Nigerian Banks and the Financial Exclusion Opportunities

Sawubona Advisory Services Limited, Lagos, Nigeria.

Research and Intelligence Unit September 2013 Brief

by Obinna Igwebuike, Brainerd Odiete and Uzoma Ikechukwu

Financial inclusion is defined as the ability of an individual, household, or group to access appropriate financial services or products.1 By implication, people are excluded from financial coverage when they dont have access to financial products and services.Access to financial services plays a critical role in development by facilitating economic growth and reducing income inequality. Inclusive financial systems allow poor people to smooth their consumption and insure themselves against the economic vulnerabilities they face2. A report recently published by the Washington-based ThinkTank, Brookings Institution, titled,

The dataset shows the following about financial exclusion in Nigeria4: 66% of adults older than 25 do not have an account at a formal financial institution. This translates to over 42 million adults without formal accounts. 79% of people aged between 15-24 do not have an account at a formal financial institution. This translates to over 26 million people. 70% of Nigerians aged 15 and over do not have an account at a formal financial institution. This translates to over 68 million people.

Measuring Financial Inclusion: Exploring Variations Across and Within Countries,

analyzed the first comprehensive database on global financial inclusion. The data analyzed, called the Global Financial Inclusion (Global Findex) Database, is a project funded by the Bill & Melinda Gates Foundation to measure how people in 148 countries save, borrow, make payments and manage risk.3 The results from the report are quite instructive. The data shows that about 2.5 billion adults do not have formal bank accounts, and the greater number of this group reside in developing countries. The report also notes that, the poorer a country is, the higher its level of financial exclusion. This is obviously a development issue, as the financial system is in many cases, the backbone of any attempt at empowering people to move up the social and economic ladder.

This is a clear picture of how unbanked the Nigerian population is and it is an obvious development challenge for the country. Within the context of individual countries, two notable variables; income and gender provide a better context for understanding financial exclusion, according to the report. Individual income levels determine access to financial services. The rich and middle-class have more access to financial services than the poor. A remarkable discovery in the report is the fact that account penetration for the poorest in high income countries is on average, higher than account penetration for the richest in upper middle income countries.5More shocking is the fact that the formal financial institution coverage for the poorest in high income countries is more than twice the average formal financial coverage for the richest in low income

Breckland Council, www.breckland.gov.uk http://go.worldbank.org/1F2V9ZK8C0/ 3http://go.worldbank.org/TN8C86K630/

1 2

Data obtained from the Global Findex database and CIA World Factbook 55Demirguc-Kunt&Klapper(2013) Measuring
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Financial Inclusion: Exploring Variations Across and Within Countries, 16

countries. This imbalance.

is

an

incredible

global

Gender is also linked to account penetration. The data shows that in the developing world, women are 20% less likely than men to have a formal account, and 17% less likely to have borrowed formally in the past year6. Barriers to Inclusion In trying to bridge the global financial coverage imbalance, there is a need to understand barriers that have prevented people from accessing financial coverage. The report also shows this, indicating that in the developing world, accessibility, cost, documentation and lack of money, are fundamental barriers to coverage.7 These barriers are real in a country like Nigeria. Banks have traditionally focused on urban and sub-urban areas, and have not done enough to reach the rural areas. With the introduction of the microfinance framework in Nigeria in 2005, many thought that the rural dwellers had everything to gain. However, the microfinance banks have been chronically under-funded and have not been able to have as much impact as was initially anticipated. Cost is also an issue, as transaction charges are sometimes high, relative to the income levels in the country. Documentation is also an issue, as banks usually ask customers to open accounts with documents that in an environment like Nigeria, is a real issue. This is especially the case for documents like birth certificates, drivers licences and international passports.
Demirguc-Kunt, Klapper& Singer (2013), The Global Findex Database: Women and Financial Inclusion, 1 777Demirguc-Kunt&Klapper, op. cit., 29 30.
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Low and no income (for example, as a result of the low level of employment) is also an issue in the developing world because when people are not financially empowered, there is little or no incentive for using formal financial institutions, especially when the cost of such coverage is prohibitive (as already mentioned above). Bridging the Inclusion Gap Technology as an enabler, offers significant advantages for bridging the access, cost and documentation gaps. Mobile money for example, has managed to do so in the last year or so. A recent report by Communications Week, indicates that about N8 million worth of transactions are done daily on various mobile money platforms in Nigeria. This is huge, considering the fact that the mobile money industry is just a couple of years old in the country. In a country where about 120 million people have access to mobile phone services (85% teledensity)8and only about 30% of the population have access to formal financial coverage, there is definitely significant opportunity for mobile money to bridge the inclusion gaps. As useful as mobile money is however, the solutions needed to bridge these gaps are beyond what mobile money can provide. According to a recent report by Visa Incorporated and its mobile money subsidiary, Fundamo, Consumers needs for financial services are far more sophisticated than previously believed and go well beyond the established transaction set offered by mobile money services today.
http://www.ncc.gov.ng/index.php?option=com _content&id=68&Itemid=70/
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The banks have to find a way to serve further down the pyramid. In Nigeria alone, the unbanked market is 42 million-people strong (at least for those over the age of 25). This is more than the entire population of countries like Argentina, Poland and Canada. Whats more, it is 10 million people less than the entire population of South Africa, a country with a much stronger banking sector than Nigeria. This is a huge market yet untapped and these banks must understand that they cannot be in the comfort of their current business models which emphasize trading with risk-free financial instruments, government Ministries, Department & Agencies (MDAs) and multinational & domestic blue-chips to take advantage of the huge retail opportunity that exists. Of course we understand that they have Non-Performing Loan (NPL) thresholds and therefore have to tightly monitor risks. However, there are significant opportunities laden in these risks. In accessing these opportunities, the banks have to operate models that significantly reduce barriers to financial entry. They can do this by; Reducing the complexities of bank account opening requirements. Banks have to find a way around the complicated account opening documentation model that currently exists in the industry. First City Monument Bank (FCMB) Plc recently introduced the Naira Wise Savings Account, an account that requires only a passport photograph and the minimum account opening balance of N500. For a bank that was known in the industry for its focus on high-end investment banking services, the NairaWise Savings Account

