Financial Inclusion is simply the delivery of financial services at affordable costs to sections of disadvantaged and low-income segments of society, in contrast to financial exclusion where those services are not available or affordable. In other words, it is the provision of a broad range of high quality financial products, such as savings, credit, insurance, payments and pensions, which are relevant, appropriate and affordable for the entire adult population, and especially the low income segment.
A Report on Financial Inclusion by the World Bank which was last updated on 5th April, 2017 revealed that an estimated two billion working-age adults (more than half of the world’s total adult population) do not have an account at a formal financial institution. Financial Inclusion efforts seek to ensure that all households and businesses, regardless of income level, have access to and can effectively use the appropriate financial services they need to improve their standard of living.
Inclusion in the formal financial system helps people carry out day-to-day transactions, including sending and receiving money, safeguard savings (which can help households manage cash flow spikes), smooth consumption and build working capital, finance small businesses or microenterprises, help owners invest in assets and grow their businesses, plan and pay for recurring expenses, such as school fees, mitigate shocks and manage expenses related to unexpected events such as medical emergencies, a death in the family, theft, or natural disasters, and improve overall welfare. The benefits of Financial Inclusion are not only significant for individuals but for economies as well. Financial Inclusion is linked to a country’s economic and social development, and plays a role in alleviating extreme poverty.
According to a World Bank report on Financial Inclusion, the recent increase in Financial Inclusion is due to “immense supportive and competitive environments, policies that encourage innovation and national Financial Inclusion strategies”. These initiatives were driven by mobile technology, digital payments and law reforms that encourage correspondent banking and relaxed customer identification. The Securities in Moveable Assets Act 2017 is one of such laws recently enacted to promote access to financial services in Nigeria. The provisions of the Act compel banks to accept movable assets as collateral when granting loans to Micro, Small and Medium Enterprises (“MSMEs”) as well as other Nigerians. In addition, with the prevalence of mobile phones, mobile money is playing a crucial role in extending financial services to the underserved.
Framework and Implementation within the Nigerian Context
Nigeria prides itself as the most populated country and the economic giant of the African continent with over 176 million people; however 64% (of the adult population) is currently unbanked. The financial sector boasts of 22 commercial banks, over 400 microfinance banks and over 23 Mobile Money Operators, who over the years, have been trying to tap into the market potential of the large unbanked population in the economy.
The current unbanked population controls majority of daily retail transactions and even the banked population is encouraging them through cash transactions because the economy has not moved away from the traditional cash based operations. The result is the increasing number of informal financial operators whose activities are not regulated, but who control high volumes of liquidity which could have been used to create economic opportunities if it were in the hands of the formal financial institutions. The informal financial operators include the money lenders, informal loan cooperatives, thrift schemes such as Esusu in West Africa and stokvels in South Africa where members are only entitled to the extent of their contribution. There are no checks and balances or any structured regulation in place to effectively manage or invest the available funds.
Financial Inclusion is becoming a priority for policymakers, regulators and development agencies globally. The World Bank Group considers Financial Inclusion a key enabler to reducing extreme poverty and boosting shared prosperity, and has put forward an ambitious global goal to reach Universal Financial Access (UFA) by 2020. Since 2010, more than 55 countries have made commitments to Financial Inclusion, and more than 30 have either launched or are developing a national strategy. A recent World Bank research on Financial Inclusion indicates that when countries institute a National Financial Inclusion Strategy, they increase the pace and impact of reforms.
Framework for Financial Inclusion in Nigeria
Nigeria, through its Central Bank (CBN), has developed its National Financial Inclusion Strategy (NFIS) to provide the blue print which will guide and support stakeholder activities in advancing Financial Inclusion in the country. Some of the features of the strategy are stated below:
- Firstly, the target set for the strategy nationally is to reduce the percentage of adult Nigerians that do not have access to financial services from 46.3% in 2010 to 20% in 2020. In addition, the strategy projected that 70% of adult Nigerians should have access to payment services in 2020, 60% to savings and 40% each to credit, insurance and pensions.
