Domestic savings mobilization has been and continues to be a challenge in most developing countries due to the informal ways of saving, and Ghana is no exception to the phenomenon. In order to curb the situation, researchers have identified several personal characteristics that influence the decision to use formal ways of saving at the formal financial institutions. However, in these attempts, no emphasis has been placed on the role of trust which is envisaged as very essential in making economic decisions. As a result, this paper contributes to knowledge as well as how to enhance domestic savings mobilization by investigating the potential effect of trust on individuals’ decision to save at the financial institution. The study uses primary data and employs the binary probit and logit regressions for the analysis. The results show, among others that, boosting individuals’ trust in financial institutions is key to formal ways of saving. The implication of the significant positive relationship between trust and saving at financial institutions is that, there is the urgent need for Bank of Ghana and all stakeholders in the financial sector to institute policies that seek to boost the trust of individuals in the financial institutions. Specifically, the Bank of Ghana has to intensify its supervisory activities and also control the activities of existing licensed financial institutions effectively to ensure their stability and sustainability. This is likely to reduce the rate at which financial institutions collapse in the country. The decline in the collapsing rate will therefore invigorate individuals’ trust in these institutions and hence formal ways of saving will be adopted. Consequently, having enough savings available will then serve as funds for investment to expedite economic growth.
[The full article can be accessed from the International Social Science Journal, 2019, Vol. 69, No. 231, pages: 63-78. Link: https://onlinelibrary.wiley.com/doi/full/10.1111/issj.12200].
Introduction and motivation for the research
The significant contribution financial institutions make to the economic growth of countries is certainly not in dispute. According to researchers (for example, Gurley and Shaw 1955; Levine 1997; Miller 1998; Schumpeter 1934; Walle 2014), stable and efficient financial institutions exert a positive impact on economic growth. Financial institutions play key role as intermediaries between the deficit and surplus units (Demirguc-Kunt and Levine 2008; Mishkin 2007). This crucial role is facilitated by mobilising savings from individuals who have surplus funds but do not have an immediate use for them. These excess funds mobilised by the financial institutions are subsequently made available to individuals who have insufficient or no funds but want to spend or invest now. Saving is also reported to be beneficial to individuals: it facilitates wealth accumulation, consumption smoothing (an economic concept used to express the desire of people to have a stable path of consumption), access to education and health, investment, insurance against emergencies, relaxation of credit constraints and, most importantly, poverty reduction (Goldberg 2014; Prina 2015).
However, the decision by the surplus units to deposit their excess funds at the financial institutions depends on the trust and confidence level in these institutions as well as their easy accessibility (see, for instance, Ajayi 2016; Beckmann and Mare 2017; Delis and Mylonidis 2015; El-Attar and Poschke 2011; Filipiak 2016; Rogg 2000; Guiso, Sapienza and Zingales 2008). Notwithstanding the importance of savings expounded, mobilisation of savings by financial institutions has become arduous due to the alarming rate at which financial institutions collapse and are taken over. This is so because, as the financial institutions collapse, individuals lose trust in saving their excess funds at the financial institutions. With regard to take-overs, individuals who may not understand properly the notion of take-over may also panic, and for that matter not save at the financial institution. Many people in developing countries have resorted to informal ways of saving (such as saving at home, with friends or family members) because of their low trust in financial institutions. In the case of Ghana, mention can be made of UT Bank and Capital Bank Limited whose operating licenses were revoked in 2017 by the Bank of Ghana and a purchase and assumption transaction approved for GCB Bank Limited to take over all deposits and selected assets of the two banks in accordance with the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930) because the banks were insolvent. Subsequently, the license of UniBank was also revoked and taken over by the Bank of Ghana due to abysmal performance leading to insolvency. Other microfinance institutions have also collapsed (for example, DKM microfinance) with others under surveillance by the Bank of Ghana to avoid possible collapse. Following these, many Ghanaians, especially those who have bank accounts with some of these financial institutions, are worried, bearing in mind the potential negative consequences such as loss of funds (especially with the unlicensed financial institutions) and inconvenience associated with these collapses, acquisitions and take-overs.
The instability in financial institutions which makes formal ways of saving unattractive is also documented by researchers. For example, Honohan (2008) and Stix (2013) report that, the adoption of basic financial services such as saving is low in many developing countries and this is confirmed by Goldberg (2014), who also indicates that many people in the developing world rarely save in their formal bank accounts. Stix (2013) further adds that, many people prefer to hold cash rather than saving at financial institutions due to distrust and memories of past banking crises. The negative effect of saving outside the financial institutions on the economic growth of countries is also well-known (see, for example, Stix 2013). For instance, saving outside the financial institutions implies that, individuals with viable investment plans which have the potential of enhancing economic growth may not have access to sufficient funds to undertake those projects.
