Monday, March 07, 2016 05:22PM /CBN
The National Financial Inclusion Strategy launched on the 23rd October, 2012 aims to reduce the financial exclusion rate in Nigeria from 46.3 per cent in 2010 to 20 per cent in 2020.
A key component of the implementation process is client empowerment achieved through improved financial literacy and consumer protection. To support the client empowerment component of the financial inclusion agenda, a financial literacy framework was developed in 2012 in collaboration with relevant stakeholders.
The National Financial Literacy Framework was developed drawing from experiences in the design and implementation of similar frameworks in other jurisdictions; a review of secondary research including an analysis of the findings of Access to Finance Surveys conducted by EFInA (Enhancing Financial Innovation and Access); a review of the ‘Mapping Exercise of Financial Literacy Initiatives in Nigeria’ commissioned by the GIZ in collaboration with CBN in 2013; and a review of other relevant policy and strategy documents.
Relevance and Linkages between Financial Capability, Consumer Protection and Market Stability
Financial system stability is a prerequisite for sustained financial market growth. If the building blocks, checks and balances for market stability are not in place, the financial sector is at risk of market failure
The push for liberalization and modernization of the financial sector and increased financial inclusion has resulted in deluge of new financial service providers and products experienced and inexperienced clients find themselves exposed to a range of products that are either totally new or too complex and sophisticated.
The risk of financial market or bank failure is particularly high during rapid market expansion or institutional growth if unchecked. This underscores not only the need for prudential regulations, supervision and enforcement, but also financial education and consumer protection.
Financial education is cardinal to the financial system in the following ways:
• Financially capable consumers make better decisions in managing and growing their assets and are less susceptible to unscrupulous financial services providers.
• Improved financial capability can result in increased uptake of appropriate products, decreased product cancellations, debt stress and repayment failure, and ultimately reduce risk for financial institutions.
• The behavior of financially capable consumers could engender competition amongst financial service providers and this can translate to more efficient products and competitive prices for consumers as well as eliminate unscrupulous financial service providers.
• Strong financial sectors and people capable of managing, protecting and growing their assets will ultimately support overall macro-economic stability and growth.
Increased Financial inclusion as a National Priority: The National Financial Inclusion Strategy (NFIS) launched in 2012 recognizes low levels of financial capability as one of the main constraints to improved financial inclusion and recommended the development and implementation of a National Financial Literacy Framework (NFLF).
Consumer Protection and Market Stability: The mix of new products and service providers coupled with new inexperienced clients in the financial sector, puts consumers at risk of poor decision making and abusive or fraudulent practices. The asymmetry of information and power imbalances between consumers and providers of financial services could also adversely affect the bargaining power of the consumer. This is particularly the case for vulnerable segments of the market such as the poor and the uneducated.
Financial education plays critical roles in enabling consumers make better financial decisions and recognizing fraudulent practices. An appropriate consumer redress framework also needs to be in place and consumers must be informed (through financial education) of their rights, responsibilities and redress options.
Improved Livelihoods: The 2014 Baseline Survey on Financial Literacy revealed that about 30 per cent of the adult population of 98 million surveyed generates an income from agriculture-related activities and 26.1per cent of the adult population owns a business.
This underscores the need for appropriate financial intermediation to t h e s e g r o u p s (farmers and MSMEs), the absence of which presents an impediment to the growth of the sector and the economy as a whole. Consumer awareness and financial literacy – combined with an effective consumer protection framework – are important requirements for increasing financial intermediation in these sectors.
A Dynamic Financial Sector and Past Legacies
The introduction of numerous policies, regulatory requirements and the proliferation of products, services and financial institution providers: The financial sector has become more complex in recent years. People are moving from being unbanked to u s i n g third generation products such as mobile banking; The 2014 National Baseline survey on Financial Literacy revealed that consumers lacked a general knowledge of most banking products in the market place as 70 per cent of the adult population (98 Million) have no knowledge of mobile money product and more than 30 per cent do not know about current accounts.
Improved Product Offering: Financially capable consumers express their needs better and thus contribute to the development of appropriate products and services to suit their needs. Credit Bureau: There are critical to the optimal functioning of credit markets. However, the public need to be educated on how they operate, the implications of bad credit records and their complaints redress processes. This also means that the necessary dispute resolution mechanisms must be in place as part of a broader consumer protection framework.
Lack of Trust in the Financial Sector: This is a result of historic bank failures and the crisis in the banking and capital markets following the global financial crisis of 2008/2009. While it is not the role of Financial education to instill trust in institutions (trust must be earned by the institutions through their treatment of consumers), it is necessary to make the public aware of the developments in the sector.
Changes in the Socio-Economic Profile
Changing Demographics: Longer life expectancy, increasing childcare expenses and household costs are increasing financial pressures on households. Governments and employers are also increasingly shifting the cost burden for social services to the individual. The implication is that consumers need to take more responsibility for their financial well-being, and therefore need to be more financially capable.
Growing Middle Class: Consumers are increasingly becoming creditworthy and may face increasing social pressure to showcase their wealth. The principles of responsible finance – particularly in relation to credit – should be emphasized with the suppliers of financial services, and the public needs to be made aware of both the benefits of credit and the dangers of over-indebtedness.
Increasing Urbanization: Over time, urbanization results in the weakening of social networks and relationships increasing the need for self-reliance, long-term planning and risk management. Urbanization also leads to increased exposure to financial service providers and sophisticated financial products. Young Population: The relative increase in the number of young people in the population – combined with urbanization – is a major social challenge facing many African countries, including Nigeria. The youth often fail to find gainful employment and have to carve out a living through a small enterprise. Support to youth and enterprise start-ups are required, including personal financial management skills.
Levels of Financial Capability
Low Levels of Penetration: The low level of penetration of complex financial products and low- cost electronic channels among the banked, points to a lack of awareness and understanding of the potential benefits of these products and channels.
Lack of Long-term Planning and Growing Assets: While most Nigerians save, these savings appear to be primarily for purposes of income smoothing, i.e. focused on the short-term. The uptake of pension products is also limited to just 5 per cent of the adult population
Risk Management: With insurance penetration at just 1.5 per cent 7 , there is a lack of appropriate risk mitigation strategies and families and business owners often sink deeper into poverty following an adverse experience.
MSMEs and Farmers: Improved personal financial capability is a precursor to improved financial management of a small business or farm. Personal and business finances are also closely linked in most households; few households maintain separate budgets and bank accounts from their businesses.
Youth: Given the rapid development of the financial sector, there are few role models and mentors for the youth to provide guidance on money management and navigate them through the complexities of the financial sector. The importance of ‘early intervention’ in the sphere of financial education is widely recognised, as it is easier to instil the right values, attitudes and perceptions among young people than to change the habits and perceptions of older people.
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