Download State of Enterprise (SOE) Report 2023

Closing Nigeria’s Exclusion Gap

Closing Nigeria's Exclusion Gap

In recent times, growth in financial inclusion has accelerated quite a bit, with at least 76% of adults having a bank or mobile account globally, up from just 51% in 2011. However, approximately 1.4 billion adults do not use formal financial services that encompass essential services like payments, savings, credit, and insurance. Unfortunately, a greater number of unbanked people live in developing countries, given the near-universal account ownership in developed economies. The transformative impact of financial inclusion is evident from many fronts. It is a lifeline for the low-income group, empowering them to save, access credit, build assets, manage risks, and upwardly progress on the social and economic ladder. Also, financial inclusion correlates with economic growth.

For instance, going by Bangladesh’s experience, financial inclusion reforms contributed to a remarkable 6.5% compound annual growth rate (CAGR) in GDP —from $115 billion in 2010 to $460 billion in 2022, accompanied by a reduction in poverty from 11.8% to 5%. Beyond the potential for a transformative and stable economy, there are many more benefits when individuals are financially included. Financial inclusion promises great commercial benefits for financial institutions to realise business opportunities in untapped markets.

With approximately 60 million Nigerians possessing a Bank Verification Number (BVN) as of December 2023, half of the adult population lack access to wealth creation opportunities through bank account ownership. Without access to bank accounts, individuals are deprived of secured savings and credit facilities, hindering their ability to set up or scale a business and contribute to wealth creation meaningfully.

In 2022, the Central Bank of Nigeria (CBN) targeted increasing the financial inclusion rate from 68% to 95% by 2024, but as of 2023, the financial inclusion rate only increased marginally to reach 74%. Meanwhile, substantial untapped potential remains across growth drivers, particularly in digital financial services. The National Financial Inclusion Strategy developed by CBN acknowledges that digital financial services have enormous potential to close the exclusion gap by widening access to financial services, learning from the remarkable uptick in digital transactions during COVID-19. About 93% of the adult population in Nigeria have access to mobile phones, and there are over 226 million active subscribers to telephony services. These numbers point to the potential opportunity in driving financial services through mobile technology compared to inefficient brick-and-mortar banks.

M-PESA, a phone-based money transfer and micro-financing service in Kenya, has been a model of how mobile phones can accelerate financial inclusion on a large scale. The Service empowered marginalized populations, including women and those in rural communities, to send, receive, and save money using a mobile phone. Banks and mobile money operators in Nigeria are treading a similar path to extend the reach of services and tap into the underserved and unserved market. Notable examples of mobile money services led by traditional banks are FirstMonie by FBN Holding plc, ALAT by Wema Bank plc, and Habaripay by Guaranty Trust Holding Company plc. FirstMonie Agent network had over 200,000 agents as of March 2023. The network spanned almost all local government areas in Nigeria, with women representing one-quarter of the agent network. In 2022, FirstMonie facilitated 332 million transactions worth ₦8.5 trillion (about $19 billion). ALAT, with over 26,000 agents, serves customers in far remote and underserved areas. The bank’s agency banking boasted a 95% uptick in new account acquisition, from 450,043 in 2021 to 879,386 in 2022. About ₦29 billion (about $65 million) in funds transfers were recorded in 776,288 transactions during the year. Habaripay, which allows micro-merchants, SMEs, and corporates to accept card payments through enabled mobile devices, has processed ₦139.3bn (about $311 million) worth of transactions through Gate and Switching and $175,927 in international payments in six months post-launch (June-December 2022).

Beyond traditional banking institutions, many fintech firms have substantially contributed to advancing financial inclusion. Examples include OPay, Moniepoint, Paga, and Palmpay. OPay, a top-tier digital payment platform supported by over 500,000 agents and 300,000 merchants across Nigeria, has amassed a user base exceeding 40 million. Moniepoint boasts 10,000 agents and serves 1.6 million merchants. As of July 2023, it handled an average of 400 million monthly transactions worth $12 billion. Paga, since 2012, has recorded over 19 million unique users and processed transactions worth more than $10 billion by April 2022. Paga boasts of over 120,000 agents in different parts of Nigeria. Palmpay, with a network of 500,000 agents and 600,000 merchants, has a user base exceeding 30 million as of September 2023.

Yet with these remarkable numbers, the exclusion rate is prominent, particularly in the rural area at 37% compared to 17% in the urban areas, and a significant gender gap persists, 21% among men versus 30% among women. Nigeria’s slow economic growth can be linked to the existing financial exclusion gap. Nigeria requires financial inclusion reforms to stimulate the pivotal roles of financial institutions to serve more of the adult population. What are the challenges limiting growth? One in particular is the lack of data sharing within the digital ecosystem. The sharing of financial information among service providers, facilitated by open financial data, is pivotal in enabling broader access to financial services and reaping numerous associated benefits. Enhanced access to multiple financial services and a broader range of product options, which open financial data offers, afford users greater convenience. According to McKinsey’s 2021 analysis, widespread adoption of open-data systems could potentially lead to a 1.5 percent GDP gain by 2030 in the UK, EU, and the US, with projections even reaching up to 5 percent in India.

