The Impact of Bank Saving Interest Rate in Banking the Population of Democratic Republic of the Congo: Research Proposal

Introduction

Financial institutions are a key pillar in any country's economy, and bank deposits are a major driver of the banking sector's success (Mushtaq & Siddiqui, 2017). Practical considerations and economic theories support the view that interest rates are one of the factors that can influence savings and bank deposits. However, the nexus between customer savings and interests rates has not been overly studied, especially in the context of developing countries. Although the topic continues to attract significant research interest, no definite agreement has been reached about how interest rates on savings affect the quality and quantity of bank deposits. Moreover, even though many studies have investigated the relationship between interest rates and economic growth cycles, very few have attempted to address customer concerns about saving money in banks in the DRC context. This shortcoming provides an important research gap, which the current study attempts to address.

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Background/Statement of the ProblemFor many years, DRC has been ravaged by civil wars leading to protracted political instability. Accordingly, many aspects of the country's economic infrastructure such as the banking industry have lagged when compared to regional countries (Nest, Grignon & Kisangani, 2006). The majority of the people of the Democratic Republic of the Congo do not have a strong culture of saving money in banks. They do not trust these institutions and are afraid to lose their money. As a result, most of them use costly informal savings mechanisms. Fifteen years ago, some commercial banks started to encourage people to save their money in the bank. The banks used the incentive of high-interest rates on savings to encourage more people to keep their money in banks. This led a boom in the in the banking sector. However, only a small proportion of the country's population is banked. On this background, the current study seeks to investigate the relationship between interest rates on banking populations in the central African country.

Research Objectives

The current research seeks to provide empirical evidence for the relationship between interest rates and customer saving behaviors in the Democratic Republic of Congo. The specific objectives of the study are:

• To investigate the extent to which interest rates on savings influence customer savings and bank deposits.
• To examine the impact of internal bank controls and institutional factors on customer perceptions on savings in the DRC banking sector.
• To determine the effect of the of BCC fiscal and monetary policies on customer savings and bank deposits in the DRC.

Research Questions/Hypothesis

The research will be guided by the following questions:

• Do interest rates on savings influence customer savings and bank deposits in the Democratic Republic of Congo?
• What are the impact of internal bank controls and institutional factors on customer perceptions on savings in the DRC banking sector?
• What is the effect of BCC's fiscal and monetary policies on customer savings and bank deposits in the DRC?

Significance and Justification of the Study

The current study is significant in that it will contribute to existing knowledge and literature on the relationship between bank interest rates and customers perceptions of savings in DRC. By exploring this important relationship, the findings of the study will provide crucial theoretical underpinnings for the strategies employed by banks in DRC to attract deposits from customers. More specifically, the study will help the management of banks to understand the effect of institutional policies on the decision to save money in banks. The findings will also be valuable to a variety of stakeholders including researchers and academicians, business owners, and workers. For researchers and academicians, findings from the current study will act as a source of empirical literature for future studies. They can cite the work in their studies besides proposing areas for further studies.

Literature Review

Some past studies have explored the relationship between saving interest rates and bank deposits. Most of the studies show a strong correlation between the two variables, meaning that high-interest rates stimulate bank savings and vice versa. According to classical economics, there are two important effects of interest rates on savings. The income effect leads to a negative relationship between savings and interest rates while the substitution effect leads to a positive relationship between interest and savings (Orji, 2012). Evidence from bank performance shows that the substitution effect tends to be strong hence a positive relationship between interest rates and the level of savings.

According to Haron and Ahmad (2000), interest rates are the main determinant on the amount of interest payment that savers should expect on their deposits. All other factors constant, an increase in the savings interest rates will make saving money in banks more attractive and will encourage more savings. In the converse, a drop in interest rates diminishes the perceived reward for savings, which tends to discourage more savings. However, the link between the two variables is complicated due to the multiplicity of factors that influence customers' attitudes towards bank savings.

Empirical studies have revealed that the proportion of banked populations in developing countries is significantly lower than that in the developing counties. A host of factors contribute to this phenomenon. These include low levels of illiteracy, lack of awareness about the importance of banking, and irrelevant products offered by financial institutions (Siaw & Lawer, 2015). Other important factors that are likely to affect customers' use of banking services (especially saving behavior) include aggregate annual bank losses which cause customers to have negative perceptions about how well banks are doing, poor regulatory and institutional policies leading to inefficient oversight functions, and county specific fiscal policies.

In a study by Nathanael and Eriemo (2014), the interests rate offered on fixed savings accounts were found to have a strong impact on saving behaviors, particularly the average bank deposit. In most cases, rates on fixed savings accounts are affected by bank lending rates because banks use customer deposits to lend money with the expectation of high returns on the borrowed capital. Therefore, nominal interest rates should be expected to have a strong causal impact on customer savings and hence the decision to save money in banks. Generally, high-interest rates on savings have been known to drive customer deposits, which is a strong indicator of bank performance.

Studies have also shown that base rates are an important factor that influences bank interest rates. Although commercial banks set interest rates independent of the other, these decisions are usually influenced by the Central Bank rates, which vary from time to time (Otuori, 2013). In theory, a fall in the Central Bank base rates leads a corresponding fall in commercial bank rates. In practice, this is not always the case. For instance, in the aftermath of the global financial crisis of 2007-2010, bank rates did not fall in tandem with base rates (Rachdi, 2013). In other words, the fall in base rates did not have a much impact on customer savings. On the contrary, most banks witnessed massive withdrawal of deposits, which was occasioned by fears of an imminent collapse of banks.

Besides base rates, studies have identified a myriad of other factors that can influence the relationships between interest rates and savings. One of these factors is consumer confidence. If the population is pessimistic about the general economic outlook (especially the performance of banks), they tend to reduce spending and hold cash. Other important factors that influence savings include financial conditions, the relative distribution of wealth and growth in real wages (Athukorala & Tsai, 2003).

Methodology

The current research is designed in the form of a phenomenological study. By definition, a phenomenological study is a systematic effort to uncover inner meanings, values and human behaviors as constructed through the lived experiences of the research participants (Groenewald, 2004). This methodology is ideal for studying and understanding a wide range of phenomena that cannot be explained exclusively using a quantitative approach. For the current study, the phenomenon of interest is the possible relationship between saving interest rates and growth of the banking population in the DRC. This phenomenon will be studied through causal study. Unlike descriptive or exploratory studies, the causal research seeks to explain the cause-and-effect relationship that exists between various variables. The strength of a phenomenological approach in this study is underscored by the fact that it will help in highlighting relevant themes and trends as pertains to the research problem.

The units of study from which samples will be selected are the commercial banks operating in the Democratic Republic of the Congo. The goal of the research is to include all relevant banks using the unbalanced panel data. Other non-bank financial institutions that accept deposits will be excluded from the study. The primary data to be used in the study will comprise of the five years (2012-2017) quarterly historical data on the bank interest rates and volume of bank deposits collected. Appropriate statistical techniques will be utilized to analyze the data in line with the stated objectives. Primary data will also be obtained from interviews with bank managers. The interviews will focus on the managers' assessment of the impact of interest rates on bank deposits and savings. Results of the current study will be compared with findings from other studies to identify possible areas of agreement and divergence.

Research Structure

The final dissertation will comprise of the following sections and parts:

• Introduction
• Theoretical framework / Literature review
• Research design
• Research results
• Discussion
• Conclusion and Recommendations
• Reference list

References

Athukorala, P. & Tsai, P. (2003). Determinants of household saving in Taiwan: Growth, demography and public policy. Journ...