African leaders have highlighted the need to mobilize domestic savings to support investment that will drive economic growth. However, as is often the case in Africa, progress in realizing many government initiatives has been slow. The increasing development and penetration of financial services provides hope that a few lofty ambitions can be accomplished. After several rounds of recapitalizing and consolidating the banking sector, the central bank reports that Nigeria now has almost 29 million bank accounts.
The regulator last April introduced a policy that effectively raised the minimum savings rate to 3.6% to increase savings in the country. It’s a move that hurt banks because it raises their funding cost. But are savers really winners?
From an early age, my parents communicated the value of saving for a rainy day but I think every African should question the wisdom of that statement. A savings culture certainly provided small opportunities to improve the quality of my life but in the school of wealth-making, the impact can be compared to drizzle and not rain on a cloudy day. The discipline of setting money aside gave me the opportunity to spoil myself with little things such as a special pair of shoes or an ice cream treat. The rewards were not life changing.
Apart from cases of inherited wealth, the richest people in the world got wealthy by either investing their savings in assets or in a business idea.
Savings do not make people rich because the returns on savings are almost always lower than the inflation rate. In most African countries, this gap is very significant. In Nigeria, where the bank savings rate is around 3.6% but the 3-year average for inflation is in double digits, many will argue that it makes more sense to spend savings as quickly as possible because the purchasing power of a saver is stronger today than in the future.
Investments offer a different wisdom. Over the last decade, Nigeria has generated mouth-watering returns to investors. From telcos to consumer goods companies, Africa’s second largest economy has made many rich. The financial markets have also provided some joy. Over the last decade, Nigeria’s stock market has provided an annual average return of 17.2%. Those that used debt wisely as leverage over this period, made even more returns.
However, many of these investments are out of reach for the typical middle class saver. This reflects the level of sophistication of the Nigerian financial market. Financial institutions must improve the product offering for investors because despite the level of poverty in the country, the potential to attract savers is huge.
The stock market only has around 5 million investors but according to a 2012 report by Enhancing Financial Innovation and Access, an independent financial sector development organization, 56.3 million people, representing 64% of Nigeria’s adult population, do not even have a bank account.
Financial institutions that create a model to encourage and mobilize savings from small scale farmers, who represent the largest group of working people in the country, and others in the informal sector will be big winners. It is estimated that over $7.6 billion is currently outside Nigeria’s banking sector. That is a figure that should capture the imagination of bankers, asset managers and financial planners.
The tough task will be finding a way to rake in the funds for investments.