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Role of Banks in Savings Mobilization

Sanderson Abel

The Zimbabwean economy has undergone tremendous changes in the last decade and a half against the backdrop of rapid de industrialization and informalisation of the economy. 

The rapid pace of transformation has created new demands as well as new opportunities for business. For the banking sector, the changes have called for a more effective and efficient provision of financial services in response to the new order. Among the changes that have been witnessed include; emergency of a diverse SMEs sector and of course, the emergence of a new crop of tobacco farmers all with a new appetite for different bank products. When properly harnessed, these subsectors are the potential sources of savings and growth in the economy.

Principally, the financial system, mostly the banks, aim to facilitate the effective use of funds,  be it from the new farmers or the diverse small to medium enterprises players as the new dispensation shows. The financial system is expected to act as an intermediary for all resources in the economy. The sources of funds are provided by savings in both the private and public sectors as well as by the net inflow of funds from abroad. They are collectively channeled through intermediaries such as banks. This intermediation function involves mobilizing resources by providing the means for savers to hold monetary and financial assets and at the same time allocating these resources for productive investment. Banks play a substantial role in mobilizing savings to promote investments and growth. This function of banks is very significant with respect to the an economy, where in banks predominate the financial markets.

The whole process of mobilizing savings by the banks hinges on financial stability. Stability of the financial system is vital to promoting the mobilization of savings and to facilitate the penetration of the formal financial system into the low and middle-income sections of the population. The savings mobilization process by the banks is a necessary precondition for a steady and balanced economic and social development too.

Once the financial system is not stable it becomes difficult to mobilize savings and the economy agents will keep their savings somewhere including under mattresses. If savings are stashed in or under a mattress, or otherwise not deposited into a financial intermediary such as a bank, there is no chance for those savings to be recycled as investment by the business sectors. This means that saving may increase without increasing investment, possibly causing a short-fall of demand (a pile-up of inventories, a cut-back of production, employment, and income, and thus a recession) rather than to economic growth. 

Financial resource mobilization problem is very linked with the savings problem. Financial sector mobilization requires an institutional arrangement which encourages and mobilizes savings on one hand, and which channels savings to mobilized into productive investment on the other. This whole process is underpinned by other factors such as the availability of liquidity in the whole economy, level of capitalization of the banks, range of products provided by the banks and other factors.

Commercial Banks through their intermediation role between savers and investors affect the volume as well as mobilization of savings, by providing the market with the diversification of instruments that will meet the precise liquidity needs of savers and at the same time making financial resources available to the investors over a relatively long-period in accord with their needs. 

Some of the challenges currently faced country is synonymous with the rest of the developing countries, can be general attributed to the intrinsic problem of inadequate savings capacity of the populace. It is also argued that the problems of promotion and mobilization of savings are caused; by inadequacies in the structure of financial markets and the density of financial intermediaries.  In our own case in Zimbabwe, the other challenge that deter the maximum mobilization of savings by the banks include the  hangover effects of the changeover from Zimbabwe Dollar to the multi-currency system where all the savings were by the populace were totally lost. It is encouraging that the Government is in the process of looking for a mechanism to repay all those who were holding the Zimbabwe Dollar accounts.

The country as a whole should understand that high levels of savings in an economy increase the amount of national resources and decrease the need to resort to foreign indebtedness in order to cover domestic investment and consumption demand. Numerous countries with low internal savings rates must borrow from abroad, which results in a debt service burden. This clearly underlines the importance of savings mobilization to sustain economic growth with national financial resources.

In the long term if saving falls below investment it eventually reduces investment and detracts from future growth. Future growth is made possible by foregoing present consumption to increase investment. However savings kept in a mattress amount to idle resources acting as tax to the economy as there are resources not being put to productive use.

The above arguments clearly underline the importance of savings mobilization to sustain economic growth with domestic financial resources. Domestically, the ability of the various economic agents to save is important to spur economic activity in the country. Any resources coming from outside the country should complement the resources set aside by the residents of the country. It is hence the responsibility of each and every citizen to develop a culture of savings and placing these savings in financial institutions.  On the other hand, the Banks should play their fiduciary duty and protect the savings of the citizens and provide reasonable returns in case the savings are placed in appropriate income generating accounts.

Sanderson Abel is an Economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. For your valuable feedback and comments related to this article, he can be contacted on abel@baz.org.zw or on numbers 04-744686 and 0772463008