Importance of formal banking system

Sanderson Abel
One of the most common opinions that have been put forward by various stakeholders since the inception of the multi-currency regime is that the banking sector has not been playing its role of attracting savings to the formal system adequately.
One of the common drawbacks highlighted by the banking public is that the banks are perceived to be charging exorbitant bank charges, leading to the clients being worse off and deserting the banking system.

In this article I would like to try to clarify a few aspects that are important for the public to know with regard to the savings accounts that they have with their banks.
Saving is simply defined as taking resources away from current consumption and allowing them to be used at a later date.

Such savings are then aggregated by banks and other financial institutions and translated into investment. This is the intermediary role of banks. Investment is the purchase of equipment, machines and the financing of improved ways of doing things, which ultimately raises output and incomes.

For example, investing mobilised savings in farming can help farmers buy higher yielding seeds, and fertilisers that improve their land and raise crop yields. They can also diversify and start to grow a wider range of crops, rear animals and start other businesses that support the farming enterprise. In the manufacturing industries, investment allows firms to build better factories and employ more efficient machines and methods of production.

All this can be made possible if people’s savings that are reportedly sitting under mattresses are deposited with banks.
Banks and other financial intermediaries play an important part in this because they mobilise the savings of individuals and lend the money to productive firms and enterprises. The money the banks earn from the loans allows them to pay interest to their clients, so everyone benefits. Commercial banks through their intermediation role between savers and investors affect the volume as well as mobilisation 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 accordance with their needs.

This is why one finds that the most common type of bank account is the savings account. Savings accounts allow you to keep your money in a safe place while it earns an amount of interest each month.

These accounts usually require either a low minimum balance or may require no minimum balance at all. This depends on the bank <http://money.howstuffworks.com/personal-finance/budgeting/bank.htm> and the type of account. Some savings accounts offered by banks require the money to be deposited for a minimum fixed period of time at a fixed rate of interest.

The bank pays you interest on the money that you deposit and leave in that account. In the meantime, the bank will loan that money out to other people, only they charge a slightly higher interest rate on the loan than what they pay you for your money. It is important that you discuss with your personal banker every time you want to make savings for a long period of time so that they can advise you on the type of investment to place your funds and the likely return. For instance, keeping your money in an ordinary savings account will not earn you a higher return than saving in a Fixed Deposit Account.

In your discussion with your banker, there is need for you to be clear on certain things. You need to ask yourself; what am I saving this money for? How long can I leave this money in an account? When will I need the cash? This process is very important because different savings products carry different advantages, timelines and interest rates and of course account maintenance charges.

There is need to be sure of getting the savings product that will meet your needs. Deposit rates are quoted depending on the types of savings and the amount being saved and the period of the deposit.

Those savings of long tenure are paid high interest rates as compared to demand deposits. At the moment, the savings deposits with Commercial Banks are attracting interest rates of between 0,15 percent and 8 percent while three months deposits are attracting interest rates of between 3 percent and 20 percent. Generally, larger amounts will also attract higher rates of interest.

Besides the fact that you will be less likely to spend <http://science.howstuffworks.com/life/brain-shopping.htm> it, putting your money in a savings account is safer because it is insured.

If you keep your money in your home and your home is robbed or burns down, your money may be lost forever. Banks on the other hand, ensure that your money is very safe. Banks are required to insure all the deposits they hold through the Deposit Protection Corporation.

This means that even if the bank goes out of business a certain proportion of the savings, up to a maximum of $500, will be paid out by the DPC. Bank clients are hence guaranteed of $500 upon the collapse of the institution while the remainder is paid out through the process of liquidation.

Let’s remember that banks at law have a fiduciary duty. It is the duty of the bank to protect the savings of the citizens and provide reasonable returns in case the savings are placed in appropriate income generating accounts.

A fiduciary must avoid “self-dealing” or”conflicts of interests” in which the potential benefit to the fiduciary is in conflict with what is best for the person who trusts them.

For example, a banker must consider the best investment for the client, and not buy or sell investments on the basis of what brings the highest commission for the banker.

Based on the fiduciary duty of the banks, there is need for the stakeholders to have utmost faith in placing their savings with the banks.

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.