Saving takes resources away from current consumption and allows them to be used for investment. Investment is the purchase of equipment, machines and improved ways of doing things, which can raise output and incomes. Investment allows people to pay for better ways to do things.
They can invest in better tools and equipment to raise their productivity.
They can buy higher yielding seeds, fertilizer and improve their land so that crop yields rise.
They can also diversify and start to grow a wider range of crops, rear animals and start their own businesses.
In the manufacturing industries investment allows firms to build better factories and employ more efficient machines and methods of production.
Banks and other financial intermediaries play an important part in this because they take the savings of individuals (surplus units) and lend the money to firms (deficit units).
The money the banks earn from this financial intermediation process should allow them to pay interest to savers, so that everyone benefits.
Commercial banks through their intermediation role between savers and investors affect the volume as well as mobilisation of savings, by providing the market with the appropriate diversity of instruments that will meet the precise liquidity needs of savers and at the same time making financial resources available to the investors over a relatively long-period in accordance with their needs.
One of the most common arguments that has been put forward by the various stakeholders since the inception of the multi-currency regime is that the banking sector has not been adequately playing its role of attracting savings.
Some of the common drawbacks raised by the banking public is that the commercial banks are charging exorbitant interest rates and excessive bank charges leading to clients being worse off.
In this article I would like to try and clarify a few aspects that are important for the public to know with regard to the savings accounts that they have with their banks.
The most common type of bank account is a savings account.
Savings accounts allow you to keep your money in a safe place while it earns a small amount of interest each month.
These accounts usually require either a low minimum balance or may require no minimum balance at all. This depends on the bank and the type of account.
The bank pays you interest on the money that you deposit and leave in that account.
The bank then loans that money out to other people, only they charge a slightly higher interest rate on the loan than what they pay you for your account.
It is important that you discuss with your personal banker every time you want to make savings for a long period of time so that they can advise you on the type of investment to place your funds and the likely return.
Keeping your money in an ordinary savings account will not earn you a higher return than saving in a general savings account.
In your discussion with your banker there is need for you to be clear on certain things.
You need to ask yourself on; what am I saving this money for?
How long can I leave this money in an account? When will I need the cash?
This is very important because different savings products carry different advantages, timelines and interest rates.
There is need to be sure of getting a product that will meet your needs.
Deposit rates are quoted depending on the types of savings.
Those savings of long tenure are paid high interest rates as compared to demand deposits.
At the moment, the savings deposits with commercial banks are attracting interest rates of between 0,15 percent and 8 percent while three months deposits are attracting interest rates of between 3 percent and 20 percent.
Besides the fact that you will be less likely to spend it, putting your money in a savings account is safer because it is insured.
If your home is robbed or burns down, your money may be lost forever. Banks on the other hand, keep your money very safe.
Banks insure all the deposits they hold through the Deposit Protection Corporation.
This means that even if the bank goes out of business, a certain proportion of the savings to a maximum of $500 will be paid out by the DPC.
Savers are hence guaranteed of $500 upon the collapse of the institution while the remainder is paid out through the process of liquidation.
Banks at law have a fiduciary duty. It is the duty of the bank to protect the savings of the citizens and provide reasonable returns in case the savings are placed in appropriate income generating accounts.
A fiduciary must avoid “self-dealing” or “conflicts of interests” in which the potential benefit to the fiduciary is in conflict with what is best for the person who entrusts them with their funds.
For example, a banker must consider the best investment for the client, and not buy or sell investments on the basis of what brings the highest commission for the banker.
Based on the fiduciary duty of the banks, there is need for the stakeholders to have the utmost faith in placing their savings with banks.
- Sanderson Abel is an Economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. For your valuable feedback and comments related to this article, he can be contacted on [email protected] or on numbers 04-744686 and 0772463008