When those of us in the United States talk about illiquid savings, we tend to still be talking about some sort of financial instrument, held at a formal financial institution. For instance, we might have a CD or a bond only payable after a certain point in time. In Africa, an illiquid savings instrument is much more likely to be a physical object, like a goat, a building or a piece of jewelry.
A major incentive for those of us in the States to hold illiquid instruments is that they often have higher returns than a more liquid instrument like cash held in our savings account. In Africa, and elsewhere in the developing world, illiquid savings are desirable for different reasons.
Notably, Africans tend to have a different relationship with social circles and finances than those of us in the west do. (At the risk of overgeneralizing, plunging ahead!) In the West, we are very reluctant to lend money out to friends or family, on the grounds that it might put a strain on those closest to us. In Africa, the reverse is true. Because it is important to support those in your familial and social circle, it is very much expected that the well off share their fortune with the less fortunate in their circle. Asking for money is very common, and it’s well understood that the wealthiest should be sharing their wealth with others.
However, this puts a strain on the finances of those who are well off, but none-the-less trying to plan for the future. It’s hard to save for your child’s college tuition in the distant future if every time you gather money, friends and relatives are asking for it. After all, it would be incredibly inappropriate to turn them down if you have cash just sitting around. Therefore, it is very common for Africans to take great lengths to “not have money with them” when they are asked. For instance, a former colleague of mine actively asked to not have his per diems with him when he travelled to his home region. He knew if he had his per diems with him, he would be unable to say no to people asking for money. One way to save money, but to not have it available, is by making sure it is held in an illiquid form.
To me, one of the most distinguishing features of an African skyline in any town or city is a variety of buildings under construction. Part of this has to do with growth in Africa, and not much else. If an economy is growing rapidly (and many in Africa are), you expect to see construction. However, part of it has to do with efforts of individuals to have their savings held in an illiquid fashion. It’s very common for Africans to invest money towards the building of a home, even when they don’t yet have the funds needed to finish it. When finished, the house will have value, but if someone requests money, they can honestly say they do not have any to offer.
A second reason that people in developing countries avoid saving at a bank has to do with high fees and low interest rates. Currently, the micro finance bank in Wukro, the town where I am based, offers interest rates below the level of inflation. Furthermore, there are fees associated with withdrawing money. The bank is a safe place to save, but Ethiopians saving there are in effect paying to save their money.
On the other hand, goats and sheep, on average, have positive interest rates. If I have 10 goats, perhaps one of my female goats will get pregnant, and the next year, I will have 11 goats. In such a case, saving with my goat bank earned me 10% interest over the course of the year, far better than I can earn at the bank.
However, the downside with saving in livestock is when droughts or external threats come. For instance, I don’t have to worry about a hyena taking my money from the bank, or depending on where in Africa you are, a rival tribe coming and taking my savings. In effect then, those who want to save and are debating goats versus a bank account have the equivalent of the following dilemma. Would you rather a) invest in a stock that would lose money every year, but by a small steady amount? Or would you rather b) buy stock in a high-return, high-risk industry? For many, the answer is option b.
For those of us in the US and elsewhere, our decision about liquidity might depend on our willingness to not access our money, and the relative interest rates. However, these aren’t the only questions that exist in the world when it comes to assessing the value of liquidity. For those in Africa, the decision might instead be based on how to avoid giving others money, while maintaining social etiquette, and how safe you think your herd of goats is this year.