Analysis: How Pakistanis are discouraged from savings
However interestingly, Pakistan actually stands out to reflect one of the lowest savings in the region. According to World Bank, savings in proportion to the country’s Gross Domestic Product stand around 22 per cent in Pakistan, compared to 38 per cent in Bangladesh, 34 per cent in India and 25 per cent in Sri Lanka. Moreover, Pakistan’s savings ratio has actually plummeted from 26 per cent in 2002, while the rest of the comparable nations in the region have shown a consistent increasing trend in savings during the same period.
The State Bank too has raised its red flag on this situation by highlighting in its annual report of FY11-12 that an average consumer allocated Rs97 out of every Rs100 to consumption expenditure in FY11. This implies a marginal savings rate of just 3 per cent in FY11 compared with over 30 per cent in FY01-08.
This behavioral shift at consumer level is, to a large extent, a result of increasing prices (inflation) which is not accompanied by a proportional increase in the return that commercial banks offer to the masses on their savings. To put things into perspective, the average return on deposits offered by the commercial banks stood at a dismal 6 per cent in 2011 which means that a person who deposited Rs100 in a bank at the start of 2011 only managed to grow his savings to a meagre Rs106 by the end of the year.
However during the same year, inflation as measured by CPI stood at 12 per cent – implying that a basket of goods that cost Rs100 at the beginning of 2011 was worth Rs112 by the end of the year. Hence an average person would have lost purchasing power of his savings, if he had used the banking channel to deposit his hard-earned wealth.
In light of these facts, it is not surprising that an average Pakistani prefers to spend whatever he earns, rather than saving part of it for rainy days, retirement age or his/her children’s college education. The affluent segment of the society which, however, does manage to save prefer to remit their money abroad (mostly through illegal channels) and invest their savings in Dubai, Singapore and Switzerland – thus leading to unabated flight of capital and strain on Pak rupee.
Distressingly, the equation does not end here. Eventually, low savings in the economy translate into low investments and thus higher reliance on foreign aid. In fact, World Bank statistics show that investment to GDP ratio in Pakistan stood at 15 per cent in 2010, once again the lowest amongst comparable nations in the region (in 2011, investment to GDP ratio stood at 35 per cent in India, 28 per cent in Sri Lanka and 24 per cent in Bangladesh).
On the flip side, the commercial banks appear to be the only segment reaping the benefits of this scenario. According to the SBP, the banking sector’s profitability has grown at an annual average of 21 per cent from 2004 to 2010. This has largely been a result of hefty “spreads” that the banks charge on their operations. Spread is the difference between average lending and deposit rates that the banks offer to their customers, and stood at 7.6 per cent in 2011.
This figure is not only one of the highest in the world, but also flags Pakistan as the only country in the region where a bank earns more than what the actual depositor is offered on his deposit.
The writer is a CFA and graduate of LUMS with experience in the financial services industry.
Published in The Express Tribune, April 18th, 2012.
COMMENTS (21)
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The Saving habbit of Pakistani Nation has gone down based on the fact that these multinational bank has launched multiple credit facilties to consumers, such as Credit Cards, Loans Auto Financing these are the major factors which were lucrative enough to pull the nation to spend on credit and than pay back on interests, there are positive sides as well but just imagine, our parents and fore fathers having more number of childerens in their times and also managing the complete household things infact they had been saving simultaniously as there were not credit faciltiies involved at their time.
Thanks to SBP for allowing the banks to make lucrative deals and now our people ar enjoying the payback periods for these banks, with heavy interest rates with an avg. rate of 25% above.
How come one can save.............
and yet no one think about the high levels of graft in this country. the exchequer is being deprived of billions of rupees, indirectly causing all the inflation in the first place. why dxb or sg or swiss in the first place? if corruption could be mitigated, then the conditions would be favorable to saving. you can talk about anything you want, but fix this issue and see the positive change taking place.
