Nigeria enjoys a diversified banking sector where the universal banking model followed by its largest banks is complemented by the development of merchant banks, mobile payments, microfinance, and mobile money agents, all driven by the goal of financial inclusion. Financial inclusion, or access to financial products in the formal sector (savings accounts, pension schemes, insurance programs and the like), is the stated goal of Nigeria's financial inclusion policy. In this post, we analyse the National Financial Inclusion Strategy 2012 ("NFIS") launched by the Nigerian government to enhance financial inclusion, include more of the Nigerian population within the formal banking system, reduce the gender gap in access to financial services and deepen awareness about the financial instruments available for use. Then, we contrast this with the revised NFIS recently announced by Nigeria ("Revised NFIS") to get an overview of the significant ground covered as a part of the NFIS and the challenges that the Revised NFIS envisages.
NFIS 2012 - tracking progress
On November 22, 2012, the Governor of the Nigerian Central Bank provided an overview of the NFIS and its goals. He pointed to the valuable baseline financial data collected by the 'Access to Financial Services Survey' conducted by the financial sector development organization in Nigeria called Enhancing Financial Innovation & Access ("EFInA"). This data provided the metric for NFIS goals and also acted as "a veritable data bank that continues to be reference material for academicians, researchers, policy makers, international development partners and investors, ultimately creating a positive impact on the Nigerian economy". Indeed a critical part of the policy environment that NFIS engendered was the collection of data on a biennial basis about various aspects of the Nigerian economy that have helped in crafting targeted programs aimed at financial inclusion. Driven by this survey, the NFIS set out the following financial inclusion goals:
- Reduction in the percentage of 'financially excluded' adults from 46.3% in 2010 to 20% by 2020;
- Increase the percentage of adults with access to payment services to 70% in the same time frame;
- Increase the percentage of adults with access to savings to 60% in the same time frame;
- Defining target rates for the number of bank branches, ATM units, mobile agents and microfinance banks per 100,000 adults in Nigeria;
- Increase in the percentage of adults with access to credit, insurance and pensions to 40% by 2020; and
- Implementation of tiered KYC requirements.
In the years since the announcement of the NFIS, there has been improvement on several metrics although more ground needs to be covered. We take a look at three of these areas - regulatory environment in the financial and related sectors, role of telecommunication in enhancing financial inclusion and the quantitative goals laid down by the NFIS.
First, Nigeria has witnessed a significant overhaul in its financial regulatory environment in the past decade. Driven in large part by the goal of financial inclusion and formalisation of the banking sector, the Government has enacted a number of legislations aimed at broadening the market for financial products. The Central Bank has reflected concerns of key stakeholders and introduced amendments to the Foreign Exchange Manual to simplify documentation requirements, reduce barriers for access to financial services and incentivize compliance.Moreover, it has also put out a range of circulars and guidelines aimed at furthering the goals of the NFIS. For instance - the Circular on the Exposure Draft of New CBN Licensing Regime (License Tiering) for Payments System Providers, Guidelines for the Licensing and Regulation of Payment Service Banks, and the Circular on the Regulatory Framework for the Use of Unstructured Supplementary Service Data (USSD) in the Nigeria Financial Sector - all look to drive the growth of microfinance, mobile banking and digital payments.Payment service banks are aimed at providing financial access to groups otherwise excluded, such as small businesses, rural populations and small income households through the effective use of technology. A consistent and predictable regulatory framework is key for reforms and the Central Bank has used the framework of the NFIS to implement this effectively.
Second, telecommunication networks have played an important role in bringing financial access to excluded groups. Through mobile banking, digital payments and microfinance instruments, the mobile phone has become the ubiquitous vehicle for inclusion in the financial system. Particularly in developing countries, the telecom companies who have "country-wide networks of airtime sellers and service points, as well as agents who go to small places far from banks to provide services" can play a critical role in furthering NFIS goals. There is some recognition of this in Nigeria.The Central Bank has created the payment service bank licenses which are available to both telecommunication companies but also a host of other financial service operators whose reach is greater than Tier I banks - "mobile money operators, retail chains and banking agents". This is beginning to reflect in money raised by startups as well, where "Of the $117m raised by start-ups in the first nine months of 2018, the lion's share has gone to fintech firms such as Flutterwave, Paga and Paystack, all of which have seen increasing attention and funding from major global players including Mastercard, Visa and Stripe."
