Over the years, people have felt the need to access financial services and become financially inclusive through one or a combination of two means. First, they get a job, and their salary is paid through a bank account, that is often opened through their employer or by its consent. Second, start a business and because they require obtaining payments or credit, they will need to open a bank account. From here on, an individual becomes increasingly financially inclusive by growing to having insurance, a credit account, a brokerage account, and mortgage etc.
While the core nature of banking and broader financial services described above, which is to assist individuals with their choices between current and future consumption or savings, has not changed in more than three centuries, the manner in which the services are delivered have changed dramatically during the period. These changes are underlined by transaction costs, which have evolved on the basis of changes in communication and computing technology. The developments in communication and computing technology have contributed significantly in bringing down the transaction costs involved in the delivery of banking services, and overtime, influenced the scale and depth of such services.
Therefore, the scale and depth of banking services have always expanded on the back of the development in communication and computing technology. Invariably, the considerations of the costs thus have implications for the pace of financial inclusion, narrowed down to access to banking services for the purpose of this article. Indeed, besides the transaction costs which is largely influenced by the developments in communication and computing technology, there is the indirect costs to exchange of financial services influenced by infrastructure or the lack of it. Because infrastructure either enables or hinders the physical connection between the provider and the beneficiary of banking services, it imposes indirect costs on financial services.
Here in Nigeria, there is an increasing realization that the two elements of transaction costs will continue to hinder the progress towards ensuring that majority of Nigerians have access to appropriate financial services at affordable costs. This is especially the case with vulnerable groups and sections of the country. Many of these Nigerians live in the rural areas, have low incomes, involved in subsistence farming or petty trading, and barely educated. To the banks, the ability to provide the required financial services to these vulnerable groups is hindered by the transaction costs described above. While many different approaches have been attempted, the scale and progress on financial inclusion is still pathetically slow.
Now, for all the historical development of banking and its variety of services, it is still largely a commodity. The manner of banking services I derive from Bank A may be different from that of Bank B, but the core of it is the same – assisting in my choices between current and future consumption and or savings. They all offer account services, and then progress to different forms and levels of credit. But it is a commodity, and commodities can be delivered in different ways. Indeed, there are always a great variety of arrangement for producing and delivering commodity goods. Though involved and see financial inclusion as development policy priority, the banking system, including micro finance banks, cannot be expected to run their businesses at variance with their transaction costs.
Today, Nigerian banks have branches in all the States of the federation, but not in equal numbers, nor evenly spread between urban and rural areas, and between cities and towns. The difference in the concentration is determined by transaction costs, and not the need of the communities. And looking at the landscape, it appears the transactions costs associated with infrastructure may be greater than that associated with that of providing direct banking services.
To scale up financial inclusion and avoid some of the costs involved in traditional banking services, the Central Bank of Nigeria granted licenses to 14 mobile payment providers in 2011. After the initial activity, growth has disappeared. Meanwhile, the Microfinance banks set up and encouraged to provide the bulk of rural banking have found the costs prohibitive. In most countries, where infrastructure does not prove a huge handicap but distance to banking locations is, they have overcome this hindrance by using agency services, such as the post office. However, also due to a combination of the absence of the right infrastructure and its inadequacy, and the associate cost that will apply, this option is also not viable. Consequently, with two years remaining of the ambitious Financial System Strategy (FSS) of 2020, there is still a great distance from the target on financial inclusion.
What option do we have? The M Pesa arrangement in Kenya has often been cited as the model for African economies with very low financial inclusion. Through the platform, the average Kenya without a bank account is able to transfer cash, purchase airtime, and purchase goods and services without the use of cash, but from the transfer of credit balance between mobile phones. This arrangement does overcome the challenge of prohibitive transaction costs. The phone does serve, both as means of communication, and as a store of value.
For Nigeria, I do not know the exact form and the process that will eventually raise the scale of financial inclusion to cover the 40 percent of unbanked but I know it cannot be done at the speed we want with current approaches. The current approaches are costs prohibitive.
With inadequate infrastructure, it appears mobile banking, led by the telecoms company that already “borrow me credit” have the capacity and existing infrastructure to access millions of Nigerians that banking services cannot reach. Given the gulf between 25 – 30 million with access to banking services, and the over 90 million with access to phone services, the telecoms are in the best position to provide “banking extension services” to these groups. It therefore means that mobile financial services platform could be the answer to bridge the gap in financial infrastructure. It offers the most feasible option to reach millions of the unbanked in rural communities in Nigeria, given existing transaction costs.
Ogho Okiti