Saving outside a financial institution is indeed an issue of concern considering its potential negative repercussions on economies. It is, therefore, indispensable for central banks of countries, including the Bank of Ghana and other stakeholders in the financial industry to put measures in place to resuscitate the trust of individuals in the financial institutions to boost domestic savings mobilisation.
Indeed, it is imperative to enhance domestic savings mobilisation in economies considering that saving is vital, especially in the absence of foreign aid and capital inflows, and also, as far as economic growth is concerned. In Ghana, for instance, gross domestic savings (as a percentage of gross domestic product – GDP) remain low and this can be attributed to the predominant use of informal ways of saving. For example, gross domestic savings as a percentage of GDP has not gone beyond 20 per cent compared with other sub-Saharan African countries such as Gabon (45.9 per cent), Republic of Congo (28.1 per cent) and Coˆte d’Ivoire (23.8 per cent) since 1960 (World Bank 2017). Again, data from the World Bank’s World Development Indicators shows that Ghana’s average gross domestic savings (as a percentage of GDP) from 1960 to 2016 is lower than the average figure for the sub-Saharan Africa region, which is 15.9 per cent. For instance, it averaged 11.48 per cent (1960–1970), 9.37 per cent (1971–1980), 4.81 per cent (1981–1990), 7.54 per cent (1991–2000), 9.75 per cent (2001–2016) and 8.76 per cent (1960–2016) (World Bank 2017). These figures certainly call for urgent intervention in order to improve domestic savings in Ghana to facilitate economic growth; and one of the ways can be through the adoption of formal methods of saving which also depends on individuals’ trust in formal financial institutions.
Trust is seen as a key aspect of one’s life and is therefore regarded essential as far as economic decisions are concerned. The role of trust in economic decisions is reported in the literature (see, for instance, Ajayi 2016; Bachas, Gertler, Higgins and Seira 2016; Beckmann and Mare 2017; Delis and Mylonidis 2015; El-Attar and Poschke 2011; Filipiak 2016; Mosch and Prast 2008; Guiso, Sapienza and Zingales 2008). For instance, Mosch and Prast (2008) report that trust influences individuals’ decision to undertake transactions with financial institutions. Bachas, Gertler, Higgins and Seira (2016) also add that trust is crucial in every economic transaction. Similarly, Allen et al. (2012) note that trust is key as far as the development of financial institutions is concerned. These writers, therefore, emphasise the need for countries to enhance individuals’ trust. Consequently, boosting individuals’ trust in financial institutions has the potential to improve financial inclusion as noted by Adusei (2013) and Ogunleye (2017). This is so because the unbanked individuals will be motivated to use the financial services and products (such as saving) of these institutions.
Notwithstanding the importance of trust in making economic decisions, several previous studies on determinants of saving at formal financial institutions (see, for example, Ajayi 2016; Beckmann and Mare 2017; Gaisina 2014; Kibert et al. 2009; Mumin, Mohammed and Kasim 2016; Sedirwa 2015; Tandoh and Tandoh 2015) have not emphasised the role of trust, with the exception of Ajayi (2016) on Nigeria and Beckmann and Mare (2017) on central, eastern and southeast Europe. The limited empirical evidence on the role of trust in making economic decisions, especially in Ghana and sub-Saharan Africa, certainly gives cause to worry.
Objective and significance of the study
This paper examines the effect of trust on individuals’ decisions to save at financial institutions. The research makes at least two vital contributions. First, it contributes to the limited knowledge regarding the potential role of trust in making economic decisions, especially in Ghana and sub-Saharan Africa. Again, this study is the first of its kind to examine the effect of trust on individuals’ decision to save at financial institutions in Ghana. The study also goes beyond existing research by examining the moderating effect of individuals’ educational level on the relationship between trust and the decision to save at formal financial institutions. The paper argues that, individuals who have attained some form of formal education are likely to understand operations of financial institutions better and are hence likely to have more trust in them. As a result, the decision to save at these financial institutions is likely to be enhanced. Finally, this study sheds new light on how the trust of individuals can be boosted in order to encourage formal ways of saving in Ghana and other developing countries to facilitate economic growth.
Literature and methodology
The importance of certain norms and characteristics of individuals, including trust, religious affiliation and social interaction in making economic and financial decisions such as saving, insurance, and investment is well documented by researchers and economists (see, for example, Ajayi 2016; Beckmann and Mare 2017; Brown et al. 2008; Hong, Kubik and Stein 2004; McCleary 2007; Renneboog and Spaenjers 2012). Trust which is the focus of this paper is conceptualised as when two parties engaged in transaction have confidence in each other: each party can rely on the other without any disappointment throughout the transaction period. Trust is also asserted to be based on the trustworthiness of a person or an organisation (Robbins 2016) and envisaged as key in decision-making and in any market transaction (see Ajayi 2016; Beckmann and Mare 2017; Bhati 2015; Robbins 2016). These authors have further indicated the importance of communication and information sharing in building trust. It therefore connotes that information asymmetry theory can be used to explain the link between trust and decision making. Information asymmetry is when one party to a transaction has more or better information than the other. In the case where one party to a transaction has more information than the other, trust or confidence level is likely to be affected and this will eventually affect decision making.