Third, the quantitative goals laid down by NFIS have witnessed a modicum of improvement. The EFInA Survey 2018 provides some helpful figures. As of 2018, the banked population is at 39.7%, an increase of 1.4% from 2016, but a far cry from the targets NFIS had set for itself for 2020. Moreover, the portion of the banked population that have savings with a bank and engaged in remittance transactions witnessed a 6.7% and 2.2% fall from the 2016 corresponding figures - a concerning development. This fall has also been recorded in microfinance usage. The barriers preventing the unbanked population are also laid down in the report - irregular income, large distance to nearest bank branches, high transactional costs, absence of regular employment and preference for cash are key concerns, with lack of availability of required documents and illiteracy also being voiced. It is crucial that any review of NFIS address these keys access barriers in order to be able to leverage the more conducive regulatory environment towards achieving targets.
How does the Revised NFIS fare?
While NFIS fared well in certain areas - tiered KYC requirements for instance have facilitated the inclusion of sections of the population that would have otherwise been excluded due to inadequate documentation - it has fallen short in achieving its target of 80% financial exclusion by 2020. The maturity of the Central Bank in recognising this and changing course is reflected in the revisions to the NFIS that it has released in the past. The Revised NFIS identifies five priority areas: (a) creation of an enabling environment for the expansion of digital financial services; (b) promotion of the rapid growth of agent networks for last mile delivery of financial services; (c) harmonisation of KYC requirements; (d) creation of an environment conducive to serving groups that are most excluded; and (e) incentivising the adoption of cashless payment channels. The gaps highlighted earlier that precluded NFIS from achieving its key targets - absence of last mile delivery of financial services, limited awareness of financial instruments and the banking sector, and excessive bureaucracy at the point of entry into the financial sector - are all addressed in the priority areas for the Revised NFIS. Here, we highlight some salient aspects of the Revised NFIS:
- Growth in agent networks: Therefore, in addition to telecommunication companies, agent networks - human resources mostly operating in remote areas - have been recognized to be important players in the last mile delivery of financial services. Particularly in developing countries with weak physical bank infrastructure, these agents bring financial services to accessible points for the population to participate. The Revised NFIS recognises this and targets 476 agents for every 100,000 Nigerian adults. Moreover, it highlights some regulatory barriers to growth in the agent network, such as low cash commission and rules against exclusivity that reduce the incentive of private players to invest these networks. It also seeks to include the postal services in a more prominent way as Nigeria's post has a greater reach than most other private or public players. The coming years should also witness the impact of steps such as the Shared Agent Network Facility's launch of 500,000 agents to provide financial services particularly in the under-served north of the country.
- Financial awareness: One of the underlying factors informing their structural barriers identified in the Enhancing Financial Innovation & Access Survey 2018 is a lack of awareness of financial products and services leading to low levels of trust. Financial literacy is therefore a mainstay of the Revised NFIS and policy discussions surrounding it. The Revised NFIS aims to include financial literacy in school curriculum, incorporating teaching about "financial products, services and markets in 20% of primary schools, 50% of secondary schools and 100% of tertiary institutions by 2020".
- Harmonisation of KYC Requirements: The three-tiered KYC requirements implemented in 2013 addressed the challenge of inadequate identification in Nigeria. As the Revised NFIS notes, only 27.6 out of 96.4 million Nigerian adults have a national identity number. Therefore, accounting for the limited prevalence of identification documents, the tiered-KYC implemented "flexible account opening requirements for low-value and medium-value account holders" and has been a significant achievement of the NFIS. However, as the Revised NFIS notes, the tiered KYC requirements are in need of harmonisation across all financial services sectors. Further, regulators need to ensure that the KYC requirements are benchmarked against the risk exposure in each sector. Finally, the Revised NFIS aims at solving for the underlying problem, that of inadequate documentation, by looking to achieve universal coverage through the national identity system.
The 2020 deadline for 80% financial inclusion is a daunting task. However, the Central Bank has shown an ability to build a conducive regulatory environment and work towards identifying barriers bridging gaps in law and policy. Operationalising the Revised NFIS will require coordination among the private sector, policy makers and government bodies - a task that regulators like the Central Bank will need to continue to be at the forefront of.
[This post is authored by Varun Baliga, a consultant working with Ikigai Law, with inputs from Nehaa Chaudhari, Director (Public Policy), Ikigai Law]
Originally published 25 Feb 2020
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