Understanding the response so far to Nigeria’s financial inclusion challenge
Following our analysis of the results of the World Bank’s Global Findex 2017 report (released in April 2018), the challenges and potential opportunities that it highlights, we move this week, to understand how Nigeria has responded to some of the challenges and what plans it has in place to reverse the current trend of increasing levels of financial exclusion.
The origins of intervention
Financial inclusion as a lever to address poverty has only been monitored reliably in Nigeria since the mid to late 2000’s. Enhancing Financial Innovation and Access (EFInA), was established in 2007 with a mandate from the UK Department for International Development (DFID) and the Bill and Melinda Gates Foundation to understand the level of financial inclusion in Nigeria and to track it bi-annually. The same year, Nigeria’s Financial System Strategy 2020 (FSS 2020) was launched by the Central Bank of Nigeria (CBN), with the aim of improving the access to and the utilization of financial services in general.
In 2008, EFInA’s first nationwide survey – The Access to Financial Services in Nigeria Survey – established a baseline from which intervention could be designed, revealing that 52.5% of Nigeria’s adult population was financially excluded. The survey is repeated every two years, and has provided a strong basis for understanding the progress that Nigeria is making towards financial inclusion. The results from 2008 to 2016 are incorporated below:
The 2008 data provided the basis for the first wave of intervention by the CBN in 2009, with the release of the Regulatory Framework for Mobile Money which adopted a dual bank-led and non-bank led model of regulation, but excluded telecommunication companies from participation. As a result of this regulatory framework, 21 Mobile Money Operators (MMO’s) were licensed by 2014.
This coincided with a period of significant growth in Nigeria’s previously disparate banking sector, with a process of consolidation in 2006-07 leading rapid growth in deposits and branch networks across a network of 25 major banks. Subsequently, between 2008 and 2012, the country’s financial inclusion indicators (provided by EFInA) showed a positive trend, as overall exclusion levels improved from 52.5% in 2008 to 60.3% in 2012.
The Maya Declaration and a National Financial Inclusion Strategy
In 2012, Nigeria joined a range of other developing nations at the Alliance for Financial Inclusion meeting in Maya, Mexico and agreed a statement of common principles to guide the development of financial inclusion policy. The Maya declaration was a commitment to unlock the economic and social potential of 2.5 billion people globally, without access to financial services.
This commitment was enshrined in Nigeria in 2012, with the development and launch of the National Financial Inclusion Strategy (NFIS) which set out a goal of achieving financial exclusion of only 20%, by the year 2020.
Specifically, adult Nigerians with access to payment services was to increase from 21.6% (2010) to 70% (2020), access to savings should increase from 24% to 60%; access to credit from 2% to 40%, Insurance from 1% to 40% and Pensions from 5% to 40%. Furthermore, the channels for delivering financial services were equally targeted to improve, with deposit money bank branches to increase from 6.8 units to 7.6 units, microfinance bank branches to increase from 2.9 units to 5.5 units; ATMs from 11.8 units to 203.6 units, Point of Sale terminals (POS) from 13.3 units to 850 units, Mobile agents from 0 to 62 units, all per 100,000 adults between 2010 and 2020.
The CBN alongside many other organizations has strived to ensure financial capabilities are spread around the country. The country’s bid to reach its self-set financial inclusion goal of 80% by 2020 has led to a number of initiatives and policies that will help address the use of financial services across the country.
CBN guidelines for agent banking
In 2013, in recognition of the importance of established broad and effective agent networks in order to support the expansion of Financial Inclusion, the CBN released guidelines for agent banking.
Under the Guidelines, either a bank or MMO can be considered the principal in an agent banking relationship but banks need to specifically apply for approval to initiate agent banking, while for MMOs, the provisions are already covered by the Mobile Payments Regulatory Framework under which they operate. The responsibility for appointing and managing agents lies solely with the principal, subject to a minimum annual compliance monitoring by the CBN. This means that the principal must ensure that their appointed agents meet CBN requirements for persons operating as mobile money agents.
Agents may conduct account opening, withdrawal and deposits, funds transfer services and bills payment amongst others. However, they can only collect and submit account opening information which must then be forwarded to the financial institution that will open the account.
The Central Bank has taken a step further by issuing a ‘Regulatory Framework for Licensing Super-Agents in Nigeria’ that lays out the rules for operations of super-agents. To apply for a super agent license, an institution must have been operational for at least 12 months, have a minimum Shareholders’ Fund unimpaired by losses of N50 million, be registered with the Corporate Affairs Commission (CAC), and must have a minimum of 50 agents. Licensed companies will renew all agent agreements every two years, except otherwise required. The Framework also lays out rules regarding the responsibilities of super agents, interoperability and the fee-sharing formula for inter-scheme transactions.