attempt is very instructive for us in understanding the possible direction the industry is moving in. The banks also have to, either directly or using the instrument of subsidiary microfinance banks, adopt rural banking retail strategies (as a lot of the people unbanked are rural dwellers). This is not as easy as it sounds because these rural dwellers have very different demographics and psychographics from the current typical customer, but many of them also need personalized services. Technology may also play a role here, as mobile money could be developed further beyond what currently obtains, to make it a bit more personalized. This will definitely come with increased cost of operations, but these costs should reduce with scale and should also lead to increase in productivity and profitability.

Conclusion Nigerian banks are generally very profitable, relative to their competitors in more saturated economies. However, a lot of these profits, in the last few years, have come from money market operations and trading activities with government and its agencies. With the recent extra-hawkish stance of the Central Bank of Nigeria (CBN), especially the 50% public sector cash reserve ratio, these banks will be under significantly more pressure to diversify their trade-base, as public sector trading is not as attractive as it used to be. The cash reserve ratio increased from 12% to 50%, a loss of 38% of public sector float. In a recent article BusinessDay online article, the need for banks to diversify their trade-base to create a

more stable financial system, was raised by Chuka Mordi, director, CBO Capital Partners. He noted, That the rate moved so significantly, shows that there are still fragile institutions in the banking system they do not have sufficient liquidity from their equity and deposits, hence their reliance on the interbank market.9A low-hanging opportunity for Nigerian banks to increase their deposits is from this unbanked market. Not only will it diversify the financial system and provide more opportunities, it will lead to a situation where a lot more people benefit from financial services coverage. These people will be encouraged to save more and better plan their financial future. They can receive advice on how to manage their incomes however meager, in a more sustainable way. This will help engender the much needed inclusive growth and development in Nigeria. We know there are factors beyond the direct control of the banks, especially as regards fiscal policies, which can do more to make the banking system more inclusive. We also know that the banks will need a bit more latitude from the CBN to reach out to more customers. However, the banks have a huge role to play also. This will not only lead to their long term financial sustainability, but also the long term financial sustainability of Nigerians. We believe this is the essence of banking.

http://businessdayonline.com/2013/08/cbnforecloses-financial-assistance-to-banks-onliquidity-pressure/
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About the Authors Obinna Igwebuike is a Partner at Sawubona Advisory Services Limited, Lagos. His consulting experience spans industries like Telecoms, Professional Services, Metals & Mining, and Commodities in Nigeria, UK and Serbia. He can be reached through o.igwebuike@sawubonang.com & @ObinnaIgwebuike. Brainerd Odiete is a Partner at Sawubona Advisory Services Limited, Lagos. He has consulted for a large number of businesses in new market development, business model (re)development, supply chain efficiency and financial strategy. He can be reached through b.odiete@sawubonang.com & @Odiete. Uzoma Ikechukwu is a Research and Consulting Analyst at Sawubona Advisory Services Limited, Lagos. She is a graduate of Economics from Covenant University, Nigeria and has significant interest in the application of technology to business solutions. She can be reached on u.ikechuwkwu@sawubonang.com & @revolutionist_d.

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