The many challenges of financial inclusion in Nigeria

In a circular, Central Bank of Nigeria (CBN) lamented that we are not meeting any of the financial inclusion targets agreed and contained in the 2012 Financial Inclusion Strategy. Not only are we not meeting the targets, we are even retrogressing! For instance, while we achieved 60.3% in 2012, it declined to 58.4% in 2016 against a target of 69.5%. This translates to a financial exclusion of about 41.6%. Focusing on adults, the report revealed that while 36.9 million adults were banked, over 59 million remain unbanked. According to the CBN, “performance did not meet expectations across all inclusion targets for products, channels and enabler. Among product categories- credit, insurance and pension all fell short of targets by the most significant margins. Point of sale terminals and Automated Teller Machines showed the least progress among channels.”

The above is not surprising as pursuing financial inclusion and other policies with flawed models or approaches can only result in limited outcomes. Some people will inevitably be included but the outcome will be below the target and unsustainable. This is the reason why the number of formal bank accounts is less than 40million in a country of 200million people with insurance penetration of about 1% even when formal financial sector has been in Nigeria for over 122years! To achieve a sustainable and effective financial inclusion in Nigeria, there is a fundamental need for a change of our approach to banking and other financial services. It will require a change from our present economic approach to a sociological (socio-cultural/economic) approach. With a sociological understanding of the meaning and causes of financial inclusion and exclusion, a new approach and strategy will emerge. The reality is that Nigeria has two functional but limitedly interconnected sub-economies: the formal and the informal economies. As both are functionally vibrant due to good population of economic participants, any effort to promote more interaction of the sub-economies will require first a genuine and comprehensive appreciation of the inherent institutional peculiarities of the two sub-economies and then a carefully planned and effective integration strategies.

Even if we in the formal sector argue that we know better than those using the informal banking sector and as such can make suggestions for them, I think that the best approach will be to genuinely engage and ask them why they don’t use the formal financial sector. In 2012 CBN financial inclusion strategy, no ‘formal financially’ excluded person or group were deemed important to be included as stakeholders in the financial inclusion drive. The lucky and important 3 stakeholders include first, the providers such as formal banks and insurance companies, second are the enablers which are the regulatory institutions such as CBN, NDIC. The third group of stakeholders are the supporting institutions and development partners such as World Bank and other agencies and experts. The situation is like a team of medical doctors that prescribe medication for a patient without interacting with the patient to find out his/her symptoms. Expectedly, the patient might improve but will not be effectively cured due to improper diagnosis of his/her ailment. This is what has been happening in our financial and other sectors of the economy. We keep adopting policies and models without careful examination of the suitability and amenability of the policies to our peculiar contexts.

If we can effectively appreciate our contextual peculiarities in our policy proposals and implementation, then the appropriate term should be ‘Formal Financial Inclusion’ and the definition should be ‘increasing access to formal financial services and products to those that do not use the formal financial sector especially those that use the informal banking sector’. This clarification will help us in understanding the causes of formal financial inclusion/exclusion and possible solutions and contribution such as the National ID Card.

The fundamental problem with our current economic approach is that the use(s) of formal financial sector are dictated mainly by instrumental needs. Examples of instrumental needs include for instance the need to save, transfer money to a friend, pay school fees, buy a property and pay for flight tickets etc. Expectedly, if the above needs can be met without using the formal financial sector, the need to use the formal financial sector or to be ‘formal- financially’ included is therefore absent. Incidentally, this is the situation in Nigeria with those wrongly classified as financially excluded. Majority of their financial instrumental needs can be met within their respective vibrant informal financial groups in addition to our cash dominated economy. Even their basic financial needs (savings and lending) can be better met within their informal finance groups than within the formal financial sector. For instance, the rotating local savings and loans provide a more effective and reliable financial system to the ‘formal financially excluded’ than the formal banking sector. So there is no incentive or benefit to use the formal banking sector. Not only is there no incentive or benefit to use the formal banking sector, there is inherent mismatch between the needs of the ‘formal financially excluded’ and the services/products of the formal banking sector. Their savings and loans are of very small amounts, volatile and short-term which the formal banks are unwilling and unable to provide or service due to the high administration costs.

In addition to the instrumental needs, the informal finance sector also provides for the intrinsic needs of the majority of those classified as financially excluded- the poor and uneducated. Examples of intrinsic needs include sharing in the joys and sorrows of members like bereavement, child dedication, daughter’s marriage etc. As these intrinsic needs are culturally oriented and encouraged, the preference of the informal finance groups is guaranteed. Moreover, the regulations and operations of the informal finance groups are properly understood, accepted, internalised and complied with due to the normative (cultural) origin and approach of the rules.

In promoting formal financial inclusion, there are certain questions that our policy makers need to evaluate and possibly answer. Some of the questions include: (i). why a poor village man will prefer to use the formal financial sector instead of his well understood informal sector, (ii). Does he need a national ID/Master-card for his daily existence and especially for his financial transactions, (iii). Even if he decides to use the ID/Master-card, where will he use it and will he understand the terms and conditions of the card, (iv). Will the card be pre-paid or will it be like a normal credit card. There are so many unanswered questions to which the answers will help us in appreciating the importance of adopting a sociological approach to banking and especially for financial inclusion. This approach will ensure that any financial inclusion policy contains both instrumental and intrinsic needs of the target group to generate the required buy-in and effectiveness of the policy. It will require using some of our development priorities such as education and agriculture to innovate strategies to enhance the integration of our formal and informal financial sectors. In some instances, the informal finance sector should serve as role models for the formal sector. Avoiding or delaying in adopting this approach will sustain our limited financial sector development especially financial inclusion evident in our in-ability to achieve more than 40million formal bank account holders in a country of about 200 million people.


Franklin Ngwu

Dr. Ngwu is a Senior Lecturer in Strategy, Finance and Risk Management, Lagos Business School and a Member, Expert Network, World Economic Forum.


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