Factors That Reduce Savings
Various factors can impede individuals’ ability to save money, thereby affecting their financial stability and future prospects. High levels of debt, including credit card debt and loans, can significantly diminish disposable income available for savings. Additionally, inadequate financial literacy and lack of budgeting skills may lead to poor spending habits, making it challenging to set aside funds for savings. Economic instability, characterized by factors such as inflation, unemployment, and fluctuating interest rates, can also erode savings over time. Unexpected expenses, such as medical emergencies or home repairs, can further strain budgets and prevent individuals from building up savings. Moreover, lifestyle choices, such as excessive spending on luxuries or living beyond one’s means, can hinder savings accumulation. Addressing these challenges requires a combination of financial education, prudent budgeting, and proactive measures to mitigate economic risks, ultimately fostering a more secure financial future for individuals and households.
This study investigates the core leading factors that reduce savings in Nigeria between 1980 -2010 using ordinary Least Square (OLS) econometric framework, which will enable us proffer solutions for the improvement of savings in the economy, which is also an important component for economic development in any country. Base on data collected, it is discovered that savings output in Nigeria during the period was unsatisfactory but was later discovered as a necessary factor for economic development and growth. This research shows the significance of savings which is achieved when saving habits is greatly considered by public private and government. The empirical results show a negative influence of trade openness (TDO) on aggregate savings. The work therefore submits that effort should be geared towards improving export capacity by improving productivity in industrial sector, which provide employment and increase per capital income as a bid to accelerate savings. And since interest rate signals a positive influence on savings in Nigeria, there should also be an intensified impact on real rates, spread and financial liberalization and or financial developing in Nigeria.
Title page
Approval page
Dedication
Acknowledgment
Abstract
Table of content
CHAPTER ONE
1.0 INTRODUCTION
1.1 Background of the study
1.2 Statement of the problem
1.3 Objectives of the study
1.4 Statement of Hypothesis
1.5 significance of the study
1.6 Scope and limitation of the study
CHAPTER TWO
2.1 THEORETICAL LITERATURE
2.1.1 Development of saving in Nigeria
2.1.2 Theoretical Review
2.1.30 Determinant of savings
2.1.3.1 Income
2.1.3.2 Wealth
2.1.3.3 Inflation
2.1.3.4 Foreign Savings
2.1.3.5 Demographic Variables
2.1.3.6 Growth
2.1.3.7 Financial Development
2.1.3.8. Interest Rate
2.1.3.9Urbanization
2.1.4 Conclusion
2.2 Empirical Review
2.3 Limitations of the Precious Studies
CHAPTER THREE
3.0 RESEARCH METHODOLOGY
3.1 Model Specification
3.2 Estimation Procedure
3.3 Method Of Evaluation
3.3.1 Economic Apriori Critical
3.3.2 Statistical Criteria
3.3.2.1 Coefficient Of Multiple Determinations
3.3.2.2 T- Statistics
3.3.2.3. F –Statistics
3.3.3 Econometric Criteria (Second Order Test)
3.3.3.1 Autocorrelation Test
CHAPTER FOUR
4.0 PRESENTATION OF MODEL RESULT
4.1 Result Summary
4.2 Economic Interpretation of result
4.2.1 Real Gross Domestic Product
4.2.2 Trade Openness
4.2.3 Interest Rate
4.2.4 Net Capital Inflow
4.3 Evaluation Based on Economic Criteria
4.4 Statement Criteria (First Order Test)
4.4.1. Coefficient of determination (R2)
4.4.2 The T- Test
4.5 Econometric Criteria (Second Order Test)
4.51 Normality Test
4.5.2 Test for Autocorrelation
4.5.3 Test for Heteroscedasticity
4.5.4 Test for Multicolliearity
CHAPTER FIVE
5.0 SUMMARY, CONCLUSION AND POLICY RECOMMENDATION
5.1 Summary of Findings
5.2Conclusion
5.3 Block Recommendations
Bibliography
Appendix
1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Financial institution, market, regulator and instrument all comprises a set of complex and closely interconnected financial system, proving financial services in an economy, such services includes mobilization and allocation of resources, distribution of investment funds among firms, financial intermediation and foreign exchange transactions.
The Nigeria financial system can be categorized into two via: the formal or organized and informal or unorganized financial system, the banks and non banks financial institutions make up the organized financial system while the unorganized sector comprises of indigenous bankers local money lenders‟ (ISUSU), shop-keepers or traders, merchants, landlords, saving associations, friends and relatives etc. the system is poorly developed, limited economics information, defective system of according are not integrated into the formal financial system, but very important to the Nigerian financial system. Capital formations, buying and selling of bonds and securities, creation of new assets and liabilities, executing monetary and credit policies of the central bank etc.
Are the roles and functions of financial system geared towards economic development of an economy? Patriotic researchers and policy makers have observed a declining savings rate in Nigeria over the past decades; this is due to the critical importance of saving for the maintenance of strong and sustainable growth in the world economy particularly in Nigeria.
