"For rural developers and others concerned with rural welfare in developing countries, perhaps the most important philosophical implication of the argument is that it is not very helpful to view rural people as financial basket cases, as
"poor.“ Rather, it is obvious that rural people do save, and that the development challenge lies in the design of financial technology to serve the saving needs of rural people" ( PISCHKE 1978:55).
NURKSE (1953) emphasized the lack of capital accumulation in the early 1950s as being responsible for a country’s poverty. According to him, „a country is poor because it is poor.“ He elaborates the viewpoint on the basis of the existence of two vicious circles in a country.
On the supply side, there is a poor capacity to save, resulting from the low level of real income. The low level of real income reflects low productivity, which is, in turn, due largely to the lack of capital. A lack of capital is the result of the poor capacity to save, and, thus, the circle is complete. On the demand side, the inducement to invest may be low because of the people’s limited purchasing power, which is again an outcome of their small real income due to low productivity. The low level of productivity, however, has its roots in the small amount of capital used in production, which may, at least partly, be caused by the poor inducement to invest.
The above-stated circular relationships indicate a common problem of the low level of real income, which reflects low productivity. Furthermore, it shows that poverty in a country is attributable to a larger extent to the lack of adequate capital equipment, which can be due to the poor inducement to invest as well as the limited capacity to save.
The importance of savings for economic development can hardly be overestimated. The major part of financing must be internal, which, in itself, is a prerequisite for attracting foreign participation. All development requires the involvement and support of the people in the developing country, and it is therefore a logical approach in development that a country should demand sacrifices and co-operation of its own citizens. This requirement cannot be limited to a small share of the population, i.e., to those who earn the highest incomes or who live in urban areas. The great majority of the total population in developing countries lives in rural areas and is poor. Not only the poverty but also the consumption pattern of these households are seen as a major obstacle to a rapid increase in domestic savings. Very naturally, therefore, a strong inclination to consume more when income increases is noticed. The poorer sections of the population usually follow the consumption habits of those with greater means or who live in the cities and, to continue this trend, habits from the developed world are the ultimate desire.
The situation may be improved if saving is given special consideration in developmental research in the developing countries. The scarcity of information on rural savings in Pakistan is a basic handicap when trying to remove the obstacles in the way of saving mobilization. Especially the questions: How should rural household savings be defined?
Who are those among the rural population who could save and who would save? Why would they save? What motivates them to save? How could these savings be mobilized?
are hardly dealt with extensively.
„The poor are not unproductive. In truth, they are the more productive segment of the population. But unfortunately, the fruits of their labour are usurped by the better off segment of the population through economic, social, and political manipulations. All these manipulations find their strength in their control over financial resources“ (YUNUS 1988:7). The old assumption that poor people are unable to save is no longer realistic; poor households do have the intention and potential to save, and when put together, the amounts they save are substantial (FERNANDO 1992:130). There are, however, cases, where people, in spite of their willingness, cannot save if they want to survive and there are certainly cases where people saved, though they would well need the money for meeting their immediate survival needs.
Household savings in rural areas appear to be a difficult variable to measure. They are not always quantifiable. Saving methods are practiced according to the need for ensuring a long term security of the households. One must, therefore, differentiate between the saving potential of the rural community in cash, kind or livestock etc. If saving potential other than cash is also considered, it has to be clarified whether these savings are monetized through sales or remain as temporary savings in kind. Since the definition of saving is not consistent in formal and informal sectors, it is necessary to comprehend what rural savings are and what causes them to vary. It is essential to consider at least two distinct patterns in this regard (APRACA1 1985:19).
1. Savings made from absolute surplus, which the saver can spare beyond his budgetary allotments for fulfilling his day-to-day needs. The duration of these savings is usually undetermined.
2. Savings as temporarily postponed consumption, which cannot be spared beyond a certain limit and are therefore not real surpluses. Instead, these are just protected from a premature alternative use. In this case, a saver just imposes a constraining act upon himself.
Incentives to save could encourage or strengthen savings behavior, but one has to make a clear distinction between the direction of initiating factors (APRACA 1985:20):
1. „The environmental demands of subsistence and lowest income groups which make a budgeting or savings behavior in the - broadest sense - mandatory for survival.
