Small savers look for security
Thursday, 11 October 2007
Ghulam Mohammad
THERE are many people in Bangladesh of small means who would want their money to grow. They want to invest their money to this end but find no feasible outlets. Entrepreneurship is no doubt preferred as a way of investing one's resources and making gains on the investments. But entrepreneurship can be risky in the Bangladesh setting for a variety of factors and the latest ranking of Bangladesh in one of the bottom positions under the World-Bank-Sponsored survey of investment climate in countries around the globe would amply suggest why investment that promotes entreprenuership is still hazardous here.
In this situation, small savers in trying to be entrepreneurs may lose everything from an investment climate which is full of hurdles and negatives. Unlike the big investors who can count on many factors to remain viable in their enterprising, the small investors cannot rely on such cushions. Therefore, they have always tended to invest their surplus resources on the safest medium available, i.e. the government's various savings schemes.
The savings schemes or savings certificates used to be preferred by them for many reasons. First of all, they generally provided interest rates on maturity at a notably higher rate than the banks. The capital market could be an investment outlet for the small investors. But investment in this market has many risks which the small investors can hardly afford to undertake. Earlier many small investors who invested in the capital market in the mid-nineties were very resentful after the collapse of the stock market in a situation where the prices of their shares fall abnormally lower than the prices at which they bought them. That experience still haunts them, though some institutional developments have taken plan during the past several years to provide a relatively better operational ground for the market than before. Thus, finding no other safe and gainful outlet for investments, the small savers' only option seemed to be the government's savings schemes. In a comparative sense, these proved to be very safe investment outlets that provided relatively higher interest rates. Such investments are considered safe by most of small investors for maintenance of their families particularly upon their retirement from active service.
Besides, saving is ought to be considered also as a major economic policy of the government. Indeed, the people of a poor and developing country need to save at a higher and higher rate. On the one hand, such savings improves individual resourcefulness and, on the other, the mobilised resources can be utilised by the government for developmental financing in many areas. Surely, the government creates debts for itself by selling the savings certificates on which it has to pay interest . But the saving schemes do also encourage the national savings habit, which is economically very desirable, and provide the government with ready resources to borrow and spend on different developmental projects. Without the savings schemes, the government would not be in a position to lay its hands on a vast pool of mobilised resources to meet its expenditures and the individual savers would be worse off having not saved their resources but spent them on consumption. Certainly, the government must keep its public borrowing limited in order to not increase the size of its public debt beyond the desirable level. But the government's public borrowing within safe limits is undoubtedly useful as these borrowings and expenditures mean economic activities and creation of demand in the economy. Moreover, the savings schemes, operated by the government, do also act as a social safety not for the people of modest means in their old age.
On its part, the government has, however, been acceding more and more to suggestions from various quarters by reducing the number of its savings schemes and also much pushing down the rates of interest offered by them. It was only recently again that the government imposed a 10 per cent tax on the interest earnings, above nominal amount of Taka 25,000/- per year, to be obtained from these schemes. All concerned have been expressing their resentment over the move that looked more like a penal measure on the savers. Some quarters were, however, supportive of the move, stating that the same would lead to encourage the flow of resources from the savings certificates to the capital market and the banks. Specially, it was stated that the move would help the banks to increase their availability of resources to be able to lower their landing rate on bank loans which, in turn, would give a boost to entrepreneurship based on cheaper bank loans. But such an outcome proved to be only theoretical thinking. In fact, no real changes were noticed at the field level. Its only outcome was to push into much distress a huge number of people in the country who depended on the government's savings instruments and got benefits for themselves and created benefits for the government as well. Besides, this blow on the savings schemes also showed up adversely on the overall national savings rate which was previously growing stronger and stronger every year.
The people at whose expense that policy of maiming the savings schemes was sought to be pursued are pensioners, retired civil servants, small business operators, housewives whose husbands died, old and infirm people with their life savings, etc. In most cases, these people are not to blame for not taking risks like young people with what could be resources saved over a life time. They depend on their capital gains on investments in these safe savings certificates in many cases as a form of regular income with which they meet family expenses, needs of health care, provided rent and support to younger members of their families. After the imposition of ten per cent tax on invest coming from various saving schemes and also enforcement of other related stringent measures, these people have been confronted with great difficulties in investing in the government-administered savings certificates.
Meanwhile, the government has also been lowering the yield rate on its certificate, though the inflation rate has been rising. The economy has otherwise been in a state of recession for many factors and this is borne out by the fact that new investment activities are now on the decline. As such the banks already have now more resources they can invest. Thus, the commercial banks of the country are presently having excess liquidity.
In this backdrop, the policy moves for imposition of ten per cent tax on interest earnings, above Taka 25,000/=, from the government-run savings scheme and also enforcement of some other stringent measures like lowering of the yield thereon etc., have been discouraging small savers, leaving them with hardly any outlet for some cushions in their rainy days. It is now welcome that the government has decided not to deduct at sources any tax on interest received from savings certificates up to an amount of Taka 0.15 million per year. But it (government) has not made the interest earnings from the savings schemes tax-exempted. It would have been better if the government did not impose any tax on such interest accruals, up to a some limit, from such savings schemes.
Meanwhile, it is to be noted here that interest given on savings should be above the rate of inflation to create some motive among savers so that the earnings from their saved amounts remain above the rate of inflation. Now that the rate of inflation has reached double-digit on point-to-point basis, the reason for lowering the yield-rate on government-administered savings certificates does not hold water. The highest rate of interest of about 12 per cent now being given on most of government's saving schemes is nothing attractive for the savers in terms of the fast climbing costs of living or inflation.
