NationalVOLUME 16 ISSUE # 07

Pakistan’s low savings rate

It is no secret that Pakistanis are not good savers. Our savings rate is one of the lowest in the world. According to the latest report, the gross savings rate as of June 30, 2020, was recorded at 8.4 per cent. The rate is much lower when compared with other South Asian countries. India has a savings rate of 29.44pc, Bangladesh 24.75pc and Nepal 36.2pc. But this comparison does not present the whole picture.

But the official savings rate does not reflect the true picture on the ground. Pakistanis save but not with banks as the medium of savings offered by them does not meet their needs. The truth is that Pakistanis don’t save within the formal system but outside it. It is estimated that 23pc people save via the committee mechanism, 16pc in gold and another 11pc through livestock. If we could institutionalise these savings mechanisms, provide a better return and simpler banking mechanisms, the savings rate would go up substantially.

It may be relevant to point out here that in our society the “committee” system is an informal mechanism through which groups of people, friends and relatives save. The committee system is popular because it does not require a bank account and is without any interest component. To exemplify, say, ten people get together, each contributing Rs 1,000 per month for 10 months. Every month there is a pool of Rs 10,000 which one individual gets on the basis of a lucky draw each month or according to a pre-arranged order of priority. This is purely a cash transaction as each member contributes Rs1,000 in cash and it is unlikely that the monthly Rs10,000 recipient deposits the amount in a bank account. The recipient of the amount spends it as per his or her needs.

According to a Gallup survey, 64pc of those interviewed stated that they save in cash. This conclusion is further strengthened by the fact that Pakistan also has the highest currency-to-deposit ratio, namely 36.2pc in the region. Experts say that the problem of low savings can be tackled by bringing the huge cash in circulation into the formal economy. It is estimated that if the cash in circulation is reduced by Rs1tr, it would lead to a Rs3tr increase in the national deposit base due to the bank multiplier effect. In order to bring Rs1tr cash into the formal economy we will have to develop new strategies.

One way is to digitise the process of savings through the committee system. That is, instead of 10 individuals meeting or one individual collecting the funds, all 10 download an app which caters for the service. The app allows them to instantly open a mobile wallet by simply sending an SMS. It populates their account though either linking an existing bank account or depositing cash at any of the 90,000 branchless banking agents. It will also allow them to transfer money in real-time to an individual who is that month’s beneficiary. The beneficiary can then use the funds to make an online utility bill payment, pay school fees or physically withdraw the funds from a branchless banking agent.

Another approach can be to create a platform where all of the services are provided with one major addition. The platform provider underwrites the performance risk of the committee members. Through the system 10 people in 10 different cities, who do not know each other, can participate in a committee to save. The platform provider, using advanced credit underwriting techniques, guarantees that each individual will pay their contribution for the duration of the committee. In this version, the underlying personal credibility of individual members which ensures monthly contributions is replaced by the guarantee of the platform provider.

Pakistanis are also known to have savings in gold. Pakistan in the last fiscal year imported 273kg of gold, worth $11.9 million which translates into billions of rupees. About 99pc of gold imported is converted into jewellery and used as ornaments as well as a medium of savings by families, especially women. The annual consumption of gold is estimated at 150 to 170 tonnes. Most gold transactions are in cash and are outside the formal economy. It is possible to formalize the transactions through an app that provides for fractional gold purchases and sales of very low value and instant liquidity. Such an app will allow for purchase and redemption through a bank account. A solution like this would bring the ability to save in gold on a fractional basis as well as provide liquidity, transparency and security and thus bring cash transactions into the formal economy.

The government can also encourage the general propensity to save by offering higher rates of return on long-term deposits through the National Savings Schemes which are otherwise popular among the public, especially retired persons. Needless to say, it is only by increasing the savings and investment rate that we can achieve stable and sustainable growth.