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Finance bill 2020: Promoting financial inclusion or exclusion?

Banks interest income growth to dampen in 2021

While there is no doubt that the government is broke and desperately looking for all sources of additional revenue, it should not be done in such a way that will jeopardize other efforts. This looks like the case with the new finance bill and its implications on financial inclusion efforts in Nigeria. Completely ignoring complaints of multiple bank charges on Nigerians, the government through the finance bill has broadened the instruments and transactions liable to stamp duties to include electronic stamping. Specifically, the bill approved that all electronic receipts or electronic transfers made to any bank account in excess of N10,000 will be liable of a charge of N50.00 with transfers in between own accounts the only exception.

In addition to the new fees in the Finance Bill, Nigerians all are also faced with litany of other fees. In the Guide to charges by Banks, Other Financial and Non-bank Financial Institutions released in December 2019 and effective from January 2020, there are over 100 different incurable bank charges that Nigerians pay. With charges such as card issuance and maintenance fees, credit and debit alert fees, cheques books and counter cheques, bank transfers, ATM usage, current and savings accounts maintenance, bank drafts and stopped cheques charges, one will begin to wonder if the Nigerian banks are actually interested in real banking or just collection of fees?

A situation where any and every attempt to use the formal banking sector especially by poor Nigerians is met with a fee is not only abnormal but contradicts all our financial inclusion efforts

In one of the groups I belong to, we were told on Sunday that while we got about N150K as interests payments from the bank, we paid about N160K as bank charges on the same account. The implication of this is that not only did the bank use our money to do business for a whole year without paying anything to us, we even paid them (the bank) over N10K for using our hard earned money to do their own business. The question then is if the banks are financially intermediating or ‘dis-intermediating’ the Nigerian economy and if the Federal Government is really interested in promoting financial inclusion and financial sector development? Not only are these charges contributing to financial exclusion, some can be described as unethical and very exploitative. Some banks even charge BVN enquiry fee and cash transfer form usage charge. A situation where any and every attempt to use the formal banking sector especially by poor Nigerians is met with a fee is not only abnormal but contradicts all our financial inclusion efforts.

Just last year 2020, it is estimated that Nigerians paid about N100 billion to our banks as account maintenance charges with our five top banks getting over 50% of the fees. While we continue to pay these charges, the key question is, what is account maintenance charge for instance and if it is justified. From my many years of experience with the financial sector, account maintenance charge is normally applied when a customer is unable to meet certain agreed terms and conditions of an account such as balance below agreed threshold. It can also apply when there are added benefits to the account such as travel insurance and overdraft facility.

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As such instances are not the reasons why most Nigeria banks charge account maintenance fees, it means that the huge amounts we pay are unjustified. If this is the case, a further question is why they continue to charge these fees and why CBN has not deemed it necessary to stop the unwarranted charges. A further question is if the banks can profitably survive without the questionable charges and I think the answer is YES! This is an economy described as the poverty capital of the world with about 100 million classified as being below the poverty line and only about 36 million people use the formal banking sector.

Traditionally, banks generate their revenue and profits through the performance of their inherent financial intermediation functions to the economy. Primarily, this is done through the mobilization and transfer of savings and other resources from areas of surplus (depositors) to areas of scarcity (borrowers & investors broadly defined). The revenue or profit of the banks therefore comes from the interest rate spread, which is the difference between the deposit interest rate paid to the depositors, and the lending interest rate charged the borrowers. Other sources of revenue or profit made by the banks are variations or mutations of this fundamental intermediation function. Economies where banks effectively perform these intermediation functions are characterized by visible and sustainable economic development and particularly the contribution of the banking sector to the economy. Unfortunately, this is not the case in Nigeria even when we have had a formal banking sector for over 122 years.

A better understanding is through a comparison with that of UK where Nigeria adopted and continues to adopt her banking and other economic systems from. In a country of about 200 million, the total number of formal bank account holders in Nigeria is about 36.4million. With a lending interest rate of above 20%, only about 7% of adults and 10% of firms have loans with Nigerian banks even as access to credit remain a major challenge to over 80% of SMEs. With total domestic credit provided by the Nigerian banks as a percentage of our GDP just at 23.3% in 2018 as compared to South Africa with 180.4%, it is very clear that Nigerian banks are not lending to our private sector. While only about 6.9% of Nigeria firms are using banks to finance investments, only 3.9% of their working capital is provided by the banks.

In the UK with a population of about 66 million people, there are about 150 million bank accounts (savings, deposits and current) and about 95% of adults have at least one bank account. Not only did the financial sector contribute about £119billion to the UK economy, it enhanced tax revenue of UK by about £27.3 billion in 2017. With about 65,379 ATM machines with no withdrawal charge in over 98% of them, the financial sector employs about 1.1million people and generated a trade surplus of about £51billion in 2016. Interestingly, there is no maintenance charge for savings account and most current accounts. The few fee paying current accounts come with added services such as travel insurance, car break-down cover, home emergency and mobile insurance among other services. While the lending interest rate in the UK over these years has been about 0.5%, the average credit provided by the banking sector to the economy as a percentage of the GDP from 2008 to 2012 was about 214.32% and about 168% in 2017. With over 10,500 bank branches, there is no charge for interbank transfers, cheque books, debit Cards etc. Using other measurement variables for banking sector development and contribution to the economy reveal the same wide differences and disappointing performance of Nigeria.

*Dr. Ngwu, is an Economist/Associate Professor of Strategy, Risk Management & Corporate Governance, Lagos Business School and a Member, Expert Network, World Economic Forum. E-mail- [email protected],