ISET Economist Blog

Lending by Georgian Banks Boosts Savings and Provides Shelter from Relatives in Need
Friday, 21 February, 2014

Georgian households, being as poor as they are, don't save enough for the rainy day. Do low savings imply that Georgians are impatient to consume and do not care about their future? Is it in our genes that we prefer today’s egg to tomorrow’s chicken? Maybe our history, the history of a small nation struggling for survival, taught us to live our lives one day at a time?

Let’s face it: while culture may definitely play a role in people’s attitude to saving (an issue to which we will come back in the second part of this article), the vast majority of Georgians consume most of their meager income and are barely able to make ends meet: according to 2011 Saving Behavior Assessment Survey (SBAS) data, only one in seven Georgians (14%) has any savings at all. Moreover, the same data show that on average two out of five Georgians are borrowing from commercial banks.

What is more puzzling, however, is that less than 40% of those (few) Georgians who report being able to put some money aside choose to keep their savings in banks (according to SBAS 2011 data). One possible explanation is the lack of trust in financial institutions. Having lost their life savings about 20 years ago, many Georgian households may prefer to keep their money at home or acquire tangible assets. [Ironically, to this date one residential building on Vazha-Pshavela Avenue carries a huge poster urging people to save money in the long-defunct Savings-bank (შემნახველი სალარო)].

But there may be other – peculiarly cultural – reasons for middle-class Georgians’ inability or unwillingness to accumulate relatively liquid reserves in the form of time deposits or cash. An improvised and not terribly scientific survey among our young ISET colleagues discovered that despite earning respectable wages none of them have any substantial savings. One problem is the temptation to spend on status symbols (fashionable gadgets, cars, etc.). But, more importantly, many appear to face tremendous pressures to support their immediate social environment – extended family and friends. Causes may vary: death or health problems in the family; a friend’s wedding or the birth of a child; education expenditures or investment into a younger brother’s new business. The result, however, is the same: any surplus cash – whether kept in a bank or under the mattress – is siphoned off by one’s social network.

The stories told by our ISET colleagues coincide with the more objective findings from the SBAS data. Georgian households report ritual services (weddings and funerals) to be the second largest(!) expenditure component after food. Almost every Georgian participates in this kind of in-group exchange (usually including friends and relatives), thus accumulating what is nowadays often referred to as “social capital”. As discussed in a previous blog by Nino Doghonadze, investment in social capital can be seen as a form of primitive social insurance providing for one’s old age, disability, or bad luck.

The strength of social networks, which may at times trample individual saving and individual insurance strategies, is thus best understood as a rational response to an almost complete absence – until very recently – of more “civilized”, state-organized systems to provide people with a decent social safety net. Georgians are not as myopic as they might appear at first glance. Instead of keeping their savings in potentially unreliable banks, they invest in social capital and networks.

Of course, not all middle-class households are happy to put all their eggs in the “social capital” basket. Alternative options of transferring current wealth into the future are an investment in other types of capital, physical or human. In the first case, you buy a building or equipment that later pays you back with increased productivity. In the second case, you invest in your own or your child’s education and later reap the fruits of the “bitter roots of learning”. While the first option is counted as “investment” in Georgia’s national accounts, the latter (investment in education) is counted as consumption. According to the World Bank’s Country Economic Memorandum (July 2013), the inclusion of the education expenditures would increase Georgian savings by 2%, as it accounts for a substantial part of people’s spending.

Furthermore, the pressure to spend (on status symbols) or support friends and family, has given rise to other non-conventional and rather costly strategies to lock one’s money away. This is not something uniquely Georgian. A recent article in The Economist discusses how villagers in North India revert to cows as a saving device:

New research by Santosh Anagol of the University of Pennsylvania and Alvin Etang and Dean Karlan of Yale University suggests that in northern India, villagers have used cow ownership as a way of preventing myopic spending. Only 7% of rural villages in India have a bank branch, meaning that many people store their cash at home, where it is easy and tempting to spend. By contrast, buying cows—available in villages nationwide—is a good way to tie up one's money, the authors of the study suggest. Even villagers who have access to a nearby bank branch may prefer to put their money in cattle. Cash invested in a cow is more difficult to spend than money deposited in a savings account: cattle are stubbornly illiquid assets. In this way, cows have been nudging their owners to save for much longer than economists.”

Cows (or cheese) may perform a similar function in the Georgian countryside. And they do! However, as far as the emerging urban middle class is concerned, the far more popular strategy has become to … borrow.

Indeed, borrowing from a commercial bank (at an exorbitant interest rate) in order to invest in real estate (new housing or renovation) is a rather costly but safe strategy to overcome myopic spending motives and to credibly refuse requests for assistance without hurting anybody’s feelings (and own conscience).

A collateralized loan is the ultimate commitment device forcing people to regularly put some money aside. It is costly – at the going interest rates – but it works. By borrowing from a bank people commit to saving in almost the same way in which they commit to losing weight by locking their fridges (in case you did not know, virtual fridge locks can even alert your friends in case you open the fridge late at night).

Bank loans are usually conditioned on regular wages and/or good collateral, leaving the poorest with cow and cheese saving options. Yet, the tendency to rely on banks rather than friends and relatives is true, on the rise. According to SBAS, Georgians increasingly approach banks rather than friends for financial support: 73% cite hatred of debts as a reason for not borrowing money from friends; the tradition of picking up the tab for collective restaurant meals – so popular in the good old days – is also becoming obsolete.

* * *

While perhaps helping individual saving, saving by borrowing is costly and does not perform the function of providing a domestic source of funding for private sector investment. Likewise, social networks are not the best 21st century way of providing insurance and organizing financial intermediation. That said, understanding social networks and the non-traditional ways of saving is important for getting the policy right and designing effective and efficient policy frameworks for social assistance, pension, education, healthcare, and banking reforms.

The views and analysis in this article belong solely to the author(s) and do not necessarily reflect the views of the international School of Economics at TSU (ISET) or ISET Policty Institute.