The responsiveness of financial savings to real interest rates and institutional reforms in Swaziland

The theory of financial liberalization argues that rising real interest rates induce more having and investment and therefore act as a positive stimulus to economic growth. Most developing countries have tested this theory of financial liberalization and their findings prove that there is a controversy. This study attempts to investigate the responsiveness of financial savings to real interest rate and institutional financial reforms in Swaziland for the period 1974 – 1998. The study adopted a modified model used by Azam (1996) and Mduma (1999). To avoid spurious regression coefficients, the study has used cointergration method of estimation instead of the study prove that real interest rates in Swaziland have a positive influence on financial savings though their effect is insignificant in the current period. The impact of real interest rate is found to be pronounced after a period of two years. The implication of such as behavior of interest rate is that Swaziland did not adopt a direct deregulation of interest rate policy but instead it adopted institutional financial reforms. Such a practice was meant to compliment the positive influence of interest rate on savings. The impact of institutional reforms proves to be slow in affecting financial savings than it is with deregulating interest rates. Financial savings are found to be mostly determined by banking habits and credit to the private sector. Per capita income has a negative influence on financial savings. In light of the above findings, the study recommends a further expansion of commercial banks into the rural areas and the involvement in savings mobilization of those small scale saving and credit cooperatives which have not been considered as financial institutions. This could improve banking habits, credit to the private sector and even per capita income, as more people will be attracted to saving in financial assets.