The Role of Banks in Financial Literacy and Savings Consciousness

In the wake of rapid technological advancements, continued growth in middle class incomes, and the role of social media, the world is witnessing a growing spending culture. But this “wealth effect” comes with financial risks. Ebrahim Oboud Baeshen, Partner at KPMG, explains why and how banks should play a role in building a financially educated and savings-conscious society.

After riding through the bottleneck of the 2008-2009 global financial crisis, household savings rates began to gradually decline in all major economies. Between 2010 and 2019, the household savings index in several countries experienced a stagnant or declining trend.

Saudi Arabia and its neighboring countries have been no different. The household savings rate of Saudi nationals stood at just 1.6% of annual disposable income in 2018, according to the latest available figures from GASTAT, which is considered low compared to other G20 countries.

A 2020 KPMG study on household savings found that financial literacy was a significant contributor to the low rate, also explaining the decline in the investment rate. Additionally, the country’s prosperity and safety net are cited as reasons for low savings rates.

In addition, the study indicated that the demographic distribution of the country has a noticeable impact on the overall household savings rate, as the savings index is expected to be higher for countries at an early stage of the hypothesis. of the life cycle, but still shows a relatively lower savings rate despite a young population that may not be convinced of the need for savings.

The need for financial stability

Nonetheless, times of economic crisis, as well as the pandemic, have reignited the importance of building and maintaining personal liquidity and have therefore reiterated the importance of embracing a culture of savings.

Saudi Arabia has recognized the key role that household savings play in the country’s economic development, as articulated in Vision 2030 and its financial sector development program. One of the main objectives of the program is to diversify the financial sector to support the development of the national economy and stimulate savings.

The role of banks

That said, the role of banks in promoting financial literacy and strengthening the culture of savings cannot be overstated.

Since their inception, commercial banks have directly or indirectly encouraged savings by offering a range of deposit products and mechanisms with various combinations of liquidity and interest rates suited to the needs and preferences of different depositors. The added benefit of security against theft and damage, and in some cases strong insurance coverage, also helped.

As a store of value, bank deposits enjoy certain advantages over tangible assets; deposits are convenient to keep as a store of value and are safer and more liquid – they can be easily converted into cash. They are also largely divisible and often less risky.

However, despite these challenges, the extent of the unbanked population, the level of financial literacy and, consequently, the savings rate are still far from optimal. For financial institutions to truly help consumers achieve financial health, most experts believe that they must view finance as a public service, a service always available to meet people’s instant needs, not as tools isolated ones focused on macroeconomic decisions.

Many consumers are looking for educational tools or programs to improve their financial well-being. They ask for help in understanding complicated financial products. Accordingly, banks could consider offering targeted awareness programs and seminars.

Another key aspect relevant to the role of banks is to ensure the availability of robust and user-friendly tools that facilitate financial literacy and savings. Unfortunately, most nifty digital budgeting apps offered by many institutions have limited functionality. Consumers need tools that go beyond just helping with life events – like a mortgage loan calculator – but that are integrated into customers’ daily lives.

Policy makers and financial services are very interested in the potential of FinTech at the service of savers. Possibilities include using machine learning to help people budget, understand their spending and savings opportunities, or allowing people to “impulse save” by transferring money not spent on savings. More research is needed to develop the right tools for people and their diverse needs.

Adapt financial literacy

Banks need to be aware of the great diversity of the general population, including their attitudes and preferences regarding savings. A one-size-fits-all approach has always been counter-intuitive. For example, for a low-income household, there are myriad challenges competing for time and attention, including the day-to-day problem of managing mismatches between income and consumption.

In the long term, there is the problem of building up sufficient reserves to meet life cycle goals such as education, housing and marriage. For short-term consumption, liquidity is essential, so a regular bank account would suffice. For medium-term lump sum build-up, a balance between liquidity and inflation protection is required; an account (like a money market fund) that tracks inflation and has reasonable liquidity should do the trick.

Moreover, for long-term retirement savings, large real returns and illiquidity are cornerstones of the mechanism. Therefore, it is essential that banks take into account, analyze and meet the preferences and needs of the public with the right advice, products and tools that guarantee a robust savings and spending ecosystem.

By contrast, for much of the middle-income urban population, banks are required to design and apply significantly different savings methodologies and strategies. Two of them are represented by “automatic saving behaviors” and “savings reframing for non-savers”.

The first focuses on making savings a “default” behavior. Research has shown that when borrowers chose to make savings payments alongside loan repayment, many continued to save after loan repayment because the regular savings payment did not continue. stopped. This is called “automatic savings” and so it is relevant to understand what other possibilities exist for people who save automatically (for example, integrating rainy day savings with automatic enrollment pensions , allowing people to access part of their reserve in case of emergency) and to determine when and why people maintain their automatic savings payments.

The latter involves reframing the rewards of savings so that they are more easily understood and recognized by the public. Matched savings schemes (for example, a scheme that presents returns as a quantified amount for each currency unit, rather than a percentage interest rate) are proven to have a positive impact on savings behavior . Bonus-linked systems show promising evidence, but none show a clear causal link to improved savings.

Millennials seem to be more careful with their finances and savings than most people realize, it is up to new age financial institutions, especially FinTech entities, to continue to improve their product and solution base, their digital offerings and customer empathy. Not only to dramatically improve banked population levels, but also for a financially literate and savings conscious society.

About the Author: Ebrahim Oboud Baeshen is managing partner of KPMG’s Jeddah office. He has over 18 years of experience in accounting, auditing and Zakat advisory services.

This article was previously published in KPMG’s ‘Banking Perspectives Saudi Arabia 2022’ report.

Sarah J. Greer