Financial inclusion as a promising path to inclusive economic growth

Thanks to the hardworking and often unappreciated leading lights in President Goodluck Jonathan’s administration – Ngozi Okonjo-Iwala, Olusegun Aganga, Yemi Kale, Stella Oduah, Akinwumi Adesina, Arunma Oteh, Oscar Onyema and the small but indubitable cadre of private sector chiefs representing firms such as Dangote Group of Companies, Globacom, First Bank, Zenith Bank, Access Bank and their likes, the World Economic Forum on Africa (WEFA) was hosted by Nigeria, the first time it is held outside South Africa (currently Africa’s most developed economy). The theme of this 2014 edition of the forum was aptly, “Inclusive growth for job creation”. Indeed African countries and, particularly Nigeria, have been recording enviable growth rates in recent years; sadly, however, these high growth rates have had little or no appreciable impact on the fortunes of the majority of their people. Therefore, the thoughtful conveners of the forum were right to have chosen the “inclusive growth” theme.

The important question, however, is: what gave rise to the seemingly perennial high GDP growth that is perversely devoid of growth in the fortunes of individuals in the populace? In other words, why are not these tidal waves of growth lifting a significant number of individual boats of Nigerians? A combination of identifiable factors can be flagged as responsible for this pathetic economic trend: One, the growth episode of the past recent years has been dominated and/or fuelled by a commodity boom that has primarily been exploited by exportation without any form of value-addition to the exported commodities. Second, and avoidably damaging, is the irresponsible government budget allocation mix which had and continues to squander the foreign exchange earnings from the exportation of these commodities on recurrent expenditures (to the tune of seventy percent and higher) without any meaningful attempt at providing enabling production infrastructure – expansion of production base.

The ramifications of the combination of these two terrible trends are all too obvious for all to see. Exporting primary products without value-addition fetches the exporting nation the lowest possible prices for these commodities, which can be dismal should commodities face a secular decline in prices. The failure to value-add deprives the exporting nation potential production base expansion and attendant job creation that would have occurred in the downstream sector. In the case of Nigeria, the final products from the exported primary product, petrol and kerosene, are consumed domestically in incredibly huge volumes; yet the primary product is processed offshore for these final outputs and imported back by Nigeria. Consequently, the finished products cost Nigeria a significant multiple of what it sold the primary (base) product.

Therefore, one can see how the growth from the sale of petroleum has yielded no additional production, created deficit expenditure purchase (i.e., the country spends more than its revenue intake, and this is without considering the corrupt accounting inflation of subsidizing the importation of the said processed petroleum products), and can invariably depreciate the relative value of the naira and increase inputs costs for the few that access offshore intermediate goods for their business.

The above mentioned subsidization cost of imported finished petruleum products highlights the irresponsible and unwise ways the foreign exchange earnings from the sale of these commodities are squandered. Overblotted salary bills of various arms of government and its parastatals, and the expenditure on sundry non-capital projects, leads to Nigeria appropriating its budgets largely for recurrent expenditure (in the range of 70 – 80-something percent). This leaves less than 10 – 30 percent, maximum, for capital expenditure. In essence, the slightest chance that the loss, due to sale of non-value-added primary products, could be reversed through provisioning of enabling production infrastructure (i.e., electricity, roads, water, education, health care, etc) by using budget appropriation to fund significant capital expenditures is also imprudently and needlessly thwarted. And the vicious circle of non-inclusive growth is clearly in full motion!

Interestingly, it is at the juncture of the budget appropriation mix failure (a recurrent expenditure dominated divide) that the “financial inclusion” antidote becomes glaringly compelling. The genius of this proffered antidote is in using financial inclusion to supplant the enabling production infrastructure that could have been provided through an “inclusive growth” oriented appropriation mix (one that assigns a significant portion, say 30 – 50-something percent, to capital expenditure). “Inclusive growth” is the kind that pulls an incremental portion of society’s  formerly unemployed into the employed category, causes a significant portion of the populace to earn incomes that are above the poverty level, or reduces income inequality gap in the country. So what is financial inclusion and how could it foster inclusive growth?

At the basic level, financial inclusion is effectively a measure of the extent to which economic agents in an economy utilise the financial services at their disposal to conduct transactions, and particularly, support the highest possible activity in the real economy. A World Bank supported report on Africa’s financial inclusion defines “financial inclusion” in terms of the proportion of adults in a country, say Nigeria, that have access to and use banking services; a figure they found to be about fifty-something percent for South Africa which has the highest of this indicator in Africa. Not only does this aggregated and financial industry-specific measure mask important nuances about financial inclusion, most unfortunately it slants the definition in a way that inhibits a full understanding of what is meant by financial inclusion, and how it can foster inclusive economic growth and sustainable development, besides aiding households to manage their incomes and effect generational transfer of wealth.

The correct definition includes both the pooling of investable funds as well as the provision of such funds as credits in support of attractive productive activity (i.e., an individual or a business that accesses credit, seeks inclusion in the services provided by financial services firms). This comprehensive definition makes clear how financial inclusion would enable diverse economic agents in a country – individuals, businesses and government units – to explore attractive production opportunities which can create jobs, expand incomes via profitability, and/or foster overall development via improvement by regular activity/engagement within a competitive environment. This outcome is, in essence, the basis of “inclusive growth”.

