirrors the aggregate actuality.

The good news is that the trend of CIC abnormal growth is being arresting now; as money is eventually getting back to banking system. The survey was conducted in Nov-Dec 2016; a fresh survey this year might have different outcome on this count. Nonetheless, historically one forth of money goes out of banking system. Hence, a fraction of emerging affluent consumers who keep savings in hand would remain higher than eight countries average of 11 percent.

The other anomaly is that there is not much savings routing to higher returns yet less risky assets - for example savings in mutual funds is chosen by 4 percent of respondents in Pakistan, as against 24 percent of Indians. Similar are the stats on stocks/equities and fixed income securities.

The need is to educate people on the risk return matrix of mutual funds and other investment avenues in simple words. The logical step for SCB is to use its resources to develop tools to inform emerging affluent on wealth management solutions. Other banks and PSX should join hands to conduct seminars and use electronic and social media to create awareness on deploying savings in various asset classes.

People are not motivated to save as the returns are low on risk free assets, while the perceived risk is too high for sophisticated products as the retail network of mutual fund and banks’ wealth management industry is thin. The need is for technological interventions to reach all the potential savers. The mobile wallets are in the infancy stage, and they have to grow fast; on the other hand, fin-tech companies should start thinking of providing wealth management solutions. For example, Kenyan government has a digital bond for small saver. Pakistan should follow suit.