Relating the above information to the current research, the decision to save at financial institutions will depend on the information available to individuals. Individuals may not be interested in saving at financial institutions if there is inadequate information with regard to operations and sustainability of these institutions. However, trust is likely to exist if there is full disclosure of information and this can affect individuals’ decisions to have formal savings. The inadequate information about financial institutions which tend to affect trust can emanate from two sources. On one hand, an individual may not be in position to have full information regarding the operations of financial institutions due to lack of formal education which facilitates reading and understanding. For instance, El-Attar and Poscke (2011) note that individuals who attain a higher level of education are able to understand the operations of financial institutions and therefore tend to have more trust in them, which in turn influences their decision to adopt financial products. It then suggests that, the effect of trust on a decision to save can be moderated by an individual’s education level. On the other hand, a financial institution may not like to disclose full information to the public, probably due to abysmal performance, because it can discourage individuals from patronising their products such as saving. Consequently, if individuals cannot confidently rely on financial institutions due to inadequate information, then their decision to save with them will also be affected.
With respect to methodology, the paper relies on primary data (collected through a structured questionnaire) from individuals who are 18 years and above in the Ashanti and Greater Accra regions of Ghana. A total of 800 questionnaires (400 in each region) were administered. However, after data cleaning to ensure completeness of the filled-in questionnaires, 600 respondents (340 and 260 from Ashanti and Greater Accra regions respectively) representing a response rate of 75 per cent were used for the analysis. By way of estimation, the binary probit and logit regressions are employed.
Brief research findings
The study reveals that, there is significant positive relationship between trust and saving at financial institution which is consistent with the a priori expectation. As individuals’ trust in financial institution increases the likelihood of saving at these financial institutions also increases. This is so because, they get more confidence in them since all fears are allayed. Subsequently, gaining more confidence encourages these individuals to save their monies at these financial institutions without any panic. This finding is consistent with Ajayi (2016) and Beckmann and Mare (2017), who report that, trust enhances households’ decision to hold formal savings by saving at the bank rather than holding informal savings. This result further confirms assertions by researchers (see, for instance, Delis and Mylonidis 2015; El-Attar and Poschke 2011; Filipiak 2016; Mosch and Prast 2008) that trust is key or essential in making economic decisions.
Other important findings are revealed. Having JHS/MSLC, SHS/O’Level and Tertiary education significantly increase the probability of saving at financial institution. It is further revealed that, the magnitude of the impact of trust on decision to save when interacted with education is relatively higher compared with the effect without the interaction. This means that, the effect of trust on the likelihood of saving at the financial institution is significantly moderated by the education level of individuals. The study also finds significant positive relationship between income and the likelihood of saving at financial institution.
Conclusions and policy implications
The outcome of this research has policy implications for stakeholders in the financial industry, especially the central bank. The implication of the significant positive relationship between trust and saving at financial institutions is that, there is the urgent need for Bank of Ghana to institute policies or measures that seek to boost the trust of individuals in the financial institutions. Precisely, the Bank of Ghana has to intensify its supervisory activities and also control the activities of existing licensed financial institutions effectively to ensure their stability and sustainability. This is likely to reduce the rate at which financial institutions collapse in the country. The decline in the collapsing rate will therefore invigorate individuals’ trust in these institutions and hence formal ways of saving will be adopted. Consequently, having enough savings available will then serve as funds for investment to expedite economic growth.
Further, given that only activities of licensed financial institutions can be effectively monitored or controlled, there is the need for Bank of Ghana to keep the banking system under close supervision and surveillance. Therefore, careful surveillance of the banking system by the Bank of Ghana is likely to help identify unlicensed financial institutions and the appropriate sanction(s) imposed. Subsequently, the names of these unapproved institutions can be published to reassure the general public about the stability in the banking system. This will then enable individuals who have surplus funds to identify appropriate financial institutions with which to save their funds. In all, having a stable and vibrant banking system will promote domestic savings through enhancing the trust of individuals in financial institutions. Also, boosting individuals’ trust tends to improve financial inclusion in the economy as the unbanked will be motivated to use the services and products of financial institutions.
I would like to acknowledge the contributions by my co-author, Linda Akoto, a PhD Candidate at the Department of Economics, University of Ghana, Legon.
The researcher is a PhD Candidate, Department of Economics – KNUST)