Discussing the best model to drive financial inclusion in Nigeria

On Thursday December 8, BuisnessDay in partnership with the Bill and Melinda Gates foundation brought together financial experts in Nigeria and across Africa to discuss what it would take to get more people into the financial system. About four of every 10 Nigerians are financially excluded. Financial inclusion is important because it enhances the financial wellbeing of individuals and households.

The financial system is the heart of the modern economy enabling individuals and households to earn income, save, invest and borrow. Where individuals or households have limited access or are excluded from the financial system, it inhibits their capacity to improve their personal and financial wellbeing. This is why governments and financial regulators around the world have taken it upon themselves to get more people into the financial system.

The governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, who was the key speaker at the event rightly, noted, “Financial inclusion is required to enhance incomes, investment and well being at the household level. It is also critical for economic growth and financial stability at the macroeconomic level. The governor notes that it is because of the critical importance of financial inclusion that the CBN launched the “National Financial Inclusion Strategy on 23 October 2012 with the overall target of reducing the adult financial exclusion rate from 46.3 percent in 2010 to 20 percent by 2020. This means that by 2020, we expect that 8 out of every 10 adult Nigerians should make use of at least one financial product (formal or informal).”

Global Consulting firm Mckinsey, which also played a key role in the event, in their presentation noted that increased financial inclusion could actually add about 12% to Nigeria’s GDP or economic output. Mckinsey also noted the critical role digital payments could play in driving financial inclusion in Nigeria and across the African continent due to the increasing penetration of smart phones. A report prepared by Mckinsey notes that as at 2014, 80% of adults in emerging markets had a smart phone while only 55% had financial accounts.

But because smart phones are seen as reliable platform to drive financial inclusion through digital payments, it raises the very controversial question of which model is best suited in driving financial inclusion. The debate in Nigeria and in many emerging markets has been whether the telecommunication companies like MTN, Etisalat, Glo and Airtel should drive it or if the banks should drive it. In Nigeria, the CBN has sided with the banks but the CBN governor speaking at the conference said that telecommunication companies would “eventually” be considered to come on board.

Kenya is often shown as the shining model of where financial inclusion, has largely succeeded on the back of a telecommunication company driven model. But Professor Njuguna Ndung’u, the former Governor of the Central Bank of Kenya, who was also at the event noted that it was a misconception to say that the Kenya model was driven by the telecommunication companies. He noted that that M-PESA actually started as a product from a Micro-Finance bank, which was looking for a cheap platform to reach out to its customers spread all over the country. It eventually struck a partnership with Safaricom and that led to the birth of M-PESA which is now widely used across Kenya by both the financially included and excluded.

Elly Ohene-Adu, former member of banking department and member of the monetary policy committee, Bank of Ghana noted that in Ghana, they chose the model of allowing the telecommunication companies to set up their subsidiaries with own boards separate from their parent companies to offer mobile banking services and this has helped drive financial inclusion among the excluded in the country.

The Ghana model looks like the most appropriate middle ground in the debate over what is the best model to drive financial inclusion. The telecommunication companies see no reason to allow the financial institutions ride on their infrastructure, which cost money to put in place to drive digital payments, while the banks see the offering of financial services as their forth which should not be breached by outsiders. Emefiele struck a conciliatory note when he said that he is willing to collaborate with the Nigerian Communications Commission (NCC), the regulator for the telecommunication to drive financial inclusion through digital payments.

 

But there are other challenges besides the best model to drive financial inclusion. One of the key insights at the summit was the   understanding that dwellers in the rural economy have very low disposable incomes, which inhibits their capacity to join the financial system and therefore it is important that the government facilitate the creation of enterprises in the rural economy to help improve rural income and also drive financial inclusion.

However, participants also pointed out that wealth in the rural economy is not necessarily captured in form of actual money but could also be held in livestock and crops. It was pointed out that in the northern part of Nigeria, dwellers in the rural economy hold their wealth mainly in the form of livestock that is only exchanged into cash when there is a need for it, for example, to pay school fees. This makes it important that in driving financial inclusion in the rural areas, these forms of non-cash based wealth is taken into consideration especially when credit decisions are being taken. The lending criteria for the rural economy can therefore not be similar to the lending criteria in the urban economy, something that the central bank must consider when policies around lending are made.

There were also some unanswered questions around a proper definition of who owns the customer, the telecommunication firms or the banks? How do you leverage existing agent networks to drive financial inclusion without short changing the owners of the existing agent networks and how do you build confidence and trust among the different regulators needed to drive financial inclusion?

 

 

Anthony Osae-Brown is the Editor of BusinessDay Newspaper Limited