A sound, healthy and reliable financial system relates to savings mobilization and efficient financial intermediation roles:
First, reduces hoarding and help spread the risk between household and firms.
Second, lowers interest rates thereby bringing about stability in capital market.
Third, they create liquidity in the economy by borrowing short-term and lending long-term.
Fourth, disseminate information between ultimate lenders and ultimate borrowers thereby mobilizing savings from surplus units and channeling them to deficit units through the help of financial techniques, instruments and institutions. Fifth the intermediaries promote development investment.
The Nigerian financial system comprise the regulatory /supervisory authorities, bank and non- bank financial institutions. As at the end of 2007, the system comprised of the Regulatory/ Supervisory authority, the Central Bank of Nigeria (CBN), the Nigerian Deposit Insurance Corporation (NDIC), the Securities and Exchange Commission (ESC), the national Insurance Comedienne (NAICOM), the National Pension Commission (NPC), and the Federal Mortgage Bank of Nigeria (FMBN).the CBN is the principal regulate and supervisor in the money market, consisting of a Deposit Money Banks (DMBs), Discount Houses, the Peoples Bank of Nigeria and Community Banks.
The CBN exclusively regulates the activities of finance Companies and promotes the establishment of specialized or development financial institutions. The SEC is the apex regulatory/ supervisory authority in the capital market. The Nigerian Stock Exchange (NSE) is a self-regulatory or user-regulatory institution. The issuing Houses, Registrar and stock brokers, who also interact with the money market, complex the chain in the capital. The Federal Ministry of Finance, together with the CBN constitutes the monetary authorities and share control over Bureau de change. The NAICOM is the regulatory authority in the insurance industry, while
the FMBN regulates mortgage finance activities in Nigeria. Saving is a sacrifice of current consumption that provides for the accumulations of capital, which in term provides additional output that can potential be used for consumption in the future (Gersovitz1988). In other words, savings is the difference between current earnings and consumption. It has also been defined as “deferred consumption” or part of income, which is not spent.
Savings is described as a financial assets accumulated by the public- both government and private agents in the organized financial system. To expand financial savings involves shifting of funds from the personal and household sector to the business or corporate sector which in turn, leads to greater investment, income growth, employment and capital formation: which cannot be achieved without increasing the rate of savings, Nigeria‟s saving still falls below the requirements of its financial system due to low per capital income, under- investment in productive instruments, and investment in unproductive channels, e.g. gold, jewelry, income inequalities and demonstration effect Etc. to remedy this problems depend on the level of development of the financial sector mentioned above as well as the savings habit of the citizenry. The availability of investible funds can be a starting point for all
investments in the economy, which will eventually translate to economic growth and development (Uremadu, 2006). The relationship among saving, investment and growth has historically been very close; hence, the unsatisfactory growth performance of several developing countries. Example: Nigeria has been attributed to poor saving and investment. This poor growth performance has generally led to a dramatic decline in investment. Domestic saving rates have not fared better, thus worsening the already uncertain balance of payments position (Chete, 1999). The role of savings in the economic growth of any country cannot be overemphasized. Conceptually, savings represents that part of income not spent on current consumption. Instructions in financial sector like deposit money banks (DMBs)/commercial banks mobilize savings in a economy, the deposit rate must be relatively high and inflation rate stabilized to ensured a high positive real interest rate, which motivates investors to save from their disposable income. In Nigeria Nnann, Odoko and Englama (2004) are of the view that the level of funds mobilization by financial institutions are quite low due to a number of reasons, ranging from low savings deposits rates of the poor banking habit or culture of the people.
According to them, another impediment to funds mobilization is the attitudes of banks to small savers. Another Limitation to savings mobilization is the fact that the concentration of banks and their offices are biased in favor of urban areas. Among the reasons for this, is the fact that the established banks under- rate the volume of saving to be mobilized and channeled into productive investment in the rural areas. It is often argued that since the rural economy operates at a near subsistence level, there is very little that can be squeezed out of income and consumption. Because of this, it has not been realized that large volume of idle funds, though in small units per individual exist in the rural areas. In Nigeria, there is basically lack of incentives to savings which had adversely affects savings. Some of these factors include; poor banking habits, attitudes of banks to small savers, poor orientation, unemployment, instability in the political system, corrupt taxation system, instability in the banking system, etc. one of the economic growth and development in Nigeria.
1.2 STATEMENT OF THE PROBLEM
In Nigeria, there is lasting need of further efforts especially in mobilizing small savings in both urban and rural areas, and the process of financial intermediation itself, knowing fully well the
saving culture in Nigeria is very poor relative to other developing economics (Uremadu, 2006). In this respect, Commercial banks in performing their roles, was found to have potential scope and prospects for mobilizing financial resource and allocating them to investment. But given the problems inherent in the formal sector, the informal savings associations, if properly developed would not only facilitate the financing of economics development but would also contribute to the development of incomes, and that necessitates the need to put in place a coherent economics policy that will be capable of providing the much needed enabling environment and also there is an urgent need to encourage Nigerians to change their current attitude towards savings, thereby placing the right saving culture by institutions and regulatory agents who influence the decisions of households, firms and government.
