Does trust in financial institutions drive formal saving? Empirical evidence from Ghana
Samuel Tawiah Baidoo holds a Master of Philosophy degree in economics and he is affiliated with Department of Economics, Kwame Nkrumah University of Science and Technology (KNUST) Kumasi, Ghana. He is currently a Project Research Assistant and PhD student at the Department of Economics, KNUST. His research interests include microeconomics, monetary economics and economic policy analysis. Email: samueltawiahbaidoo@yahoo.com Linda Akoto holds a Master of Philosophy degree in economics and she is currently a PhD candidate at the Department of Economics, University of Ghana, Legon. Her research interests include monetary economics, economic policy analysis and international economics. Email: akotol@ymail.com. Schumpeter 1934; Walle 2014) stable and efficient financial institutions exert a positive impact on economic growth. Financial institutions play a key role by serving as intermediary 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 detailed earlier, 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 those financial institutions. With regard to takeovers, 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, for instance, mention can be made of UT and Capital banks which were recently acquired by the GCB bank because of insolvency. Subsequently, uniBank was also taken over by the Bank of Ghana due to abysmal performance.
International Social Science Journal