2. The incentives set to make savings eligible as a form of budget allocation - as one form of substitution to immediate consumption.“
Apart from this, in low income societies in which the status of women outside the house is given little, if any, recognition and they are obliged to turn over to her husband or the head of family any cash income they generate, ‘women saving’ also represents an important aspect of rural savings. This ‘underprivileged’ sex saves discretely to cope with its economic misfortunes. „Most of these women must be considered as living below the statistically determined subsistence level by their own income standards or as living at subsistence level considering their total family resources. Yet they save. They do so not because they can afford it beyond their immediate consumption needs but as the only possible form of protecting their income from any undesired take-over from among their own family members“ (APRACA 1985:21). Although savings generated by women is again utilized in the household economy, yet the possibility of making independent decisions for its allocation acts as an incentive for them to save.
1 Asian and Pacific Regional Agricultural Credit Association (APRACA).
Another more relevant question, though difficult to handle, is how the marginal savings can be mobilized and made more and more beneficial for the rural sector in general and for the development of the economy in particular. That is, how can immediate and fringe benefits from savings be introduced and be made appreciable to the potential savers. The strategies and conditions through which rural savings may be tapped by the formal sector still have to be unveiled.
1.2 Dualism of the financial sector
Income saved or invested represents an increase in wealth from the perspective of the individual, but implies an increase in the productive potential of the whole economy. Every saver does not have the best investment opportunities; therefore, savers place their funds at the temporary disposal of those who can invest them. „Monetarization facilitates the exchange between savers and investors considerably if the monetary system of a country functions properly. However, even if money is a medium of exchange, the direct exchange between savers and investors is cumbersome, time consuming and problematical for a number of reasons“(SCHMIDT/KROPP 1987: 5). The presence of an efficient financial infrastructure can mitigate the problem and act as a ‘go-between’ between savers and investors.
The financial sector of most of the developing countries shows a dual character and may be classified as a modern (formal) and an indigenous (informal) sector. The interest in the informal financial sector arose in 1950s, and the picture became clearer in the1980s.
Recent research shows that informal finance makes a larger and more positive contribution to development than many of us thought (WAI 1992:338). The new ideology considers both sectors as complementing each other, „As long as informal and formal, indigenous and modern institutions remain apart, far-reaching development processes are unlikely to result“ (KROPP/MAR/PRAMOD/QUINONES/SEIBEL 1989:4).
The discussions in the Third International Symposium on the Mobilization of Personal Savings in Developing Countries, organized by the United Nations in December 1984, centered on the following issues (KROPP/MARX/PRAMOD/QUINONES/SEIBEL 1989:4):
− Developing finance through external credit or internal savings mobilization?
− State controlled ceilings of interest rates or market rates?
− Higher efficiency through centralization or decentralization of financial institutions?
− Progress through joint or separate development of formal and informal financial institutions?
In their final resolution, the participants of the UN symposium agreed that:
− internal savings must provide the basis for credit programs;
− state control of interest rates must be relaxed in favor of market or near-market rates (‘deregulation’);
− for effective service, financial services need to be more decentralized;
− both formal and informal financial institutions are necessary for the financing of development;
− linkages between formal and informal financial institutions seem to be more promising than separate development.
The overall conclusion was that:
„the main means of improving the performance of the non-institutional sector were policies directed to enhancing its links with the institutional financial sector“ (UN 1986:13).
National and international consultations within and between agencies such as United Nations, the World Bank, FAO, BMZ, GTZ and others resulted in an international policy climate, and the activities at the level of the United Nations were paralleled by new endeavors at national levels. „Asia Pacific Rural and Agricultural Credit Association (APRACA) took a vigorous move to promote financial self-reliance among its members institutions through the mobilization of rural savings in the early 1980’s“
(MARX/QUINONES 1992: 1).
The ‘linkage-programs’ that emerged during the second half of the 1980s are composed of a number of elements, some of which include: (MARX 1992:67)
− co-operation between banks and existing self-help groups;
− promotion of savings;
− provision of credit only on the basis of previously accumulated and regular savings at various savings : credit ratios (financial linkages);
− a dialogue and communication process between different actors as the main tool to institutionalize the linkages, in which each partner respects and ensures the autonomy of the other partners.
