Nigeria is fully committed to financial inclusion, especially as a proven requirement for first reducing, and eventually eliminating extreme poverty. This is especially important in Nigeria where 40.1% of the total population were classified as poor, which is not surprising since 73.2 million adults within our population are also financially excluded. Most of these financially excluded adults work within the informal sector, are without financial records and are distrustful of formal financial services (FFS). If we want to rectify this, trust must be established.
Trust is a fundamental sociological behaviour and the foundation of every personal and business relationship. It plays a significant role within the financial services industry according to the Ernst and Young 2016 Global Consumer Banking Survey which proved that a strong correlation exists between levels of trust and customer advocacy. Nontraditional banks who provided unbiased advice to customers had higher trust and recommendation levels than traditional banks. Without trust, any efforts to formalize this sector will be futile, and lead to more people falling below the poverty line every day.
Micro enterprises contribute 65% to the nation’s GDP yet the segment remains informal, and 80% of its workers are the most marginalized members of society, without access to key financial services. Again, at the centre of this marginalisation is a lack of trust, which requires a multidimensional evaluation. Firstly, low levels of literacy affect many of the people within this segment’s ability to understand the value proposition of formal banking (In a 2015 baseline survey on financial inclusion, the CBN found that 50.7% adults had no formal education). Simply put, you are less likely to trust what you do not understand. To address this, we need to deepen financial literacy by using languages and channels that people understand and use freely.
Secondly, solutions must reflect cultural and religious nuances. If providers deliver fit-forpurpose solutions, it will only increase the use of such solutions by the target market. For example, it is a design failure to design interest-earning products to promote savings in a culture dominated by people with religious and/or ethical aversion to interest-earning products. There is also a need to align products to existing norms and behaviour patterns to increase adoption.
Thirdly, cost is a critical trust factor. If the cost of financial services is prohibitive, or interest rates are exorbitant to the people within the informal sector, they are less likely to patronise your services. These costs increase their belief that formal financial products are a “one size fits all” catering to the formal sector only.
These challenges have contributed in various ways to the limited success of Nigeria’s financial inclusion strategies. For example, in a baseline study conducted by the Central Bank of Nigeria (CBN) and International Finance Corporation (IFC) on National Collateral Registry which involved 1,500 respondents from various states, only 31% of MSMES have accessed credit through the formal banking system. Given the inadequacy of formal financial services to meet their needs, these low-income earners have become very reliant on informal banking methods such as traditional practices like Esusu – an informal form of rotational savings and credit provision between small groups of people, which is a framework that is built around trust.
To address their exclusion, the CBN adopted the National Financial Inclusion Strategy (2012) which aimed to reduce the exclusion rate to 20% by 2020 through tools like agency banking. In 2016, it achieved 58.4% inclusion and plans to have 70% of its adult population in the formal financial services sector in 2020. So far, the strategy is yet to reach the desired effect, with the unbanked population currently standing at 41.6%. It is clear from the results, that the current approach needs to be tweaked.
The continual financial exclusion of those at the bottom of the pyramid is one of the reasons that a staggering 40.1% of Nigerians live below the poverty line of $2. What is more worrisome is the massive youth bulge – with over 70% of all Nigerians now younger than 40 years. This youthful population have an entrepreneurial spirit, digital savviness, and energy, which are incredibly productive, if enabled by very specific tools, including access to formal financial services.
During my tenure as Executive Secretary of LSETF, I was privileged to meet 23-year-old Ibrahim Shuaib, a final year student in the department of dentistry and dental surgery at LASUTH. He received a N250,000 loan from the Fund for his dry-cleaning business, called Dr. Clean, which he used to buy laundry equipment and employ over 15 people. He not only expanded Dr. Clean to other campuses, Ibrahim also started a beverage business which is managed by his sister, and repaid his loan within 4 months. These achievements illustrate that access to financial services improves economic outcomes and small loans can have a positive multiplier effect in society.
Ensuring low income earners are connected to formal financial services which cater to their needs has become more crucial today with the COVID-19 pandemic. To curtail the virus, the Federal and State Governments imposed lockdowns to restrict movement which hindered the income-generating activity of those who rely on daily/ weekly wages for sustenance. While some of the restrictions have now been eased, there are still restrictions to movement and curfews to contend with, against a backdrop of increased costs of products and service. This has highlighted the need to support the informal sector, especially to protect household consumption. While the Government has approved a three-month repayment moratorium for SMES registered in programmes like Tradermoni, which is a step in the right direction, there is still much more to be done. As more people experience hardship given the rising food prices, disrupted supply chain and other COVID-19 related effects, it is likely that we will see an exponential increase to the number of people who fall below poverty in the coming months.
Governments at all levels must not waste the opportunity to use this crisis as a springboard for integrating more people with financial services. For example, financial services and telecommunications can collaborate to use anonymized data to identify poor and vulnerable people who should receive grants or food supplies. In addition to this, future cash grants can also be distributed electronically, creating an incentive for both the user and provider of financial services, and deepening inclusion.
The hardship of this pandemic has provided a unique opportunity to revisit the framework of our National Financial Inclusion Strategy and ensure that we design a multi-party solution that allows various sectors collaborate to reduce poverty and create prosperity. There is no better time than now- the past is behind us – and the future, much too late.
( Special Adviser: Investment, Trade and Innovation, Ekiti State)
