Bedrock of financial intermediation

Sanderson Abel—

Policy consistency and predictability entails compatibility and uniformity of course of actions by all stakeholders so that it can be correctly and efficiently followed by all of them without creating a conflict. The two are important in achieving economic coherence and for decision making by the various economic agents in the economy more so in financial services sector.Financial intermediation is the process performed by financial institutions of taking in funds from a depositor and then lending them out to a borrower.

The banking thrives on the financial intermediation abilities of financial institutions that allow them to lend out money at relatively high rate of interest while receiving money on deposit at relatively low rates of interest. In the course of financial intermediation, financial institutions are governed by a number of policies and guidelines promulgated by the regulators while at the same time impacted by those that are meant for the various sectors and economy wide policies.

In this instalment I dwell more on why policy predictability is important for the mobilisation of savings in an economy.

As a first step, policies that are meant to grow the economy are a must for the mobilisation of savings. Literature shows that there is a positive correlation between savings and economic growth which entails pro-growth policies are a necessity for the mobilisation of savings.

In light of this macro-economic fact, there is great need for the Government to put in place measures that will increase economic. The Government needs to pursue overall macroeconomic policies that provide for a stable economic climate, thereby fostering confidence among all economic agents who will become incentivised to increase their propensity to save.

National savings consist of private and public savings. Private saving includes saving accumulated by households and businesses. Public saving are those of the Government which are achieved through their budget surpluses.

If national savings are so important, then how can we increase national saving? This is a particularly hard question to answer. The trouble is that one policy might increase household saving, but at the same time reduce business and Government saving. Increasing national savings hence requires a proper policy mix devoid of policy reversals and contradictions.

Savings are important as they allow economic agents to accumulate funds for making investments in their businesses or covering shortfalls in operating cash flow.

Saving empowers poor individuals by shifting the saver’s perception of his or her situation from “a day to-day struggle to survive to a longer-term view based on planning with a growing cushion of savings”. These can also be thought of as the change in the wealth level or the change in assets held by individuals less the change in liabilities. As saving levels increase, so does the stock of wealth. This increase in the stock of wealth means that individuals are able to finance a higher level of consumption than before.

Role of policy in national

savings mobilisation

Under the current situation where the economy is experiencing stunted growth, saving enhancing policies are important.

It is very important for the economy to forego current consumption and save instead for future economic development.

To have more machines, we must produce capital instead of consumer goods. To get more human capital, we must build schools and not use our resources to produce consumer goods. To create more and better technology, we must devote resources to research and development, not to the production of consumer goods.

We just have to save, if we are going to make progress in lifting the standard of living of the citizens of the country. But, as each of us knows, saving is hard because it requires patience and sacrifice. What this means is that we save today, and these resources are used to produce machines and other capital, which will be used later to produce the goods we intend to purchase in the future.

Research has proven that there exist a negative relationship between savings and fiscal budget deficits. This implies that the amount of savings falls when the amount of budget deficit increases. Since the early 1980s Government has run a deficit on its budget. The reasons for this have been sluggish revenue growth and rising recurrent expenditure. The Government should aim to reverse this situation through improved revenue realisation and controlling expenditures so that it makes a net positive contribution to national savings. It is import to note that the private sector takes a cue from the public sector hence efforts by the public sector towards improving the savings will be complemented by the private sector.

The 2017 National Budget Statement due in the next two weeks presents an opportunity for the Government to implement saving strategy. Tax incentives to encourage higher rates of private individual and institutional savings as outlined in the national budget are a move in the correct direction.

In the 1980’s and early 90’s building societies issues PUPs which was a common way of saving and these attracted a lot of interest from the banking public as they offered a better return in the market. Fiscal initiatives to increase savings are welcome. The Central Bank could complement the fiscal policy measures so that the national savings targets can be achieved.

This would push the economy towards the Zim-Asset targets that guarantees growth in the short to medium term.

Economic growth is important because it is the channel through which incomes in the economy can grow.

In the present environment, the Monetary Policy should assist in reduce deflationary pressures as it constrains savings.

Policies that enable more money to be saved or channelled through the banking system are the responsibility of both monetary authorities and financial sector stakeholders.

It can all be summed up in that the best strategy for national savings mobilisation is dependent on sound, stable, and credible macro-economic policy rules which will let businesses and consumers plan rationally for the long run. The policies should be both predictable and consist to allow economic agents to make long term decisions.

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 [email protected] or on numbers 04-744686 and 0772463008