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Factors Affecting the Mobilization of Savings

Updated on July 18, 2014
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Introduction

Savings play a crucial role in the capital formation of a country. In particular, savings by individuals add a substantial portion to capital formation. Savings are nothing but investments by individuals or organizations. Savings can be for short-term or long-term. Savings are the main source of capital formation, which acts as a fuel for smooth functioning of an economy. Therefore, what matters is how to mobilize savings from people. It is not easy to develop savings habits among people. The reason is that there are various factors affecting the savings habits of people and hence mobilization of savings. Among these factors, some affect mobilization of savings positively while some affects mobilization of savings negatively. Let us look at these factors one by one.

Banking and financial sector development: This is a positive factor, which results in an increase in the mobilization of savings. Growth in the banking and financial sector development leads to establishing many new branches of banks and financial institutions. New branches facilitate money-depositing processes. Therefore, with increased number of branches and facilities, people are able to save money conveniently. If there is no easy access to bank branches, people may be reluctant to visit the faraway branches to save money. Hence, establishing convenient banking is the prime factor to increase mobilization of savings. For instance, many countries claim that new branches in the rural area have helped to increase the savings of people.

Customs and abnormal situations: Some traditions, customs or conventions affect the mobilization of savings negatively. For instance, in rural India, people still have the habit of saving money at home. Further, people like to save money in the form of gold ornaments. Obviously, gold in your personal locker is of no use for the economic development. Though gold has market value, it cannot be converted as an investment for a government developmental project instantly. Therefore, money is locked in the form of gold. Customs like these affect the mobilization of savings negatively.

Furthermore, if there is no peaceful situation in a nation, people do not show much interest in saving money. The reason is that they are not sure about the future of the economy. Hence, abnormal economic or political situations affect the mobilization of savings negatively.

Factors Affecting Investment

Assume that a country is successful in mobilization of savings. What if the saved money is not properly invested? If savings are not invested, there will not be capital formation. Savings should be converted as investments in order to create capital formation. Therefore, it is pertinent to look at the factors that affect investments.

In general, there are two types of investments: (i) public investment and (ii) private investment. Government carries out public investments. Examples of pubic investments are constructing roads, railways and industrial area, developing irrigation facilities, etc. Private investments refer to investments made by individuals such as businesses and factories. Private investments are equally important as public investments for the growth of capital formation.

Factors affecting public investments

Some macro economic factors such as government’s industrial policy and the situation of financial instability affect the public investments negatively. In a normal economic condition, public investments are regular activities of a government.

Factors affecting private investments

Private investments, on the other hand, are affected by various factors. The following are the most important factors that affect private investments in a country:

Willingness and Skill: For private investment to be successful, individuals should have willingness to start a new business and entrepreneurial ability. Savings in the bank do not become investments automatically. Individuals should take up initiatives to borrow money from banks and invest the borrowed money properly. In this way, industrial development occurs in a nation. Because of this reason, government fixes loan target for banks every year. Hence, willingness and entrepreneurial ability of people play a vital role in private investment.

Expected Rate of Return: Before starting a new business, you obviously calculate the expected profits. If you do not satisfy with the expected profit rate or rate of return, you will not start the business. Hence, expected rate of return is another important factor that affects private investments.

Rate of Interest: For investments, people borrow money from banks. What will happen if the rate of interest for borrowing money is very high? It is obvious that no person comes forward to borrow money at a high rate of interest. At the same time, if the rate of interest is low, many people tend to borrow money. Therefore, rate of interest is an important fact in determining the level of private investments.

Market Conditions: It is of no use in starting a business if there is no demand for goods in the market. A situation of low general demand occurs during recession or stagflation. On the other hand, if there is high general demand, people tend to invest enthusiastically upon the expectation of high profit.

© 2012 Sundaram Ponnusamy

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