THERE are many people in Bangladesh of small means who would want their money to grow. They want to invest their money to this end but find no feasible outlets. Entrepreneurship is no doubt preferred as a way of investing one's resources and making gains on the investments. But entrepreneurship can be risky in the Bangladesh setting for a variety of factors and the latest ranking of Bangladesh in one of the bottom positions under the World-Bank-Sponsored survey of investment climate in countries around the globe would amply suggest why investment that promotes entreprenuership is still hazardous here.
In this situation, small savers in trying to be entrepreneurs may lose everything from an investment climate which is full of hurdles and negatives. Unlike the big investors who can count on many factors to remain viable in their enterprising, the small investors cannot rely on such cushions. Therefore, they have always tended to invest their surplus resources on the safest medium available, i.e. the government's various savings schemes.
The savings schemes or savings certificates used to be preferred by them for many reasons. First of all, they generally provided interest rates on maturity at a notably higher rate than the banks. The capital market could be an investment outlet for the small investors. But investment in this market has many risks which the small investors can hardly afford to undertake. Earlier many small investors who invested in the capital market in the mid-nineties were very resentful after the collapse of the stock market in a situation where the prices of their shares fall abnormally lower than the prices at which they bought them. That experience still haunts them, though some institutional developments have taken plan during the past several years to provide a relatively better operational ground for the market than before. Thus, finding no other safe and gainful outlet for investments, the small savers' only option seemed to be the government's savings schemes. In a comparative sense, these proved to be very safe investment outlets that provided relatively higher interest rates. Such investments are considered safe by most of small investors for maintenance of their families particularly upon their retirement from active service.
Besides, saving is ought to be considered also as a major economic policy of the government. Indeed, the people of a poor and developing country need to save at a higher and higher rate. On the one hand, such savings improves individual resourcefulness and, on the other, the mobilised resources can be utilised by the government for developmental financing in many areas. Surely, the government creates debts for itself by selling the savings certificates on which it has to pay interest . But the saving schemes do also encourage the national savings habit, which is economically very desirable, and provide the government with ready resources to borrow and spend on different developmental projects. Without the savings schemes, the government would not be in a position to lay its hands on a vast pool of mobilised resources to meet its expenditures and the individual savers would be worse off having not saved their resources but spent them on consumption. Certainly, the government must keep its public borrowing limited in order to not increase the size of its public debt beyond the desirable level. But the government's public borrowing within safe limits is undoubtedly useful as these borrowings and expenditures mean economic activities and creation of demand in the economy. Moreover, the savings schemes, operated by the government, do also act as a social safety not for the people of modest means in their old age.
On its part, the government has, however, been acceding more and more to suggestions from various quarters by reducing the number of its savings schemes and also much pushing down the rates of interest offered by them. It was only recently again that the government imposed a 10 per cent tax on the interest earnings, above nominal amount of Taka 25,000/- per year, to be obtained from these schemes. All concerned have been expressing their resentment over the move that looked more like a penal measure on the savers. Some quarters were, however, supportive of the move, stating that the same would lead to encourage the flow of resources from the savings certificates to the capital market and the banks. Specially, it was stated that the move would help the banks to increase their availability of resources to be able to lower their landing rate on bank loans which, in turn, would give a boost to entrepreneurship based on cheaper bank loans. But such an outcome proved to be only theoretical thinking. In fact, no real changes were noticed at the field level. Its only outcome was to push into much distress a huge number of people in the country who depended on the government's savings instruments and got benefits for themselves and created benefits for the government as well. Besides, this blow on the savings schemes also showed up adversely on the overall national savings rate which was previously growing stronger and stronger every year.
The people at whose expense that policy of maiming the savings schemes was sought to be pursued are pensioners, retired civil servants, small business operators, housewives whose husbands died, old and infirm people with their life savings, etc. In most cases, these people are not to blame for not taking risks like young people with what could be resources saved over a life time. They depend on their capital gains on investments in these safe savings certificates in many cases as a form of regular income with which they meet family expenses, needs of health care, provided rent and support to younger members of their families. After the imposition of ten per cent tax on invest coming from various saving schemes and also enforcement of other related stringent measures, these people have been confronted with great difficulties in investing in the government-administered savings certificates.
Meanwhile, the government has also been lowering the yield rate on its certificate, though the inflation rate has been rising. The economy has otherwise been in a state of recession for many factors and this is borne out by the fact that new investment activities are now on the decline. As such the banks already have now more resources they can invest. Thus, the commercial banks of the country are presently having excess liquidity.
In this backdrop, the policy moves for imposition of ten per cent tax on interest earnings, above Taka 25,000/=, from the government-run savings scheme and also enforcement of some other stringent measures like lowering of the yield thereon etc., have been discouraging small savers, leaving them with hardly any outlet for some cushions in their rainy days. It is now welcome that the government has decided not to deduct at sources any tax on interest received from savings certificates up to an amount of Taka 0.15 million per year. But it (government) has not made the interest earnings from the savings schemes tax-exempted. It would have been better if the government did not impose any tax on such interest accruals, up to a some limit, from such savings schemes.
Meanwhile, it is to be noted here that interest given on savings should be above the rate of inflation to create some motive among savers so that the earnings from their saved amounts remain above the rate of inflation. Now that the rate of inflation has reached double-digit on point-to-point basis, the reason for lowering the yield-rate on government-administered savings certificates does not hold water. The highest rate of interest of about 12 per cent now being given on most of government's saving schemes is nothing attractive for the savers in terms of the fast climbing costs of living or inflation.