T wo aspects of our economic environment that weigh down on growth are the huge (effective) share of indirect taxes in tax revenue and the second is the declining contribution of national savings to national development. Instead of fueling growth, savings are largely recycled by banks to serve government’s fiscal needs.
SAVINGS AND INSURANCE
The concept of life insurance has evolved from a primary emphasis on conventional insurance protection to a relatively advanced form of a savings product. Life insurance products enhance the role of insurance in an economy by helping in the: (1) mobilization of savings; (2) development of capital markets; and (3) facilitation of the pension system. Specifically, by entering into life insurance contracts, individuals or groups of individuals can save and invest effectively for long periods of time. Life insurance companies pool the periodic premium payments into huge investment portfolios of long-term securities, which in turn provide a stimulus for the development of the capital market. Also, the introduction of attractive pension products partly shifts the role of the government for pension provision to the private insurance sector.
SAVINGS AND CAPITAL MARKETS
A vibrant and robust capital market has a pivotal role in the economic growth and development of a country. There is strong evidence that economies with large stock market capitalization to GDP ratio fare much better as compared to economies having low investment to GDP ratio. A prerequisite to the growth of investments is the level of domestic savings and access to supply of tradable stocks and bonds.
Pakistan has a robust capital market infrastructure and adequate regulatory framework. Pakistan Stock Exchange is still amongst the best performing stock exchanges in the world. However, the capital market capitalization and investment ratios are low. For growth of the capital markets, Pakistan needs to promote domestic savings; foreign investors can only supplement the growth.
SAVINGS AND MICROFINANCE
Savings is a key part of the poverty-reduction agenda. The microfinance industry has been successful in opening mobile accounts, but has yet to make these accounts active. The microfinance industry has had healthy growth in Pakistan, but now needs to grow exponentially if it is to become a major player in addressing financial exclusion and poverty. Apart from microfinance, agriculture and small business are critical sectors in Pakistan’s economy that play a significant role in job creation and poverty reduction.
SAVINGS AND REMITTANCES
Owning a savings account is the first step toward what many authors and institutions term “financial democracy.” Developing practical savings plans encourages migrants to use remittances toward productive purposes that contribute to development. Banks must focus on designing mechanisms through which remittance clients can save in a formal system linked with remittances and development-enhancing products. Remittances saved formally are an important component of investment financing.
Converting remittance clients into banked “individuals with savings accounts and other financial products” is crucial to leveraging remittances for development. Benefits of formal savings plans include a more secure mechanism for saving, interest-earning potential, increased collateral for loans, development of a credit history, and an established relationship with banks. Banks are much more willing to extend credit to clients with whom they have had a long-term professional relationship. This credit can then be directed toward productive rather than consumptive purposes. For example, “expatriates have expressed interest in channeling the 30 percent of remittance money not spent on consumption into housing loans, micro-business investment, educational expenses, savings, and health/life/repatriation insurance. The ability of expatriates to leverage loans for these purposes, however, depends first on their ability to save a portion of total remittances received – usually in formal banking systems.
The primary methods through which remittance clients are attracted to these types of services are diaspora outreach, community events, hometown associations, advertising, and, most of all, word of mouth. However, progress toward enticing immigrants into the formal banking system has been slow. While many banks are offering more innovative transfer services, they have been sluggish in developing financial products like savings plans that are attractive to the remittance client demographics. Banks that have been successful in developing savings plans for remittance clients, however, have offered incentives and customized their products for this clientele in mind. Savings that are deposited into formal bank accounts can therefore be directed toward asset building loans that advance development objectives.
SAVINGS AND REAL ESTATE
One of the reasons for the underperforming housing sector in Pakistan is the high cost of living in cities and consequently savings at low income level are negligible or non-existent. Unless lower middle-class people get access to home loans, there will continue to be a problem with the construction of new properties for this lower-tier segment. It is a vicious circle; people can’t get home loans so they can’t even buy low-cost affordable houses and demand remains low for cheaper housing schemes to be built, developers remain reluctant to instigate a new budget residential project as they fear that many units will not be filled.
SAVINGS AND WOMEN
Despite low or irregular earnings, women tend to save 10 to 15 percent of their income for various short and long-term goals. In the absence of any formal savings vehicles, women will often save through methods that are risky, volatile and unreliable, such as ‘under the mattress’ or through neighborhood savings groups. Women are forced to rely on these methods due to the barriers they face in trying to access safe spaces to save their money, such as a lack of financial literacy, lack of mobility or high costs of opening accounts.