- Secondly, in order to achieve the above targets, the channels through which people can access the services such as branches of banks, microfinance banks, number of ATMs, mobile agents, Point of Sale (POS) agents of deposit money banks are also expected to increase to specified numbers per 100,000 adults in 2020. Accordingly, stakeholders are being encouraged and coordinated to ensure that the channel targets are met, while the Nigerian public is being sensitized to demand for, access and use the services available at these channels.
- Thirdly, regulators are being encouraged to develop relevant guidelines that will ensure that the number of access points increase. In this regard, the Central Bank of Nigeria has issued guidelines on the agent banking and mobile money operations, both of which will make financial services available at points other than conventional branches that are often far and difficult to reach by consumers of these services. The Bank has also issued the tiered know your customer (KYC) requirements with simple documentation requirements, and by so doing, enables low income and rural dwellers to open and operate bank accounts. The financial literacy programme of the Central Bank of Nigeria in collaboration with the Federal and State Ministries of Education was established to implement financial literacy curricula in schools, as well as the collaboration between CBN and financial services providers to implement financial literacy campaigns. This will enlighten both providers and the public on possible financial services and how best they can be provided and accessed. Furthermore, the consumer protection programme will ensure that there is fair treatment of all customers.
Current Implementation Status
The NFIS which was launched in 2012 set out certain initiatives aimed at improving Financial Inclusion in the country. Various stakeholders engaged in the finance sector are implementing these initiatives.
Financial Service providers have engaged in Financial Inclusion campaigns to capture the untapped working populations. The Bank of Industry (BOI) in 2015 launched the Bank of Industry Fashion Fund. Under the scheme, women entrepreneurs in the fashion industry can apply for up to N1,000,000 (One Million Naira) without collateral to invest in their fashion businesses. Access to such a scheme would likely require one to own a bank account with a commercial bank. Other financial institutions in Nigeria have also launched some initiative or strategy aimed at improving Financial Inclusion in the economy.
Regulators of the Finance Industry (CBN, PENCOM, NIC, NCC, NDIC, SEC etc.) are not left out as they have a key role to play in this regard. Since the launch of the NFIS in 2012 the CBN has embarked upon and implemented the following initiatives aimed at improving Financial Inclusion in Nigeria:
- Guidelines on Mobile Money Services (Guidelines) in Nigeria. – Issued in 2015
- Regulatory Framework for licensing Super-Agents in Nigeria – Issued in 2014
- Consumer Protection Framework – Issued in 2016
- Bank Verification Number (BVN) Project Exercise – Introduced in 2014
- Three Tiered Know Your Customer (KYC) Requirements – Introduced in 2013
- Cashless Policy
- A financial literacy framework
Other regulatory bodies such as the National Pension Commission (PENCOM) and National Insurance Commission (NIC) have embarked on financial literacy awareness campaigns enlightening consumers on the benefits of the services offered within their industry, as well as law reforms that would promote Financial Inclusion within the Nigerian economy. In this regard, the subsequent review of the Pension Reform Act (PRA) 2004 and the enactment of the PRA 2014 introduced the Contributory Pension Scheme (CPS) which made it mandatory for employers and employees in both the public and private sectors to contribute towards employee retirement benefits. The new pension scheme introduced an autonomous tripartite system involving The Regulator, The Administrator and The Custodian to minimise the possibility of misappropriation of pension funds in order to ensure that a large number of the population have adequate access to investible funds and lower rate credit facilities. Furthermore, the National Insurance Commission has also introduced the Micro Insurance and Takaful Insurance Guidelines which are to aid the achievement of Financial Inclusion in all sectors of the economy. The Minister for State for Finance, Dr. Yerima Lawan Ngama in a keynote address at a two-day MicroInsurance and Takaful Insurance Stakeholders Engagement Workshop and the official launching of the Takaful Insurance Guidelines in Lagos said the step taken by the Commission will further increase insurance penetration level and also contribute to the nation’s GDP.
