Financial inclusion is not only about having a bank account, but also the ability of individuals and businesses to have access to useful and affordable financial products from bank loans to mortgage and insurance.
Access to a transaction account is a first step towards broader financial inclusion, but at the heart of true inclusion is the ability for small business owners to access affordable loans to expand their businesses, create jobs and lift millions out of poverty.
That is why the increase in bank lending to SMEs is a victory in itself for financial inclusion, with small banks growing their risk appetite by the highest margin in the period between December 2017 and end-June 2018, shrugging off the risks of an economy fraught with rising political tension in the build up to the 2019 general elections and weak economic activity,
While the general trend in the banking sector shows a contraction in loans and advances to customers in the last two years, the loan books of Sterling and Fidelity bank have risen the most this year, according to Business Day’s analysis of company filings.
Sterling and Fidelity banks grew their loans and advances to customers by 20 percent and 10 percent respectively thanks to increased activity in their Micro, Small and Medium enterprises (MSME) banking segment, as deduced from interactions with management, while Stanbic Ibtc and Wema bank grew theirs by 9 percent each.
Union bank also increased its loans to customers, albeit by a small margin of 1 percent, while Diamond bank and Ecobank bucked the trend after their loan books contracted 30 percent and 9 percent respectively.
While the smaller banks have taken an aggressive approach towards lending, the big banks haven’t followed suit, probably because quality borrowers are actually scarce these days.
The loan books of Guaranty Trust, Zenith, Access, United bank for Africa and First bank, shrank cumulatively by 6.6 percent as at June 2018 compared to the level at the end of 2017, with two of the country’s most capitalised banks on the stock exchange, GTB and Zenith contracting the most.
That is not to say the larger banks are not committed to moving the needle on financial inclusion, as even they have invested billions of naira in financial literacy programmes, building agent banking networks and developing mobile applications to ease financial transactions. The reality instead is that the big lenders are trying to derisk their balance sheets at a time when the smaller banks are playing catch-up.
Nigerian banks pulled the plug on private sector lending to manage a worrying spike in non-performing loans, after the economy slumped to its first recession in 25 years two years ago, causing loans to go bad and threatening the asset quality of lenders.
The economic crisis was triggered by the decline in oil prices and production and because banks were largely exposed to the oil and gas sector, bad loans spiralled out of control in 2016 but the situation has since improved after an oil-led recovery took the economy out recession in the second quarter of 2017.
Oil prices have rallied and production in the Niger-delta has stabilised, having been disrupted by militant attacks in 2016. Brent crude touched $79 per barrel Friday, September 28, according to Bloomberg data and has more than doubled since 2016’s average of $38 per barrel.
Other macroeconomic indicators have also improved.
The economy expanded some 1.7 percent in the first half of this year and is tipped to expand by the International Monetary Fund (IMF) to grow by 2 percent by year-end compared to 0.8 percent in 2017 and -0.5 percent in 2016. Although in GDP per-capita terms, the economy is still in doldrums with economic growth rate below the population growth rate of around 3 percent.
Inflation has declined significantly to around 11 percent from a peak of 18 percent in January 2017 and FX liquidity has improved, helping the exchange rate stabilise at around N360 per USD at a market-driven window called the Investors and Exporters window. The window was created by the CBN in April 2017 to boost autonomous dollar inflows.
The CBN’s external reserves have benefited from higher oil prices and increased foreign portfolio inflows which means the apex bank doesn’t have to burn through reserves like in 2016 when it emerged the biggest supplier in the market after autonomous inflows gummed up.
Impressed by the improved economic situation, banks largely forecast 10 percent loan growth during investor presentations at the start of the year, but earlier than expected political tensions heading into the 2019 presidential elections and fragile economic activity have forced banks to renege on their promise and be conservative with credit creation.
Still a long way to go in credit provision
According to World bank data, 70 percent of the 445 million MSMEs in emerging markets lack access to to credit. While the gap varies region to region, it is particularly wide in Africa and Asia, but no specific data is provided.
Some 40.1 million Nigerians are financially excluded according to a survey by development agency, Efina, meaning they had no bank account and zero access to financial products and services.
Beyond broader economic gains, bringing the unbanked in their large swaths into the banking sector would boost bank deposits and improve affordable lending to small businesses.
The total deposits held by commercial banks in Nigeria was N21 trillion as at the end of 2017, according to CBN data. That comes to 24 percent of GDP, a poor figure compared to South Africa’s bank deposits as a percentage of GDP of 200 percent.
If every adult Nigerian without a bank account opened one and puts N5,000 naira each in those accounts, the banking sector will have an additional N200 billion naira, a fifth of a trillion, in fresh deposits, providing better liquidity and reduced interest rates which will be triggered by banks’ access to a larger pool of cheap funds in customer deposits.
Greater adoption of digital financial services to ease financial transactions and penetrate rural areas has often been touted as a viable means of getting more people to transact via formal channels.