At present, apart from Indonesia, the program is being pilot tested in the Philippines, Thailand, Nepal and India (KROPP/QUINONES 1992:xvii). Unfortunately, Pakistan has not yet been subjected to new approaches, mainly due to:
− a lack of grass-root information on the saving behavior of the rural households;
− no clear policy framework specifically for saving mobilization from the rural sector;
− unacquaintance with the socio-economic factors influencing the extent and form of savings.
Keeping this lack of grass-root information in view, the present study is designed to provide some fundamental information on rural saving behavior at household level, framework of saving mobilization, socio-economic factors influencing this behavior and the characteristics of modern and indigenous financial institutions. Finally, the study proposes an area-specific linkage model between the formal and informal financial sectors within the boundaries of the community’s socio-cultural framework.
1.3 Objectives of the study
The study seeks to analyse the saving behavior of the rural population in Pakistan on the basis of an empirical research conducted at household level in a village of Province Punjab. The data on income, consumption and saving is recorded for a period of one crop year.The major questions on which the study will concentrate include:
– the different types of saving of rural households;
– the magnitude of saving of rural households;
– different ways of keeping it;
– decision making for income management within a household;
– the difference in saving and investment priorities among different social strata and its reasons; and,
– the socio-economic factors influencing the form and extent of saving.
The theses will be:
• The farmers save a nominal amount of their income because of their non-businesslike attitude towards life, religious habits, and undue expenditure on ceremonies, etc.
• There exists no proper provision of sustained incentives to save in rural areas.
According to our hypothesis, the ratio of saving may well be stimulated in time by the knowledge that attractive, safe and profitable outlets exist for the employment of saving.
• Saved resources are not converted into durable assets and, therefore, do not aid the production resources, which means that, even if the rate of saving is considerably increased, the direction of investment will not be productive, unless the underlying factors are explored.
• The socio-cultural parameters in rural areas include the dominant structures, traditions, norms, social hierarchies and social dependencies which cannot easily be changed through government measures, no financial policy can be successful unless existing traditional structure of the community receives proper consideration.
• The lack of coordination of savings services with credit services and the overused practice of 'spoon feeding' with loans from government agencies is inducing a 'charity recipient mentality' among rural population.
• The services of financial institutions do not correspond to the demands and needs of the target groups.
• Informal financial structure is more trustworthy for the rural population in comparison to the formal one. An organizational support which may serve to strengthen financial self-help groups and to link them with the formal financial infrastructure may contribute to saving mobilization.
• Political instability brings changes in the state’s financial planning at short notice, this prevents the people from making any long term saving or investment planning;
• The central problem in the mobilization of local resources and their efficient use is the lack of a 'bottom up development approach.'
1.4 Structure of the study
Chapter 2 outlines the conceptual model of the household saving, its historical evolution and its orientation in different schools of thought, and an insight of the consumption and investment concepts. The chapter as a whole draws a theoretical and conceptual framework for the empirical analysis of saving, consumption and investment model of the households in a rural sphere.
Chapter 3 presents the statistical and organizational evidences of household saving from Pakistan. The secondary data give facts and figures on some selected topics such as the overall saving situation, the average and marginal propensity to save and the financial technology available to facilitate transactions for savers in the rural areas of Pakistan.
Chapter 4 describes the socio-economic framework which shapes and formulates the saving behavior of an individual in rural Pakistan. It concentrates upon developmental planning as well as on the policies of Islamization and deregulation of the financial sector in the last two decades. The community’s traditional setup, which shapes the ideology of an individual, is discussed as a dominant factor.
Chapter 5 submits the empirical results, which present the formal and informal forms and extent of saving, decision making strategies, and investment priorities among rural
households belonging to different economic strata. The quantitative analysis is done on the basis of twelve case studies carried out within a period of one crop year in the research area. Special consideration is given to the saving activities on the basis of traditionally evolved cooperative type institutions.
Chapter 6 deals with the social, psychological, cultural, economic and institutional factors influencing directly or indirectly the form and extent of saving. In addition to it, a correlation analysis supports the qualitative description of the factors.
Chapter 7 covers the concluding discussion and recommendations. The study proposes an area specific linkage model between the formal and informal financial sector, within the boundaries of the socio-cultural framework of the community.
And finally, the study is summarized in Chapter 8.