Technology key to driving savings culture for growth

It’s an open secret that Kenya continues to grapple with a low savings rate. Total savings, as a share of the country’s gross domestic product, remain under 10 percent, which compares unfavourably to the world average of about 25 percent.

But why does savings matter?

For a country to grow sustainably, it needs capital to fund critical investments that can power the economy — build roads, bridges, rails, airports, dams and power generation infrastructure, among others.

Investment influences the rate of economic growth because, first, investment is a component of demand and second, it influences the productive capacity of the economy.

In fact, there is a body of literature, which has demonstrated that there is a positive relationship between savings and economic growth, especially in countries classified as low-income.

Consequently, the low savings rates call for policy intervention, specifically to address two structural problems (at the root of it).

First, real wages have not recorded stable growth over the last decade, in fact, real average earnings have posted negative growth since 2015. At the same time, final consumption, adjusted for inflation, has been rising. Essentially, as the cost of living rises, households have been living from hand-to-mouth, which has meant that, as a country, we are not saving.

Second, the market lacks enough innovative savings products to attract savings.

More than a decade ago, the share of commercial banks’ funding from savings as a deposit mobilisation tool was close to 20 percent of their total funding base.

That has since fallen to around seven percent.

Instead, the share of demand deposits (checking accounts) has grown considerably to nearly 60 percent, which serves to show that the economy, and its actors, has increasingly become too transactional.

This then calls for a paradigm shift in how savings are packaged and sold. For starters, the old model of savings where, at the end of each income cycle (usually monthly), you deposit money into a savings account, is gone, especially in an era where the mobile phone has become a wallet.

The old bank account savings model has lost its value proposition — in fact, I’m not even sure if people still open savings accounts anymore.

Consequently, to help jumpstart savings and enhance value proposition, there is an emerging conversation around the role of technology, whether it is through mobile or web-based platforms, or even artificial intelligence.

In early December 2019, Safaricom, the leading telco in Kenya, rolled out a savings product dubbed Mali (Swahili for wealth). Users were allowed to open a savings wallet and would earn interest of up to 10 percent per annum, essentially plunging the giant telco into wealth management.

While Safaricom has since gone slow on the product, the move provides a sneak preview into the future of savings.

Indeed, mobile platforms have been known to remove non-pecuniary costs such as transportation and administrative processes of account opening, which have been cited as one of the major impediment to savings and investments.

Further, mobile phone users have demonstrated high confidence and trust levels in their devices as compared to conventional financial institutions.

The case of Mali probably speaks to the fact that telcos may not be best suited to drive this agenda but their flagship wallets, such as M-Pesa, will provide critical plug-and-play services for other financial technologies (or fintechs) to plug in, through (revenue-share) partnerships.

It is a tripartite partnership that will also draw in financial institutions with their fund management capabilities.

Latest literature shows that fintechs have helped increase household savings, especially through widening financial inclusion.