Economic Benefits and Impact
The effort put in by the Nigerian government and the CBN to increase Financial Inclusion through the years has resulted in not just an increase in the number of people utilizing financial services but also in the growth and sophistication of the financial system. Furthermore, development economists have since established that Financial Inclusion leads to overall economic growth and development. In other words, the more financial inclusive markets are linked with better economic development. The impact of Financial Inclusion can be assessed through various spectra of financial products offered to consumers including the following:
- Credit – Access to credit helps to encourage investments in assets that enable business owners to start or expand small enterprises. For instance, in 2016, “Enhancing Financial Innovation and Access” (EFInA) awarded a $2 million grant to First City Monument Bank (FCMB) to extend banking services to the financially excluded population in Nigeria. EFInA, a financial sector development organization that promotes Financial Inclusion in Nigeria, said the grant would enable FCMB, via its Group Lending and Agency Banking project, provide financial services and access to credit facilities to prospective customers in 12 states; namely, Bauchi, Kaduna, Sokoto, Niger, Kwara, Lagos, Oyo, Ogun, Akwa Ibom, Rivers, Cross River, and Abia
- Savings – Studies on the impact of savings show that savings help households manage cash flow spikes and smooth consumption, as well as build working capital. Compared to informal means of savings, saving at a formal financial institution can be safer as deposits are insured up to a limit by the Nigeria Deposit Insurance Corporation (NDIC) and more valuable because of interest earnings. At a macroeconomic level, savings can lead to higher productivity and economic growth if they are invested within the country.
In view of the above, the National Financial Inclusion Strategy defined several initiatives to drive the achievement of the target for savings, including the implementation of the tiered KYC requirements, the implementation of a national savings mobilization programme and policies to support linkages to informal savings groups. The prospects of achieving the savings target will depend to a large extent on the implementation of a national savings mobilization programme, the three-tiered KYC requirements, concerted implementation of the Digital Financial Inclusion Project, and the development of a formal framework on linkages between informal and formal financial institutions. Also, the mobile money accounts and agent banking initiatives need to be enforced by regulators and services providers.
- Insurance - Vulnerability to risk and the lack of instruments to cope with external shocks make it difficult for poor people to escape poverty. Micro insurance can be an important instrument for mitigating risk. Micro insurance is insurance that is usually accessed by low income earners in the society. Another aim of the product is to ensure everybody is included under the scheme and to increase the contribution of insurance to the country’s Gross Domestic Product. An example is the recent introduction of the “Micro Insurance and Takaful Insurance Guidelines” by the National Insurance Commission which was laid down to aid the achievement of Financial Inclusion in all sectors of the economy.
- Electronic Payment and Mobile Money - An efficient payment system reduces incidental transaction costs. Rather than travel long distances, people have the ease of doing business on their mobile phones and other computer devices which is more cost effective Key initiatives to drive usage of electronic payment channels among Nigerian adults, as mentioned in the National Financial Inclusion Strategy, include the implementation of the tiered KYC requirements, the roll-out of the Cashless Nigeria Project in all States of the Federation, and programmes to increase public awareness about mobile payments. The three-tiered Know Your Customer (KYC) requirements were introduced in 2013 to simplify account opening requirements. The requirements state that accounts of all three tiers can be opened with basic personal information and without any minimum amount. The primary aim of these initiatives is to increase the number of adult Nigerians that have access to financial services via the use of electronic payments in order to reduce inefficiencies, leakages and illicit financial flows in the financial system.
In addition, more inclusive financial markets are directly linked with economic growth and employment. Policy makers increasingly recognize that a financial market that reaches all citizens allows for more effective execution of other social policies and development priorities.
