Wednesday, February 24, 2016 09:21 AM / FDC
At a time when Nigeria’s economic growth is slowing down, financial inclusion could not be more important. Financial inclusion ensures that irrespective of income level, all individuals, households and businesses have access to appropriate financial services products.
Given that low-income earners constitute a significant portion of the population and have a huge chunk of the economy’s idle funds, increased access promotes capital accumulation, credit creation, increased economic activity, and increased investment. It's estimated that Nigeria could even have a growth potential of 374% if 100% financial inclusion could be achieved (political and socioeconomic factors are kept constant).
Nigeria has made significant progress in this area but 39.5% of Nigeria’s adult population remains financially excluded, with an additional 11.9% only informally included. Accordingly, the government has set financial inclusion as a key pillar of the Financial System Strategy 2020 to make Nigeria one of the major global economies by 2020. However, a number of challenges remain including low literacy levels, rising inflation, increasing poverty and poor salaries.
The government and financial authorities need to take a more proactive approach to ensuring increased financial inclusion. Such an approach would involve eschewing any banking regulation or cost that could discourage people from saving or effecting banking transactions.
Financial Inclusion in Nigeria
Financial inclusion has been an integral part of Nigeria’s financial industry reforms for over 30 years. From the rural banking pro-gram in 1977 to the establishment of community and microfinance banks in the 1990s and early 2000s, the government and monetary authorities have delivered policies aimed at increasing financial inclusion.
Progress made with these policies includes: the establishment of over 300 banks in rural areas in the 1970s and 1980s; the provision of N300million ($80 million) to small and medium scale businesses between 1988 and 1994; a significant increase in borrowing rates thanks to community banks and the government-run People's Bank; and additional initiatives since 2005 such as the National Microfinance policy, non-interest banking, a financial literacy campaign, electronic banking and the cashless policy that saw financial inclusion rise from 23.6% in 2008 to 48.6% in 2014.
As a result of this nearly 5-decade long effort the ratio of currency outside the banking sector to narrow money supply has risen from 61.1% in the 1960s to 38.2% in 2005 and 20.8% at the end of 2015. However, the success has not been without challenges.
Moving Nigeria towards greater financial inclusion
A recent study by the IMF, which examined data from Uganda, Kenya, Mozambique, Malaysia, Philippines and Egypt, demonstrated that by leveraging three aspects of financial inclusion, a country can positively impact economic growth and affect income distribution.
The aspects of financial inclusion were access to credit, depth of credit and credit intermediation efficiency. Access to credit was determined by examining fees, transaction costs and documentation requirements. Depth of credit was determined by examining collateral requirements and borrowing costs while credit intermediation efficiency was determined by examining interest rate spreads as well as monitoring costs for banks.
The data below shows that the GDP was impacted by a 1% increase in credit/investment ratio resulting from each of the segments of financial inclusion. The credit/investment ratio indicates how much the credit is growing compared to investments in an economy and this ratio has an impact on GDP. In essence, the credit/ investment ratio is affected by a change in each of the aspects of financial inclusion and then the impact of changes credit/ investment ratio on GDP is then measured.
In Nigeria, however, credit access barriers such as hidden charges, ATM withdrawal charges, email alert fees and other frivolous fees continue to be pervasive. The recent introduction of the account maintenance fee, introduced by the CBN to help cushion the impact of trade shocks in the banking sector, is yet an-other example of this.
In the case of the People's Bank and the community banks, documentation requirements, hidden fees, borrowing costs and inter-est rate spreads all act as deterrents to high success rates, even when these rates are lower than standard retail banks.
The IMF study provides a solid framework through which policy makers can evaluate Nigeria’s financial inclusion initiative going forward. In order to optimally benefit from this study, it is imperative for the authorities to critically assess areas where previous financial inclusion drives did not succeed in the past and map out a practical strategy towards resolving the issues. This will provide the country with a solid platform with which to tailor a practical and forward-looking financial inclusion blueprint.
Opportunities for Nigeria's future of financial inclusion
The effort the Nigerian government and the CBN to increase financial inclusion through the years has resulted in not just an in-crease in the number of people using financial services but also in the growth and sophistication of the financial system.
The current macroeconomic policy aimed at improving lending to the real sec-tor is a positive step but it is likely to benefit those that already use the financial services products, and therefore additional steps should be taken to ensure that there are favorable credit facilities to encourage participation by the poor and financially excluded.
In addition, interest rates are still high and that will discourage poor business owners, who are not financially included, from seeking credit. Given the macroeconomic malaise Nigeria is currently facing, the government and policy makers are devising strategies to drive Nigeria towards sustainable growth. A coherent, effective and implementable financial inclusion roadmap has to be part of that plan.
A key catalyst in efforts to spur financial inclusion will be technology. With broadband projected to reach 30% by 2018, the government will have to leverage on the power of technology to achieve greater financial inclusion. Nigerian banks are already making it easier to utilize internet banking by making it possible to open an account from a mobile phone with internet without having to step into a banking hall.
The financially excluded, mostly those in the rural areas, should be made aware of such developments. The Nigerian financial inclusion situation should be analyzed in the context of the IMF study while taking into account Nigeria’s peculiar financial system and economy. An understanding of the past together with an insight into the present and future is required for have an effective financial inclusion strategy.
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