Magaji, S. (Ph.D) Department of
Economics, University of Abuja, Nigeria
Yahaya, H. (Ph.D) Department of
Statistics, University of Abuja, Nigeria.
Savings is the act of not consuming current income.
In economic theory, saving is required for investment to take place,
and the investment is required to achieve economic growth
Hence, high savings means high investment, which results to high
economic growth rate.
This means that for a country or continent to achieve economic
growth and development savings must be reasonably high and
An alternative to mobilisation of savings for investment and capital
formation is the use of foreign capital which is also associated with
higher cost and grotesque conditions.
Africa is lagging behind in terms of economic growth and
Despite the fact that Africa is blessed with abundant human and
natural resources, its economies remained stagnant
The fundamental question of interest to us is that isn’t African savings
reasonable to stimulate investment necessary for economic growth?
Alternatively if African savings is low relative to the investment
required for target growth how do we boost the savings?
This paper discusses:
 Concepts and Theories of savings
 Household source of income in Africa
 Composition of households’ savings in Africa
 Analysis of savings trends and determinants in Africa
 The constraints to savings in Africa
 And make recommendations
In economic theory, savings are dependent directly
on the level of income
Thus saving function equation is normally expressed
as S = a + sY where s is the marginal propensity to
save and Y the level of income and ‘a’ autonomous
Hence savings are simply income not consumed
It is only when income is realised that decision is
taken about what proportion of the income is to be
spent and what is to be saved.
Savings are also viewed as deferred consumption.
Households may allocate current period’s income to
current or to future consumption.
The Traditional Theories
Traditional theories of savings are the lifecycle hypothesis
LCH and the permanent income hypothesis PIH. Both of
these theories are concerned with analysing the household’s
choice of consumption and savings over a long time horizon
Keynesian Theory
Keynes argued that saving is not directly offset by
investment spending. Saving and investment are influenced
by interest rate but other influences are also important and
can keep the interest rate from serving its vital function of
equating savings and investment spending. Keynes
concluded that desired saving could exceed desired
investment spending at the full employment level of output.
Modern Savings Theories
Traditional theorists wrongly assumed that individuals exponentially
discount consumption to determine how much to save for future
consumption versus current consumption
The Keynesian theory is designed for developed countries (DCs) and
cannot therefore apply to Africa because households in Africa are larger
than in DCs and are more likely to contain several generation
As a result of this there are fewer tendencies to save for retirement or for
inter-generational transfer
In addition, income in Africa is uncertain and cyclical, making estimation of
long-term income flows difficult. Furthermore, credit constrain can deter
borrowing in early years. This means that households simply save small
amounts at frequent intervals to smooth consumption, rather than
accumulate or save for retirement.
Two modern theories attempt to remedy the shortcomings of
Traditionalists and Keynesian. These theories are “hyperbolic discounting”
and “mental accounting”, which model decision on how much to save for
the future consumption and how much for the present
Modern theories emphasized commitment savings
* Generally poverty is a characteristic problem of African
* Other characteristics are: diseases such as HIV/AIDS, malaria,
typhoid and tetanus; unemployment, political troubles, and
reliance on imports
* As a result of these, households are depressed of income
which is the basis of savings
* The rural dwellers rely virtually on agriculture and informal
source of savings
* Savings growth rate is expected to be stagnant because of
low financialization of the African economy, high level of
poverty, and massive importation of consumer non-durable
Households’ savings in Africa is classified into formal and informal but more
than 80% of the savings is not done in financial asset
Informal households’ savings in Africa are not normally incorporated in the
formal financial system for good utilisation of the savings in modern
investment to achieve economic growth
Both formal and informal savings made in Africa primarily are for short-term
Features of commercial bank deposits is high proportion of demand deposits
relative to time deposits
In fact, savings in Africa whether formal or informal is done in liquid form to
guarantee short-term usage
Savings in Africa is more informal than formal and most of it is not captured
by the monetary authority for documentation
In addition, most of the savings in Africa is in terms of assets rather than cash,
which means that to save for another to invest, is insignificant
Furthermore, savings in the formal sector is mainly done for short term
purposes attracting insignificant interest while that of informal sector is
primarily made to smooth consumption
Hence, there is only one option of analysing the trend of savings in Africa –
Analysing the GDS trend based on the documented figures of the monetary
 As proposed by Aryeetey and Udry
(2000) there are no standard rules
on the determination of how well
national and domestic savings
should perform in any given year
 Hence in discussing how well
savings are doing in any economy,
the standard used is to compare
the economy to other economies
of similar characteristics, or to
compare the same countries’
saving performance over time, or
to compare the actual
performance versus the planned
 Aggregate
savings rate remained strikingly low
for a number of countries
 To compare the actual performance versus the
planned performance, most countries lagged
behind the targeted savings rate
 In fact, the low savings rate made most of these
countries to abandon their series of
development plans
Africa annual savings as a percentage of
GDS lags behind that of developing
economies of Asia.
 In addition, the volatility of savings
growth rate in Africa is far higher than
that of developing countries of Asia.
very few countries have ever achieved their savings
targets in Africa
Basic gap models assert that the rate of economic
growth is constrained by inadequate levels of savings
and therefore foreign capital is required to fill these
gaps in order to achieve a target rate of growth
Africa has a very wide savings gap and so far the
methodology of bridging this gap through the use of
foreign capital is faulty thereby leaving the continent
with stagnated growth rate
In order to bridge the savings gap, internal
mechanisms must be designed to boost GDS, curtail
loss of foreign exchange and capital flight.
Low Presence of Formal Institutions
Fragmented Financial Markets and Low Patronage
Patronage to Holding Physical Goods than Cash
Informal Savings More Acceptable Than Formal Ones
Financial Reforms
Inflation and Currency Devaluation
Risk of Institutional Failure or Bankruptcy
High Transaction Cost and Low or no Return on Small
 External Debt Services
To boost savings in Africa, we recommend as follows:
• Amalgamation of African Financial Markets
• Promotion of Export Earnings
• Fight Poverty and Diseases
• Use Foreign Capital with Caution
• Promote MFIs
• Promote Commitment Savings (CSs)
 African savings are primarily low because of low income
 Institutional or corporate and government savings are what the monetary
authorities have control over
 Household economy is detached from the formal economy in a number of ways:
low usage of banks, savings in terms of assets rather than banks, and portfolio
arrangement based on physical assets rather than financial assets
 Africa’s GDS is seen to be very low, highly fluctuating and relatively far below the
average of less-developed countries of Asia. These are primarily as a result of
high influence of some key negative determinants of savings in the continent.
 Hence Africa experienced a very wide savings gap which is a constraint to
economic growth and the methodology to bridge the savings gap through the
use of foreign capital is faulty
 Foreign capital rather leads to high external debt-servicing which consumes
reasonable portion of Africa’s GDP.
 For Africa to be free from low savings there is a need to amalgamate African
financial markets, promote export earnings, fight poverty and diseases, use
foreign debt with caution, promote MFIs, and promote CSs.

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