@Shyam: lol. So you think Islam treats the symptom, not the cause. You cant have an interest free concept in an inflationary currency environment. Stealing anyone's fruits of labor via inflation is morally wrong.
@Meekal Ahmed: I know that both investment and saving figures have plummeted down further in FY11 and FY12TD but had to take the numbers as of 2010 as that was the latest available for all regional comparable nations from a single authentic source ie ADB. Taking more recent numbers would only validate my arguments further.
The average deposit rate of 6% quoted for 2011 does not refer to the minimum saving rate just enacted by SBP. It is actually the weighted average of all outstanding term deposits, savings account and current account - which obviously is a far more representative figure when compared to just the saving account.
Banking is one industry that's not doing so bad right now. How about we leave them alone for now?
@AsifAmeer
Budget deficits by government are not banned by islam so it is ok
the article makes practical sense for policy makers to apply logic and implement thoughts if there have the time to worry about such things.
It is a good written article and a move to give awareness regarding increase in saving level. We must save 20% of the income so that this can raise the GDP & economic growth.
@Shyam: So is running account deficits, forcing interest in dealings. I dont hear anyone speak of budget deficits by the Federal Govt.
Interest on savings is unislamic and must be banned in the citadel of islam
It should be "saving" not "savings" in the article title.
Opening a bank account in Pakistan is also very hard. You have to provide proof of income documentation just to open a bank account! If banking were made easier, a lot more people would start saving with a bank.
Hamad, you did a decent job in explaining the low savings rate with respect to inflation. I dont the 10% inflation figures from the Govt. I do not agree with their calculation. Per me, true inflation can only be calculated against commodities (Metals/Crude/Cotton) And Pakistan's annual inflation rates breaches 24%!
The spread in the REPO market is high because the Govt is luring the Commercial banks to risk its capital in treasury bonds. Problem is, with SBP's NFA (net foreign assets) going negative, and the SBP not raising its discount rate, there is immense pressure building on the Rupee in the forex. There's payment to IMF due this month. Only thing thats saving Pakistan from an iceberg are the remittance payments! Warna these treasury bonds would take a huge dump.
Nicely written .
I think your investment figure is out-of-date. I believe it is now down to only 13% of GDP.
The 6%minimum deposit rate has just been enacted. It was lower than that earlier. It is well known that depositors get a negative rate of return in real, inflation-adjusted terms.
Spreads are high because the banking sector is highly concentrated and earn excess profits as the data on profitability show. There is very little competition. This is a structural flaw in the banking sector. It is the job of the SBP to address this issue. They don't seem to be very bothered that savers are being routinely ripped off.
@Asim: then leave out the current accounts. Even then the despoit rate averaged around 8% last year! thats still way below the lending rate/ discount rate / inflation and just around as much as the banking spreads!
@Banker: Can u explain this??? "the commercial banks appear to be the only segment reaping the benefits of this scenario. According to the SBP, the banking sector’s profitability has grown at an annual average of 21 per cent from 2004 to 2010. This has largely been a result of hefty “spreads” that the banks charge on their operations. Spread is the difference between average lending and deposit rates that the banks offer to their customers, and stood at 7.6 per cent in 2011.
This figure is not only one of the highest in the world, but also flags Pakistan as the only country in the region where a bank earns more than what the actual depositor is offered on his deposit"
Pakistan can't be compared with India and Srilanka... Majority of the people like to keep their money in current account and not to take any interest for religious purpose, including me.
So this report or analysis is not depicting the true picture of the actual reality.
@Banker: Average deposit rate even after excluding current accounts were a little over 8% in 2011. Even that doesnt beat inflation!!
The writer is quoting the AVERAGE despoit rate in Pakistan. Dont forget that a number of bank customers prefer to keep their money in current accounts (and not get any return) due to their (religious) preference of staying riba-free! Now that isnt banks' fault?
then why is it that the government does not push the banks to offer high rates? after all, no body has asked banks to open lavish branches, with wooden floors and good-looking ladies - they should save money from branches and give to the deposit holders!
well written