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Even with over 100 years of formal banking development in Africa, the banking sector is still highly fragmented along formal and informal finance sub-sectors. More surprising is the limited usage of the formal banking sector even with years of development and reforms. In Nigeria and Kenya, regarded as countries with reasonably developed formal financial sectors, only 10 per cent of their populations have accounts with formal banks. This drops to about 6 per cent in Uganda, 5 per cent in Tanzania and Ghana with an average of 4 per cent in Francophone African countries. These figures imply that in a country like Nigeria with a population of over 160 million people, only about 16 million have formal bank accounts. By implication, over 160 million remain formally unbanked even though formal banking started in 1892, over 120 years ago. Only 7 per cent of adults and 5 per cent of firms have loans with the formal banking sector and access to finance remains a major challenge to over 80 per cent of SMEs. As access to finance is fundamental to the sustainable development of any economy, the marginal penetration and usage of the formal banking sector might therefore help in the understanding of the limited economic development of Sub-Saharan.
Since 1892 when the first bank was opened in Nigeria, policies that had been used to develop the financial sector have followed the standard two main western-oriented approaches to financial sector development – financial repression or liberalization. In 2012, the Central Bank of Nigeria (CBN) launched a detailed National Financial Inclusion Strategy (NFIS), with the aim of decreasing the number of adult Nigerians excluded from the formal financial sector from 46.3 to 20 per cent by 2020. While the strategy is very detailed with clear objectives and targets, a critical examination suggests that it derives from the same neo-liberal concept of ‘one-size-fits-all’ approach. This approach is argued to be deficient and responsible for the limited success of other financial inclusion and development policies. It is externally oriented and lacks deep appreciation and understanding of the relevant institutional peculiarities of the society.
Interestingly, while the usage of the formal banking sector has remained very limited even with over 120 years of existence and reforms, the informal banking sector with no formal regulation remains very active with savings mobilization, provision of credits, wide usage and popularity. According to Seibel, Nigeria is one of the countries where informal financial institutions continue to play an important role. These informal financial institutions are immensely popular in Nigeria. Virtually every ethnic group has its own institution (adashi, in Hausa, perhaps the best known besides esusu); and most adults are members in one or several. Yet their importance and potential have been controversially discussed. Nevertheless, they are constrained by some intrinsic problems. They are normally close knit groups of about 10–50 low-income earners and as such the value of savings and loans is normally small and short term, resulting sometimes in high administration costs and lending rates.
The question is, what factors are responsible for the limited usage of the well-regulated formal banking sector as compared to the high usage of the formally unregulated informal banking sector? In the 2012 NFIS, three main barriers were identified: demand-side barriers, which relate to factors like irregular incomes, unemployment and low literacy rates; supply-side barriers due to issues like long distance to access points and inappropriate products and cost of services; and regulatory barriers due to complex ‘Know-Your-Customer’ (KYC) conditions and limited trust in the formal financial sector amongst others. Thesehighlight the issues with the current use of financial liberalization policies that derive from neo-classical/liberal theory and its ‘one-size-fits-all’ approach. It follows that when foreign laws and models are adopted, they might not be very suitable and amenable to the inherent informal institutions of Nigeria.
Incidentally, due to the exigencies of colonization, proper cognizance of the importance of contexts and situations in policy developments and implementations was not taken into consideration at the creation of Nigeria and has continued to be ignored as the current2012 NFISdemonstrates.BothNigeria’s legal system and economic models have continued to be in line with the British common law and neo-classical/liberalsystems,respectively. Consequently, the outcomes from the implementation of such policies such as reduced fragmentation and increasing financial inclusion are limited due to the unplanned and inappropriate juxtaposition of contradicting institutions. For a better outcome, the contents of the policies and their implementation should include a robust appreciation and inclusion of relevant formal and informal institutions. For instance, the laws should not just be formal laws in line with the British legal system; they should reflect deep utilisation of Nigerian informal laws (culture) as well. Moreover, as the documented (formal) laws of most society are rooted and developed from their informal norms and values, pursuing banking sector development primarily through externally oriented prudential regulation and related laws might not be very effective.
A reliable and stable banking sector has been difficult to achieve in Nigeria due to a combination of factors ranging from unclear rules and their violations to unwillingness to use the formal banking sector and the policies for financial inclusion. Furthermore, there is a misconception in the way the concept of financial exclusion is presented and financially excluded groups identified. Those identified as financially excluded might not in the real sense be excluded. They might be engaged in financial transactions like savings and credits and may not want to use the formal financial sector because they do not understand and trust the system. Consequently, enacting more regulations will worsen the distrust, rather a deep understanding of the fundamental factors why the formal financial system is not inherently trusted and used is suggested.
Like every business relationship, fundamental to achieving a high financial inclusion and usage of the formal financial sector is the effectiveness of the laws of engagement. Nigeria’s formal legal system was created and has continued to develop with no historical or cultural linkage. Whereas the informal laws derive from societal normsandvalues, hence commandshighattachment and preference from the populace especially the uneducated and those in the rural areas.Nigeria therefore can be described as an economy with two weakly interconnected informal and formal ‘economies’. However the informal finance groups canbe argued to be providing a kind of social safety net and more effective in meeting customers’ financing and social needs than the formal banking sector. While the formal banking sector provides only instrumental benefits, the informal finance sector provides both instrumental and intrinsic benefits which majority of Nigerians prefer.
There is need for policies and strategies to promote higher inclusion for over 160 million Nigerians who remain outside the formal financial sector. The potential effectiveness of the 2012 NFIS is questionable and the aim of increasing the percentage of adult Nigerians using the formal financial sector from 30 to 70 per cent by the year 2020 might not be achieved. The 2012 NFIS lack deep appreciation of the fundamental issues and problems causing exclusion from the formal financial sector. To be effective, there is a need for a robust appreciation of Nigerian institutional peculiarities and then the integration of both formal and informal institutions to create efficient policies for sustainable financial inclusion. An examination of the informal finance sector that has remained very active and highly patronised, even though formally unregulated, confirms this. Given its successful regulation by informal institutions such as informal laws, trust and incentives, achieving a higher formal financial inclusion in Nigeria, will require effective integration of the informal institutions with the formal ones.The analysis of the informal finance institutions revealed that they possess vital elements that have ensured their functioning and consistent growth. It is these vital elements or features that should be incorporated in the formal banking reforms and regulations to achieve a better formal financial inclusion.
*. This article was originally published by Dr.Ngwu, Franklin N. as “Promoting formal financial inclusion in Africa: An institutional re-examination of the policies with a case study of Nigeria.” In the Journal of Banking Regulation 16.4 (2015): 306-325 and has been adapted for you by the Christopher Kolade Centre for Research in Leadership and Ethics (CRLE) at Lagos Business School. CRLE’s vision is creating and sharing knowledge that improves the way managers lead and live in Africa and the World. You can contact CRLE at crle@lbs.edu.ng.
Franklin N. Ngwu(PhD)
Dr Ngwu is a Senior Lecturer in Strategy, Finance & Risk Management, Lagos Business School, Pan- Atlantic University
