Lessons from India: Challenge of providing financial access to all in Nigeria

In 2009, only 35 percent of India’s population had a bank account. By 2017, the government had successfully led a process that increased that to 80 percent.

This is similar to where Nigeria is today, with a 40 percent inclusion rate and a target to achieve 80 percent by 2020. But Nigeria must deliver results in a much shorter timeframe if it is to remain on track to achieve the goals of the National Financial Inclusion Strategy.

Providing financial access to all is a challenge that many countries around the world continue to face. Recognised widely as a critical contributor to both social and economic development, the ability for the poorest people to access financial services is a complicated challenge that has been addressed differently in many countries.

The challenge in Nigeria is to build a solution that addresses its own unique challenges. To find a model that will build out access for the most vulnerable citizens, and so enable a channel for the efficient payment of social benefits, while also offering a commercial model that will incentivise private sector investment. The urgent need to align behind a new Nigerian model was starkly portrayed by the World Bank’s Global Findex Data for 2017, which was released in April. Despite a slow improvement in the use of mobile money, the overall number of Nigerians with access to financial services has dropped from 44 percent to 40 percent since 2014. Nigeria’s challenge is extenuated by a population growth rate of 3 percent, which means a constant stream of new young adults are captured by the numbers every time the report is released, and inclusion must grow considerably faster than 3 percent annually to be felt.

The potential benefits of successfully achieving this are well known. Enhanced economic activity leads to GDP growth. More financially-included citizens means more deposits in the banks, which in turn means more credit available for everyone. Economic growth leads to job creation, and solutions that open up access in the rural areas that are most financially excluded can offer broader opportunities as well. Every party, from citizen to government to bank, telecoms company, fintech companies and associated service providers should benefit from a properly delivered solution.

To understand how best to approach this challenge in Nigeria, it is important to analyse the approaches that other countries have taken, the success that they have had and the mistakes that they made. Based on the transformation that has occurred in India, it is worth analysing in some depth what they have achieved, whether it solves the problem and how they did it.

One of the most significant obstacles to inclusion is the cost of KYC required in the absence of a single point of trusted data on individuals. A national level identification number with basic personal information can dramatically reduce the cost of acquisition, and India successfully rolled out unique national identification numbers to 1.15 billion people. This reduced the cost of customer acquisition by 95 percent.

A second vital contributor to success was strong and consistent political will to ensure that every Indian had a bank account. Between 2014 and 2017, the government’s Prime Minster Jan Dhan Yojana (PMJDY) scheme opened up over 300 million bank accounts while obliging banks to open up customer engagement infrastructure in 650,000 villages across the country and investing heavily in financial literacy. Banks obliged, largely because many of them were government-owned.

But these interventions alone did not solve the challenge. While hundreds of millions of bank accounts were opened to receive government subsidies, the majority (as high as 75 percent) remained inactive, acting purely as recipient points for government payments, and failing to stimulate wider activity. While banks established physical infrastructure in 650,000 villages, many of them were simply stakes in the ground, incapable and unwilling to actually provide services. In 2013 the government realised it needed to do more if it was to achieve true inclusion.

At the heart of the problem was that it was not commercially viable, as account activity was largely limited to government subsidies (which are paid directly to the individual in India), and the cost of building fixed infrastructure in every village was prohibitive for banks, with no associated revenue return.

To address these deficiencies, government made a decision to create a new category of banking licence (payment banks) in 2014, with a specific focus on banking those communities not reached by traditional banking infrastructure and able to operate with a drastically lower cost base. By recognising that the biggest cost obstacle to serving these people was geographic proximity, a simple decision was taken to allow those companies already serving the poor to offer financial services over the top. Whether these institutions are Coca Cola distributors reaching the farthest corners of most countries, FMCG and structured retail or telecommunications companies, the principle was the same: give the businesses already serving our poorest customers the ability to offer financial services. When this is combined with the cost reduction associated with broad adoption of national ID, the business model is fundamentally altered and considerably more viable.

India remains in the infancy of implementing these changes, but progress can already be seen. Pay TM, an e-commerce company that leveraged the new licence system, has attracted 300 million customers in just 18 months. That’s millions of accounts that have been de-risked from the core banking system, while offering customers a closer, more nimble and attractive proposition.

What can Nigeria learn from this? It can learn many lessons. It can learn how to avoid the mistakes that India made by over-leveraging traditional banking infrastructure to serve customers that don’t fit that business model. We can, and should, take cognisance of the challenges that India faced, and whether we can avoid them, and move directly to a solution that will allow service delivery to the poorest, at the lowest possible cost, and so with the highest chance of success for both the customer and the financial services provider.

Nwafo, a public affairs commentator, sent in this piece from Abuja.