A significant challenge faced by many unbanked adults in Nigeria is the lack of proper identification documents necessary to process a BVN or National Identification Number (NIN) before they can open a Tier-1 bank account or wallet. This challenge is compounded by a low literacy level, because many adults cannot read and write. The low literacy level also implies a lack of fundamental understanding of financial products and services that hampers informed financial decision-making. Another challenge is the lack of income. From the EFInA A2F 2023 Survey, little and irregular income remains the most prominent challenge to financial inclusion, impacting almost half (49%) of the unbanked adult population. Shockingly, only 16% of Nigerian adults are considered financially healthy, indicating a lack of “efficient mechanism to meet financial needs” as 84% of adults are considered financially unhealthy. Another significant obstacle arises from banking agents’ reluctance to venture into locations deemed unprofitable. The viability of a location for an agent is contingent on at least moderate financial services demand and the availability of reliable power and mobile connectivity. Unfortunately, the lack of these essential infrastructure pose a significant hurdle for agents in sparsely populated areas, impeding the ability to serve and break even at the same time. The profitability of agents hinges on a high transaction volume, which explains the concentration of agents in urban locations like Lagos.

A persistent challenge in the financial inclusion discourse is the enduring gender gap, restraining women’s autonomy in managing their finances. Despite ongoing efforts to address this disparity in Nigeria, women in impoverished households and rural communities continue to grapple with financial exclusion. This narrative extends beyond Nigeria, echoing throughout Sub-Saharan Africa and the Middle East, where significant gender gaps persist. The persisting preference for cash transactions is yet another challenge. Despite the potential benefits of digital financial services, many prefer cash due to a lack of trust in digital systems. Some merchants are hesitant about receiving transfer payments for fear of reversals, erroneous transfers, and financial loss. High service and transaction fees further compound the challenges limiting financial inclusion. Charges on account maintenance, withdrawals, fund transfers, and SMS alerts are gross deterrents to many users in the middle-to-low-income class.

Clearly, there is a need to double down efforts on financial inclusion; address current challenges to empower more Nigerians, alleviate poverty, and achieve sustained economic growth. Below are some suggested areas where governments and industry players can channel efforts and align focus to drive significant improvement in financial inclusion. These include but are not limited to:

1. Strategic government investments in infrastructure:
The government plays a pivotal role in advancing financial inclusion by strategically investing in critical backbone infrastructure. Priority should be given to enhancing mobile network connectivity, ensuring constant power supply, and enabling the environment to foster the growth of digital financial services. Given the limited fiscal revenue, the government should explore sustainable models, such as Public-Private Partnerships (PPPs), to support infrastructure provision, including renewable solar electrification in rural areas.

2. Provision of subsidies to agents in remote locations:
Besides supplying basic infrastructure in remote locations, the government should consider subsidizing local agent services. Subsidies such as financial and tax incentives would incentivize agents to operate in remote locations where service is not profitable due to low volume of transactions.

3. Acceleration of national identity registration:
Governments should launch community outreach programs to raise awareness about the importance of national identification and provide resources to facilitate registration at the grassroots. The awareness programmes and registration should be targeted, more at individuals and households in rural communities, partnering with religious and community leaders and non-governmental organisations. A network of registration points that leverage local agents and merchants can enable individuals to register near where they live or do business quickly. Sufficient motivation must be provided, considering religious and cultural context and attitude towards sharing personal information.

4. Enhancement of Privacy and Security Protocols:
Trust in digital financial services is gradually eroding due to frequent cyber frauds. 11,679 fraud cases were reported in Q2 2023, which occurred mainly through mobile and computer/web channels and point-of-sale machines. The amount involved in frauds increased from N2.58 billion in Q1 2023 to N9.75 billion in Q2 2023, an approximately 276.98% increase. Financial service providers would need to abide by data protection regulations and invest in adequate cybersecurity infrastructure and customer re-orientation programmes.

5. Consumer credit facilities:
The availability of consumer credit will increase account ownership and penetration of other financial services, payment, and insurance, particularly with significant benefits to the larger economy. The federal government should set up robust systems and policies supporting a range of consumer credit products, including personal loans, credit cards, installment plans, and buy-now-and-pay-later. Enforcement of regulations will ensure compliance and build trust in the systems. Governments must provide technology infrastructure and ensure that from origination, processing to servicing, access is not inhibited or monopolized by the privileged; strengthen the national credit bureaus and registry to eliminate biases and lack of trust and guarantee ease of access to personal loans irrespective of consumers’ social, economic status and gender.

6. Macroeconomic reforms:
Several macroeconomic indices significantly impact earning capacity and the ability to save or conduct any other financial transaction. Inflation remains one critical challenge facing consumers as there is a constant squeeze on their disposable income. A stable economy hinges on the ability of the Central Bank to control inflation, but this becomes difficult if a significant amount of money in circulation is outside of the banking system. Many Nigerians require constant power supply, access to grant or soft capital, and competitive exchange rates to earn a good source of living. The development plan of the current administration is a good step in the right direction, aiming to address key macroeconomic challenges. Still, the implementation of the plan must guarantee sufficient impacts on people and society.

In August 2023, TheCityUK, with support from EnterpriseNGR and other industry representatives, developed and published a clear roadmap for enabling the implementation of the National Fintech Strategy. Some of the recommendations in the roadmap address the industry-facing challenges, such as right-touch regulatory framework, investment incentives, digital and physical infrastructure, and the role of key stakeholders, government, regulators, and operators. Given the significance of the operations of fintechs to facilitate last-mile financial services access, the recommendations in the roadmap document should complement the direction offered in this Policy Insight. Lastly, CBN’s National Financial Inclusion Strategy (revised) provides recommendations on achieving financial inclusion targets. Urgent implementation of those recommendations is as equally critical to closing Nigeria’s exclusion gap.