news - Policy makers must promote a savings culture

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Policy makers must promote a savings culture
July 14, 2009

Nairobi, July 14 (Business Daily)-Virtually every forum on Kenya's failure to attract adequate investments and create jobs ends up with one lamentation: the poor culture of saving and the low investable funds arising from it.
With such a clear diagnosis of what ails the country's progress towards a medium income economy, it is surprising that policy makers have largely focused the quest for direct investments on external rather than internal benefactors.
The incentive structure appears to be heavily tilted against local investors despite their being a more reliable source of long term capital than foreign direct investors who are mostly fair weather partners in development.
It is this lopsided approach that has informed the enjoyment by export processing zones - whose linkages to the local economy are debatable - of tax holidays and concessions on labour practice.
This at a time when many informal sector operators and mid-sized agri-processing are groaning under the weight of high utility costs, poor infrastructure and a hostile regulatory regime.
The systematic muzzling of a savings culture and future enterprise starts at the opening of a bank account where one soon realises that a checking account is far much better than a savings accounts, on which so many restrictions are imposed with no commensurate return by way of a real interest rate.
The savings rate in Kenya hardly exceeds two per cent while deposit rates are in the four per cent range, about half of the prevailing Treasury bill rate.
When contrasted against lending rates in the 15 per cent to 20 per cent range, one gets the feeling that commercial banks are unfairly exploiting both depositors and borrowers in furtherance of the profit motive.
Banks usually blame the high cost of doing business in Kenya as well as the country's high political risk profile to justify the huge interest spread.
A valid question would be whether those two factors do not affect the market they serve, hence the need for compensation for savers and depositors.
On the demand side of the equation does it not amount to selective wisdom when banks punish borrowers with high interest rates for low cost deposits, limiting the ability of investors to borrow for new ventures and expansion?
With the diverse options in the markets - notably credit and savings co-operatives, - banks are increasingly finding it difficult to attract deposits and are being forced to revise the savings and deposit rates respectively.
But leaving a key factor in doubling the national savings rate from 16 per cent presently to the over 30 per cent needed under the Vision 2030 strategy to market forces will hardly wash.
Of more significance is that sluggish pace of reform in the finance sector is slowly eroding Kenya's strategic position as a financial hub for the region and the continent, a role that increasingly looks like it will be claimed by Nigeria.
Following tough measures taken by the West African country to enhance banking sector stability since 2003, well capitalised Nigerian banks are now scouring the continent for acquisitions and business opportunities.
For Kenya to travel the same path, there are a couple of leaves it needs to borrow from the Nigerian experience.
The first is that market forces apply best when there is a solid regulatory framework.
Short cuts or letting market players dictate the agenda as has happened with the quest for higher bank capitalisation in Kenya only blocks reforms that would benefit the economy more.
The second is that an invisible hand is needed to promote equity in financial transactions.
The country's savings needs will not be achieved through measly deposit rates doled out by commercial banks and lending interest rates that border on usury.
Monetary authorities need to ensure returns at all levels of the value chain are reasonably based on prevailing fundamentals as Nigeria has done by raising savings rates to four per cent.
Related to these is the need to stay true to the reform agenda, while injecting innovation as the situation demands.

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