Market costs, investor education, product diversity, technology enablement, and strategic partnerships are the key ways capital markets can drive financial inclusion through innovation and access, a recent report by Enhancing Financial Innovation & Access (EFInA) shows.
The report titled ‘Capital Market Inclusion’ noted that a well-functioning capital market can play a vital role in support of inclusive economic growth by channeling long-term finance into infrastructure and other large-scale projects that create jobs and improve access to markets.
“In the advent of the COVID-19 pandemic, there was a spotlight on the importance of diversity in building sustainable capital markets and the need to advance an objective financial inclusion initiative that gives individuals and businesses better access to affordable financial products and services that meet their needs,” It further stated.
For market costs, the report elaborated that cost being a key consideration, depositories and exchanges have taken strong measures to improve operational efficiencies and reduce fees.
Secondly, for investor education, the efforts of infrastructure providers in promoting financial literacy and investor education include combining traditional initiatives, such as global investor days, “ring the bell” campaigns, master classes and training courses, and social media influencer campaigns.
“Exchanges, supported by government agencies and regulators, are leading this charge. Young people are a crucial demographic and infrastructure providers are fueling their interest with initiatives that involve gaming, coding, and film-making,” It added.
For product diversity, exchanges typically encourage participation by offering products and services that serve a broad range of investors.
While for technology enablement and strategic partnerships, the report noted that the capital market infrastructure landscape has grown to include fintechs and start-ups that offer products and services across the value chain.
“Exchanges and depositories are forming strategic partnerships with these entities to adopt new technologies that help enhance access to previously underserved customer segments at lower costs.
“Recent defaults/delays in payouts by crowdfunding platforms, particularly in the agricultural space have raised concerns about the stability of the space.
It also added that trust remains a critical factor in driving financial inclusion. “Hence, the safety and stability of mass market investment platforms are critical to increasing financial inclusion.”
According to the World Bank, financial inclusion is when individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit, and insurance – delivered in a responsible and sustainable way.
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The importance of financial inclusion, which is a key enabler to reducing extreme poverty and boosting shared prosperity, has made it to be identified as an enabler for seven of the 17 Sustainable Development Goals 2030.
This is why since 2012; the Central Bank of Nigeria (CBN) has been finding ways to reduce the unbanked population by introducing initiatives capable of bringing more people into the financial system.
One of the ways is its National Financial Inclusion Strategy which aims to increase the financial inclusion rate to 80 percent in 2020 from 46.3 percent in 2010. But data from EFInA shows that the rate grew to 64.1 percent in 2020 below the CBN target.
The ultimate goal of financial inclusion is inclusive growth and for this to happen the place of capital markets cannot be undermined, says Uchenna Uwaleke, Professor of Finance & Capital market at Nasarawa state university, Keffi.
“Indeed, the capital market can serve as a veritable channel for enhancing financial inclusion through new products and services tailored to suit investors’ preference for risk and return as well as borrowers’ project needs and risk appetite,” Uwalek said.
He also added that this challenge has since been recognized in other jurisdictions.
“In China for example, as a way of reducing the exclusion rate of Small and Medium Enterprises, an interbank bond market exists offering a number of innovative products such as the SME Collective Notes (SMECN) which is a special financial bond.”
The EFInA report also highlighted key levers through which fintechs are driving financial inclusion in the capital market. The levers mentioned are access, pricing, product design/innovation, and education/ perception.
“Fintech has increased product affordability through higher returns. They are offering two-three times the interest rates on savings compared to traditional players.
“And the design of their financial products caters to the needs of various segments of the population across culture, religion, gender, geography, etc. They also educate consumers on the needs and benefits of financial products and services,” It concluded.
In 2021, Nigerian fintech startups raised almost $800 million, a 120 percent increase compared to what they raised in the last three years combined ($360.7 million), according to Techpoint.
The increasing investments in the fintech space have made experts call for a collaboration between fintech and the capital market, as it would effectively create a digital economy as well as increase financial inclusion and cashless payments.
“Fintechs have a huge potential to transform the capital markets and effectively build a digital economy,” said Jude Chiemeka, Divisional Head, Trading Business, Nigerian Exchange Limited (NGX).
According to him, they are transforming the financial services industry by focusing on targeted products and services, automating and commoditising high-margin processes, strategic use of data, and collaborating with incumbents.