The following are necessary for a fuller understanding of financial inclusion: (1) It means pooling of the most available heap of investable funds possible from all nooks and crannies of the economy and, (2) channelling the pooled funds to attractive production activities, particularly those of small-to-medium size enterprises which are established as the main engines of economic growth and job creation across countries. The kernel of this definition is effective financial intermediation, which has been amply shown to spur economic activity in many countries.

What is worth noting about effective financial intermediation is the logical sequencing of functions –first, comes the pooling of the funds and then follows the use of the funds to finance production, and importantly, financial services firms have to be actively and fully engaged for intermediation to be effective. Where either the proper sequencing of functions is absent or the full and active engagement of financial services firms is lacking, the ultimate essence of “financial inclusion” – inclusive economic growth and sustainable development, will be difficult to realize.

The overarching importance of this article is to point to, at a broad level, what actions are possible for harnessing the potential of “financial inclusion” as an effective enabler of “inclusive economic growth”.  These actions can be categorized into the two broad themes of (i) private sector led imaginative and creative financial services and (ii) government’s credible policy and institutional infrastructural support. Given government’s highlighted culpability in the identified vicious circle of non-inclusive growth currently prevalent, an upfront “no-go area” for the second kind of “financial inclusion” enablers is subsidization. In other words, government support role should not include direct subsidization.

In fact, government’s intervention must spring from a nuanced understanding of “financial inclusion”: Since the articulation of the Maya Declaration in 2011 in Mexico under the sponsorship of the Alliance for Financial Inclusion and the World Bank, a new awareness has grown about how “financial inclusion”, currently conceived, means extending effective financial intermediation to the often excluded segments of society – i.e., the poor in sparsely populated rural and sub-urban areas, women, micro and small businesses. Providing these segments of society access to affordable and relevant financial services would engender better management of household affairs, inclusive growth and sustainable development. This nuanced view of financial inclusion as being akin to “old wine in a new portable and better keg” must be shared by both the private sector and government, for “financial inclusion” to achieve the envisaged enhanced economic development it portends.

For the private sector led enabling of financial inclusion, as an inclusive growth tonic, a logical place to start is firms in the financial services industries. Financial services firms, particularly the intermediating kinds – including banks and particularly non-banks – must proceed on the realization that cultivating low-cost but massive-scale thrift behaviour in urban, suburban and rural areas of the country is the best way to assemble their requisite production input (investable funds) for credit extension of sundry forms for diverse scales of economic activity and resource management.

Saving products such as “mobile money” (using the M-PESA type model), agency and bonded “okada-vendor” based deposit collection models in sparsely populated areas, mobilizing saving against production shocks by selling micro-insurance products, harnessing “isusu” type informal saving behaviour, and the likes, are examples of ways to accumulate huge investable funds that are underpinned by economies of scale and low transaction cost.

Some of these saving products can be creatively tied to similar or lower risk credit products. Importantly, the main idea is for financial services firms to be discerning and flexible in using these creatively gathered investable funds to provide high performing credits in a sustainable manner. That is, in order to ensure sustainability of their intermediation business, financial services firms must discern effectively who among the many credit seekers have sustainable value propositions in terms of the kind of business activity for which they seek the credit.

Outside of banks’ conservatively tailored credit contracts, non-bank and less traditional funding products such as trade credits and leases have been found to be very important sources of external finance to businesses in Africa. Similarly, the typical profile of many businesses in Nigeria is that: they are small sized, relative young, and lack formalized structure and neatly kept records of operation and performance. Consequently, venture capital type funding contracts would also be effective in provisioning finance for many Nigerian businesses.

Therefore, Nigerians must use their near-fabled resourcefulness and creativity to extend financial services to the “usually excluded of society”, keeping their eyes on low transaction cost, huge scale of operation, leveraging ICT platforms, tapping into the huge unemployed and youthful labour; and particularly disrupting and/or co-opting the currently prevailing conservative banking model. That is, this new intervening financial services industry must produce relevant products that are accessible and most affordable – low price and reach.

The role of government would be, at a high level, to encourage such productive creativity by providing incentive and oversight that protects consumers without stifling the emergent markets. The joint effort of Nigeria’s Securities Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE) in using the various platforms at their disposal to extend financing to small and less known firms which normally could not access publicly available finance is instructive in the ways government can play a constructive role. Similarly, the NSE’s role in the West African exchanges would increase external funding pool for medium to large firms, and release less formal financial services providers to turn their attention to some of the “often excluded” segment of society.

More than any Nigerian government of recent memory, the Goodluck Jonathan’s administration, and state governments such as Lagos, Ogun, Akwa Ibom, Anambra and Cross Rivers, have shown promise in provisioning enabling environment for businesses (private sector initiatives) to commence. These should be encouraged to enable more businesses to thrive. The coupling of governments’ institutional and physical infrastructure provisioning with private sector led “financial inclusion” project, will unleash an incredible level of inclusive and sustainable economic growth. It is possible, let us dare to live our potential!

Kalu Ojah