Like many emerging economies, Nigeria has a national financial inclusion strategy (NFIS) to guide market and ecosystem actors on how to improve the lot of individuals and microenterprises. The strategy document spells out specific priority measures to be adopted in a bid to reduce credit risks and transaction costs associated with serving the most financially excluded members of society. Some of these measures include initiatives to support the expansion and reach of digital financial services, increasing agent banking networks, and promoting more channels for cashless payments.
The pace of financial inclusion however remains sluggish. Since the country’s strategy took effect in 2012, it has been less successful than anticipated due to several factors, including overly long intervals in assessing progress/impact of the policies adopted, use of limited progress indicators, lack of flexibility, and limited capacity for making quick adjustments to adjust to a fast-changing financial ecosystem. The number of citizens with access to bank accounts and credit increased slightly, but, access to non-bank services has barely changed: women and rural households and individuals located in the northwest region are still largely excluded and face access barriers.
Moreover, the chances of meeting the national financial inclusion target of ensuring 95 percent of the country’s adult population have access to formal and/or informal financial services by 2024 are low. The current official figures reported by the central bank show an inclusion rate of 63.2 percent, making the 2024 target less feasible at this rate.
Flaws in the National Financial Inclusion Strategy
Weaknesses in the NFIS reduce its effectiveness, as elaborated on in this review. These issues tend to impair the effectiveness of interventions targeted at reducing barriers to financial inclusion. A number of these gaps are summed up below.
· The metrics for measuring progress are limited to evaluating just access to finance. However, there are equally important issues that need to be considered in assessing the true inclusion rate. These include affordability, quality, and suitability of available financial products, or appropriate skills to use and maximize these services. While the biannual access-to-finance surveys explore some of these areas on usage, affordability, and quality dimensions, not enough focus is placed on the findings. To buttress the importance of these issues, insights from the Nigeria Inter-Bank Settlement System indicate that about 30 percent of bank accounts are inactive. It would therefore be useful to consider if and why inactive bank accounts are increasing, or if inactive users are growing faster than the number of new users. This is so that the inclusion rates reported are more reflective of realities.
· The definition of financial inclusion per the NFIS suggests a bias towards adult individuals. As such, performance monitoring is limited to household surveys and does not provide sufficient information on improvement or lack of improvement relevant to enterprises. Since progress indicators are not directly targeted at enterprises, they do not reveal crucial details of the level of financial exclusion suffered by vulnerable informal micro businesses. It is therefore difficult to determine which specific policy reforms are needed for this group.
· In implementing the NFIS, financial inclusion programs have not been properly integrated with other development initiatives. The country’s weak institutional landscape creates further problems in this regard. An example is the disbursement of one of the major COVID-19 relief schemes done via cash rather than digital platforms because a significant proportion of vulnerable groups still do not have access to digital platforms.
· Given that the NFIS does not have adequate legislative backing as it is not yet public policy, it makes operationalizing and enforcing the strategy tedious, thus affecting impact.
Recommendations
· More frequent progress monitoring is necessary to identify initiatives that are working well and others that may need improvement. For example, it would be interesting to monitor if the use of agent banking has significantly helped reach more people in remote locations, or if granting more licenses to new entrants in the Fintech space has made the prices of financial products more competitive.
· There is a need to expand indicators being measured to include not just individuals/households, but micro, small and medium enterprises (MSMEs). While this does not negate the financial sector development approach adopted in many African markets which has resulted in significant progress, more diverse studies could also evaluate how expensive or cheap financial services are, if the banked population is using available services, and if available products are suitable to individual and business needs. Such analysis can reveal the causes behind observed trends, and how this varies across demographics, to guide appropriate drafting of policies that can improve financial inclusion.
· Impact evaluation can then be used to check if and how improved financial inclusion has affected the desired outcomes highlighted in the NFIS, which include reducing poverty, closing the income inequality gap, and boosting faster economic growth. This would inform better targeting of scarce resources, and afford policymakers and implementers insightful lessons for improved interventions.
· Better structured linkages with the nation’s broader welfare assistance programs and a digitalization drive can improve the chances of successful financial inclusion outcomes. One avenue for integration is to leverage the social register of poor households and find ways of including this group of low-income earners in the formal financial system. Technologically driven financial service solutions should also be encouraged, meaning the NFIS team would have to work more closely with stakeholders in the country’s digital space such as the Nigerian Communications Commission and the Ministry of Communications and Digital Economy, to push for regulations and interventions that will enhance customers’ access to the internet, encourage greater investment in digital infrastructure and more responsible use of data to increase customers’ capacity and trust.
Beyond addressing the perceived shortcomings in the implementation of the NFIS, it is important for the financial ecosystem to collectively work together to tackle the major barrier of high transaction costs and affordability concerns in serving low-income segments in mostly rural and remote regions. This would involve, among other things, providing a conducive environment for financial service providers to see the value in serving excluded groups. If these policy reforms get buy-in from all stakeholders, and implementation is properly coordinated to increase policy effectiveness, Nigeria will be better equipped to meet its NFIS goals.
This article was originally published by the Center for Financial Inclusion
Osakwe is a development economist, who is committed to understanding how poverty and inequality can be reduced to achieve improved welfare and more inclusive societies.