As earlier stated, over half of the world’s adult population does not have access to formal financial institutions. Improving the global average level of Financial Inclusion has therefore become a global challenge as this poses a threat to global economic growth and development. The following are some of the key challenges that hinder Financial Inclusion in Nigeria:
- Low Literacy Levels– Given the fact that more than half of the adult population in Nigeria is uneducated, it stands to reason that this group of Nigerians also lack knowledge of the benefits derivable from accessing financial services. Furthermore, staff of financial service providers also seems to display a lack of adequate understanding of the financial services they offer and are unable to educate the unbanked effectively. We recommend that Government should embark on awareness initiatives in local languages to cater to the gap in the adult population. Financial service providers on their part have to provide on-going training to their staff.
- Poverty and Unemployment – Increasing poverty and unemployment are another major impediment to Financial Inclusion in the country. As these increase, more of the adult working population is less inclined to utilise financial products and services. The Government on its part has to create an enabling environment for businesses to thrive which will in effect lead to more job creation within the Nigerian economy.
- Inadequate/Inefficient Financial Service Infrastructure - Also of great concern is the largely inefficient e-channel service of most of the deposit money banks. The various e-channels and applications such as ATM, POS and mobile banking platforms that are supposed to facilitate electronic transactions have remained deficient in most cases. ATM card requests stay untreated for weeks and months, while most subscribers to Internet and mobile banking platforms complain of poor services. This challenge manifests itself generally in form of inadequate financial infrastructure especially in the rural areas where the bulk of the financially excluded are found and therefore limits options for accessing financial services. Financial service providers must invest in infrastructure and ensure that regular maintenance and upgrade is conducted whilst improving customer relations.
The above are some of the demand-side challenges to Financial Inclusion in Nigeria. The supply-side challenges include long distance to financial access points, the prohibitive cost of financial services and inappropriate financial products, etc.
Regulatory barriers include the cumbersome “Know Your Customer” (KYC) requirements, lack of adequate laws and regulatory framework that would promote access to financial services. Other challenges include lack of trust in financial services providers and high rates of corruption in the country.
In light of the above, it is undeniable that Financial Inclusion is integral to any nation’s economic development, especially for developing countries like Nigeria. Greater Financial Inclusion is achieved when every economic activity, geographical region and segments of the society have access to financial information, financial assistance, financial services and financing with ease and at minimal costs. This helps promote balanced growth through the process of facilitating savings and investment and thus causing efficient resource allocation from surplus sectors of the society to deficit sectors of the society. By this process, financial transactions are made easy, income level and growth increases with equity, and poverty is eliminated, while the economy becomes insulated from external shock.
Achieving greater Financial Inclusion is a responsibility of all relevant stakeholders and involves collective effort. However, the onus is on the government to make the first step towards Financial Inclusion by establishing the necessary institutional framework, an effective regulatory framework and an environment necessary for successful implementation of any Financial Inclusion strategy. As mentioned earlier, the Federal Government, through the Central Bank of Nigeria, has gone about this by inaugurating the National Financial Inclusion Strategy in 2012 and several other initiatives aimed at improving Financial Inclusion such as the Mobile Banking, Know Your Customer (KYC) guidelines, Consumer Protection Framework, Bank Verification Number (BVN) project and even the recently released Securities in Movable Asset Act 2017 which was enacted to compel banks to accept movable assets as collateral for granting loans to Micro, Small and Medium Enterprises (“MSMEs”) as well as other Nigerians.
The government must be commended for its progress thus far but must continue to engage stakeholders and create the necessary environment for financial stability. Stakeholders such as commercial banks, insurance firms, agents and other financial service providers must adhere to requirements and regulations set by the CBN. They must also endeavour to engage potential financial service consumers, as they are the main tool for widening the coverage of financial services in the country.
George Etomi & Partners (GEP) is a full-fledged law firm providing commercial advisory services to an array of local and international clientele. GEP takes pride in its deep expertise in the Capital and Financial Markets domestically, regionally and globally and advises clients on financial transactions, including leading international and local investors in infrastructure projects across various sectors, investment banks, merchant banks, commercial banks and development financial institutions on financing issues and risk mitigation strategies as it may affect the companies.