Savings Culture: Is it purely an individual’s self determination, or a primary national goal?

Ebrahim K Ebrahim

Pension Researcher & Chairman of the Annual MENA Pensions Conference

In continuation of my series of articles on the economics and management of savings and benefits.

My middle-class Bahraini friend says his wife buys around 60 items of new clothing each year, including perfume and accessories — more than one per week. Of course, women don’t need that many new clothes, yet they buy them anyway. Likewise, my eldest son has more sandals and shoes for work, football, basketball, gym, and casual wear than his 6-feet-high cabinet could take. Other cases of excessive spending and debts involves defaults, losing one’s home and sometimes ending up in jail. Why?

Well, much to our life frustration, most of us have been brainwashed by our consumer culture to over-consume. Worse, over time this hyper-consumption has become part of our identities. Our values, attitudes, habits, and practices reflect this culture of addiction. Our life is fully immersed into consumerism. The consumer debt in the six GCC countries is almost in excess of $100 million a day. This stark figure sometimes excludes mortgages. A high rate of personal debt like this is troubling for the economy, because retail debt generally does not lead to economic growth.

So, what’s the thing that builds growth and the economy then? That’s a no brainer, surely. It’s the opposite side of personal finance – a savings culture. A low or moderate rate of savings limits the country’s rate of investment, restrains its rate of economic growth and makes it vulnerable to international capital flows. In the long run, the level of national output depends not on demand (consumerism), but on the capacity to produce and export as much as possible. The capacity to produce comes primarily from investment, especially if it’s in the local economy. Experience around the world reminds us that countries with high rates of capital accumulation are the ones that grow more rapidly, and that a high level of domestic savings is imperative for the growth of capital market. Experience also indicates that cross-border capital flow in excess of 4 to 5 percent of GDP for more than a few years is very unusual. You can’t always depend on the outside and the complexities that it brings with it. Hence, only a country with a high domestic savings rate can maintain a high investment rate. Hence the savings power.

So, what are the GCC countries doing about savings? Which institution is shouldering this responsibility today? Central banks manage monetary policies, report on sovereign and institutional debts and monitor banking, insurance and investment businesses. Who is assessing the health of the public/ personal savings rate in the region? Is this something that can be totally left up to the individual behavior? Who pays the cost if the individual financial behavior isn’t sensible? Almost certainly, it won’t be that individual alone. It will be the government and tax-payers - as of now we can speak of tax-payers in the GCC.

Obviously we need a higher sustained level of domestic savings, and not debts, if this region is to fulfill its potential for higher real income and greater standard of living. Increasing the rate of saving is an important economic priority for our countries. A cohesive package of policies could be considered by governments to stimulate a higher rate of saving. As successfully implemented in several developed markets, these ideas concern largely the following: tax environment, financial regulation, government debt management, and a new system of retirement saving accounts.

Favourable Tax Environment Should Shine

Till today, there is no tax on investment income at both individual and corporate levels – implicitly meaning the economic system favours income over consumption. When there is no tax on corporate profits, this increases the rate of return available to savers. The fact that there is also no capital gain tax enhances the allocation of business investment and the overall return to savers. The same favourable tax treatment applies to housing too. So, much of the structure of GCC economies should already be motivating personal savings (which is why most of working expats like it here). However, if these are not resulting in an adequate rate of savings today, then more work is definitely needed. Creating a savings mindset is clearly a first imperative; but also putting in place some policies that specifically drive personal savings and provide a discipline on savers is a MUST. The introduction of an individual savings plan/ account at a national level with attractive, differential treatment associated with tangible perks (premium government services, tax exemptions, higher pensions, etc.) can be the next step.

Financial Regulation

Today banks and providers promote savings by a variety of products even with small balances. However, some reforms could stimulate additional saving by increasing the reward for saving and liquidity of saving deposits. Most deposits and fixed-income assets have a very short duration. The absence of longer term assets makes it impossible to obtain fixed long-term real returns. Individuals might be willing to save more if they could invest those savings in longer term assets with attractive real return.

Furthermore, we should, by regulation, restrain banks’ lending to give large amount of credit to consumers in the form of credit cards, mortgages, etc. by introducing higher capital requirements on banks providing consumer loans, hence restraining their overall use. And on the contrary, small savers should be encouraged to open saving accounts by reducing the required minimum balances and providing them with some sort of meaningful return – this is so vital if there is a public policy goal to increase savings.

Government Debt

A government can manage its debt in ways that can contribute to higher personal savings by providing assets that make savings more attractive. Similarly, it can encourage private issuers to initiate securities that households are comfortable with, such as what Bahrain Bourse has done in recent years by allowing locals to subscribe to bond issues for as small as BD500 ticket.This gives small retail clients access to a relatively safe and high-return investment that until recently has been the exclusive domain of large investors with a minimum ticket of US$200,000. This is a small example from which a bigger and more significant learning can be drawn for the wider GCC government debt industry.

Knowledge is Power – become your own CFO

Savings and long-term accumulation are socially conditioned forms of behavior. Individuals learn how to save by watching the behavior of their family and those around them. Programs and campaigns to educate people about the benefit from savings can change the attitudes and raise national savings rates. The fact that personal debt is skyrocketing in the GCC is because banks are armed with investment and marketing folks who are always motivated to make it super easy for us to buy extra credit cards, take another car loan and increase our borrowings even beyond our financial means. On the other hand, average people simply do not have the knowledge on what’s financially benign and what’s morbid! The only way to empower consumers to face and filter out the scam is by increasing their basic financial knowledge. Who is genuinely and consistently advocating and nurturing financial literacy in the region today? Simply no one. Financial authorities are single regulators – largely busy monitoring the compliance of their licensees – and are not necessarily specialists in the topic themselves. Private sector? Maybe but they can only do a bit, as they are often obsessed with their core business. Single examples can be cited by the Saudi Capital Market Authority’s launch of a financial literacy program for children in 2011, the UAE Emirates Foundation’s launch of financial literacy study in 2012, and Bahrain Bourse's 'Smart Investor' and 'Trade Quest' that are growing in popularity.

However, these remain as adhoc efforts, lacking focus, rigour and sustainability. If you are to increase the rate of savings and investment and make that a primary national goal, you’ve got to have the tools and mechanisms to manage it – i.e., institutionalise the savings environment and give it clear mandates. That’s how high-saving countries have succeeded in recent years!