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Banking in Nigeria: 45m customers up for grabs

… only 1.8m customers have access to credit

Nigerian banks may have failed to meet one of their core responsibilities of giving loans to customers as over 45 million account owners in Nigeria lack access to credit.

While data from the Nigeria Inter-Bank Settlement System plc (NIBSS) show that Nigeria has 47.66 million registered Bank Verification Number (BVN), an 11-digit number required to opening a bank account, the most recent data from the National Bureau of Statistics (NBS) that have a breakdown of banks’ customers with access to credit show that only 1.89 million customers were given loans as of first quarter of 2019.

Comparing the 1.89 million customers that got loans from banks to the 47.66 million BVN holders, Nigerian commercial banks only served 3.78 percent of their customers in the review period.

“To cut cost and lower their risks, banks prefer to loan huge sum to wealthy individuals and big companies because they believe they can easily recoup the loans. To the banks, lending to small businesses and households is too much stress,” a Lagos-based financial analyst who pleaded anonymity, states.

Even though the state-funded NBS has a 2020 ‘Selected Banking Report,’ the report, which contains the data of banks’ customers that were given loans in the period, a source from NBS says the reason why the breakdown is only available up till Q1 2019 is that NBS “don’t get that info all the time, so when it is gotten we add it.”

A breakdown of the NBS data show that even though the amount banks have been giving to their customers as loans has been on the rise since 2015, but the number of customers has, however, trended in the opposite direction. From giving loans to 3.03 million customers in 2015, banks reduced the number to 2.48 million in 2016 and then to 2.33 million in the following year. The NBS report did not have data for 2018, but 1.8 million was reported for Q1 2019.

“Banks are established to provide loans and other financial services to you and other customers,” the CBN’s Bank Customers’ Bill of Rights and Duties noted.

According to the Corporate Finance Institute (CFI), a commercial bank is a financial institution that grants loans, accepts deposits, and offers basic financial products such as savings accounts and certificates of deposit to individuals and businesses.

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With the huge gap between banks’ customers and those that can access loans, it would be right to say that to most banks’ customers, Nigeria’s deposit money banks, as their name implies, only serve as a place where customers make deposits and are then charged for making transactions, a key barrier of financial inclusion.

Analysis of the 2020 full-year financials of Nigeria’s biggest banks show that the tier-one lenders earned N395 billion as fees and commissions for helping to maintain customers’ accounts, electronic transactions, commission on touchpoints, account services, and banking charges for transfers related transactions.

With over 45 million banks’ customers outside the credit space, it is safe to say that, though many Nigerians are included in the formal financial system, but many more are financially underserved.

Financial inclusion means that people have access to basic financial services like a savings account, credit and insurance. A higher exclusion rate in Nigeria could lead to a poorer population as lack of access to credit and insurance puts them at an economic disadvantage.

According to Mastercard, to achieve any real financial inclusion impact, people also need to become active users of financial products.

“Simply providing access to financial services is not enough. To achieve any real impact, people also need to become active users of financial products,” Ann Cairns, vice chairman of Mastercard, says.

In the absence of banking services like credit, or if financial products are rarely accessible, analysts say people will inevitably turn to informal providers, such as neighbourhood savings clubs, local money lenders, and unlicensed remittance services or Esusu, Adashe, or Ajo, as its fondly called in Nigeria.

“Bank is not the first option that comes to mind when I think of getting a loan to expand my business, I have never gotten a bank loan before. Even though they know where my shop is, they usually ask for too much both interest rate and the loan requirements,” a Lagos-based provision store owner who simply identified herself as Mrs Juliet, states.

EFInA’s report put 40 million Nigerian adult population in the unbanked segment in 2018. The number could be higher going by BusinessDay estimate of the 45 million bank customers that lack access to credit.

Fintech is saving the day

While banking in Nigeria remains an attractive sector, with over $9 billion in value pools, the vast majority of consumers who are underserved present opportunity for non-conventional financial institutions.

With a high financial exclusion rate, especially in rural areas, due to issues of cost, trust and proximity to service points, Nigeria’s financial inclusion gap created an opening that Fintechs have been quick to take advantage of.

Many of Nigeria’s Fintech companies stepped up to develop enhanced propositions across the value chain to address pain points in affordable payments, quick loans, and flexible savings and investments.

Fintechs have led with innovation in product development, designing useful, convenient and affordable financial products and services for millions of Nigerians, according to the ‘Harnessing Nigeria’s Fintech potential’ report by Mckinsey & Company.

“In the process, they have created a multiplier effect across the economy, unlocking new business models beyond financial services, fuelling the growth of e-commerce, increasing the STEM talent pipeline, and moving the needle on progress towards the country’s development goals,” Tunde Olanrewaju, a senior partner with Mckinsey & Company London, says.

According to Andy Jury, CEO of Mukuru, when Fintech banking platforms are able to not only provide multiple channels – USSD, an app, WhatsApp, live chats, etc, whereby customers can transact but also the ability to sign up without having to physically interact with a bank or branch, then the opportunity for self-empowerment and financial emancipation is further amplified.

Banks are late to the party

Even though 94 percent of banking assets are owned by private local banks, as Nigeria ranks second of 180 countries in terms of the share of bank assets held by local lenders, ahead only of Israel’s 97 percent, Nigerian banks are only now starting to consider the opportunity in the evolving financial-technology industry where Fintechs have booked their space by riding on the boost in smartphone penetration.

For example, Nigerian consumer Fintech company, Carbon, which has about 659,000 customers, said it processed transactions worth N96.54 billion (~$241.35m) in 2020, up 89 percent compared to the same period a year ago. For its lending arm, disbursement volume was N25.21 billion (~$63m), up 9.1 percent from FY2019. Also, N13.02 billion (~$32.55m) worth of investment was made on the platform, representing a 365 percent increase from the previous year.

Investors’ appetite for Nigeria’s growing Fintech industry, following the huge opportunities in the space, forced them to inject more money in the industry in March 2021 than they did in the whole of 2020.

This gives reason on why banks like Guaranty Trust Bank plc and Access Bank plc, Nigeria’s biggest lenders are approaching the CBN for a new licence to also tap from the Fintech space.

Even though banks have rolled out digital products mainly by partnering technology firms, they want a separate licence to control the payment infrastructure, an analyst states.

Scarce PSB licence slows telcos’ potential

More than two years after the CBN gave an official node to non-financial companies like telcos to apply for mobile banking licences to assist in deepening access to financial services, big industry players, though have applied are yet to receive the licence.

While two smaller telcos and a payment company have been given the mobile money licences, the country’s largest mobile operators, MTN and Airtel are yet to receive the licence.

Targeted at Nigeria’s over 40 million unbanked population who are mostly in the rural communities, the payment service bank (PSB) by the apex bank would enable telcos and other non-financial institution to offer financial services that exclude lending and taking foreign-currency deposits.

Meanwhile, in the last 10 years that Nigeria was considering whether to allow telcos to assist in financial inclusion drive, countries like Kenya and Ghana adopted the model and have since seen an explosion in mobile money wallet usage. Nigeria’s CBN was rather focused on an independent bank-led model that would supplement and support the existing banking system.

Industry analysts have argued that the fear of telcos like MTN Nigeria taking a larger share of banks’ customers, following its already established infrastructure, is the key reason for the delay to grant it licence.

Kenya’s Safaricom and MTN Ghana are said to attract mobile money earnings that are higher than some banks annual profit in both countries.

“The same may happen in Nigeria, and so some banks are looking for ways to lobby the CBN for Fintech licence or make it delay granting the licence to their biggest threat,” a Lagos-based investment analyst says

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