As pointed out earlier, since national policy is it macroeconomic or microcosmic generates variables which could influence the propensity of economics and financial actors to save. This research work could attempt to examine from policy perspectives, the magnitude and direction of such variables as: interest rate, income,
growth, urbanization, foreign (aid) sector, fiscal policy etc, on savings in Nigeria.
Therefore, this research question will try and answer the following:
1. What are the factors that reduce savings in Nigeria?
2. What impact does factors reducing saving have on aggregate savings in Nigeria?
1.3 OBJECTIVES OF THE STUDY: In the light of the above problems, the objectives of this research work include:-
* To ascertain those factors that reduces savings in Nigeria.
To determine the impact of the factors that reduces saving on aggregate savings in Nigeria.
1.4 STATEMENT OF THE HYPOTHESIS
The hypotheses to be tested in this research work are:
a. Ho; the factors that reduce saving has no significant impact on aggregate savings in Nigeria.
b. H1; the factors that reduces saving has a significant impact on aggregate savings in Nigeria.
1.5 SIGNIFICANCE OF THE STUDY
This research work will be of immense help to [policy formulators particularly those involved in the development of the Nigerian economic agenda. It will help them in choosing the appropriate policy in the macroeconomic policy management, particularly those affecting saving in Nigeria. Also, through the findings and suggestions of this research project work, a greater awareness will be generated in the financial arena or sectors so as to appreciate the effects being carried out by the federal; government of Nigeria through the Central Bank of Nigeria and Federal Ministry of Financial in improving the policies affecting positive saving in recent years. Finally, this study will assists in a modest way to increasing student‟s knowledge on the practical and real- life situation of the theories they learn in the classroom.
1.6 SCOPE AND LIMITATIONS OF STUDY
The scope of this study is to estimate and evaluate the factors that reduce savings in Nigeria (1980-2010).
The Limitations are constrained to lack of fund, human error and limited time frame, which imposed difficulties when serious attempt to effect a general in – depth towards the study of the factors that reduce savings in Nigeria.
Factors That Reduce Savings:
There are several factors that can reduce an individual’s or household’s savings. These factors can be categorized into various economic, social, and personal reasons. Here are some common factors that can reduce savings:
- Low Income: One of the most significant factors is having a low income. When people don’t earn enough to cover their basic living expenses, there’s little or nothing left to save.
- High Expenses: High living expenses, including housing costs, utilities, transportation, and healthcare, can eat into a person’s income, leaving little room for savings.
- Debt: High levels of debt, particularly high-interest consumer debt like credit card debt, can make it difficult to save. A significant portion of income goes toward servicing debt rather than being saved.
- Emergency Expenses: Unexpected medical bills, car repairs, or other emergency expenses can deplete savings quickly, forcing people to dip into their savings or stop saving altogether.
- Lack of Financial Literacy: A lack of knowledge about financial management, budgeting, and investing can hinder savings efforts. Without understanding the importance of saving, some people may not prioritize it.
- Impulse Spending: Impulsive buying habits and the inability to stick to a budget can lead to excessive spending and reduced savings.
- Inadequate Retirement Planning: Failing to plan for retirement early enough can result in not saving enough for one’s retirement years. Many people underestimate how much they need to save for retirement.
- Job Loss or Income Reduction: A sudden loss of employment or a reduction in income can make it challenging to save, especially if there is no emergency fund in place.
- Inflation: Rising inflation erodes the purchasing power of money. When prices increase, the value of savings decreases, making it harder to achieve long-term financial goals.
- Low Interest Rates: Low interest rates on savings accounts and other conservative investments mean that savings grow more slowly. This can discourage people from saving as much as they would if interest rates were higher.
- Peer Pressure and Lifestyle Inflation: People often want to keep up with their peers or upgrade their lifestyles, which can lead to increased spending and reduced savings.
- Taxation: Taxation on interest income and capital gains can reduce the returns on savings, impacting overall savings growth.
- Family Responsibilities: Supporting family members, such as aging parents or children’s education expenses, can reduce the amount available for personal savings.
- Healthcare Costs: Rising healthcare costs, including insurance premiums and out-of-pocket expenses, can significantly reduce disposable income available for savings.
- Cultural and Social Factors: Cultural norms and social pressures can influence spending behavior. In some cultures, there may be expectations to spend on certain events or items, limiting the ability to save.
- Behavioral Biases: Psychological factors like procrastination, overconfidence, and the tendency to prioritize short-term gratification over long-term goals can lead to reduced savings.
- Unplanned Life Events: Life events such as divorce, legal issues, or unexpected family responsibilities can disrupt financial plans and reduce savings.
To improve savings, it’s essential to address these factors through budgeting, debt management, financial education, and careful planning for future expenses and emergencies. Building good financial habits and seeking professional advice can also help individuals and families increase their savings over time.