An updated framework for Mobile Money
Nigeria’s Mobile Money regulations were first issued in 2009 and were designed to take both a bank-led approach and non-bank led approach to the roll out of mobile money.In contrast to the non-bank led approach taken in other markets, where telcos are permitted to become Mobile Network Operators (MNOs) and have played a significant role in the uptake of mobile money in many developing countries. The framework laid out the rules and roles of each participating party (i.e. agents, banks, telecommunications firms, etc.) as well as Know-Your-Customer (KYC) requirements.
In 2015, the CBN released reviewed guidelines on Mobile Money, which continued to explicitly prevent MNOs from being mobile money operators, as a continuation of the bank or independent-led-implementation model Nigeria has followed since inception. The guidelines did however increase the shareholder funds required to operate as an MMO.
Shared Agent Licenses and the Shared Agents Network Expansion Facilities (SANEF)
In further recognition of the importance of agent networks to delivering financial inclusion, and the insufficient progress made to date in establishing large, nationwide agent networks, the Central Bank of Nigeria and the Nigerian Communications Commission have been collaborating closely on the structures required to allow telecommunications companies to acquire a new ‘shared agent license’ that would allow them to build and operate agent networks through which financial service providers could offer their products and services.
These licenses, would be acquired by Special Purpose Vehicles set up by the telecommunications companies as separate entities, to be regulated by the Central Bank of Nigeria. This was codified in an MOU signed between the CBN and NCC earlier this year, which sets out the terms for the two regulators to collaborate to deliver an effective framework for financial inclusion.
The SANEF initiative was launched earlier in the year by the banking sector and the Central Bank of Nigeria, with the objective of rolling out 500,000 shared agents to approximately 50 million Nigerians. The initiative differs from previous ones because it allows for agents to be shared by MMOs, instead of operating on behalf of a single MMO. This means that any agent can service any client regardless of their banking institution of choice.
Supporting entrepreneurs and small businesses
As part of wider efforts to promote financial access and credit for key industries, the CBN has embarked on a range of programs including the Anchor Borrowers Scheme to support agricultural value chains (N81 billion disbursed to 366,465 beneficiaries) and the Micro, Small, and Medium Enterprises Development Fund (MSMEDF) which has disbursed N95 billion to 199,785 beneficiaries.
The Central Bank has also established a National Collateral Registry (NCR) to facilitate access to finance for micro, small and medium enterprises through the registration of movable assets that could be used as collateral to obtain loans from financial institutions. So far, over 500 financial institutions comprising Deposit Money Banks (DMBs), Microfinance Banks (MFBs), Development Finance Institutions (DFIs), merchant banks, and nonbank financial institutions have registered. The NCR has also recorded a total of 22,744 financing statements valued at N511.35 billion secured with 29,060 various types of movable assets from 106,637 debtors given a total of N563.11 billion worth of loan granted.
Refreshing the National Financial Inclusion Strategy (NFIS)
In 2017, under the guidelines of the NFIS, a review of the current progress of financial inclusion in the country was required. Coupled with the results of an EFInA survey which showed financial exclusion levels increasing nationally from 39.5% to 41.6% and in line with standard practice, the CBN initiated a review and a refresh of the National Financial Inclusion Strategy.
An exposure draft of the ongoing NFIS refresh, released in early July 2018 – states Nigeria is currently not on track to meet the 2020 targets. Nevertheless, the document acknowledges promising developments such as the Memorandum of Understanding (MoU) the CBN signed with the Nigerian Communications Commission (NCC) on digital payment systems in 2018; the CBN’s industry sandbox collaboration with the Nigeria Inter-Bank Settlement System (NIBSS) to allow financial technology start-ups test solutions in a controlled environment as well as the CBN’s partnership with the banking sector to roll out a 500,000-agent network to offer basic financial services.
The key challenges constraining growth were identified by the review and refresh strategyas unforeseen socioeconomic shocks, such as the economic recession and insecurity in parts of Northern Nigeria, the slow uptake of digital financial services (DFS) and limited rollout of national identity numbers (restricting the ability of financial service providers to meet know-your-customer (KYC) requirements). It further acknowledges lessons learned from limitations of the 2012 strategy including a lack of prioritisation across a long list of actions and Key Performance Indicators (KPIs), as well as an outdated set of solutions, some of which, as innovation advanced, became increasingly suboptimal in their prescribed methods.
The refreshed NFIS priorities have been defined based on a new approach that is deliberately more “future-proof” in its focus on first principles, instead of specific approaches that have the potential to become obsolete. It outlines two overarching principles, and several topic-specific principles, noting that these principles are to be adopted as an inseparable set, collectively important to drive financial inclusion in the Nigerian context.
The first of the two is an appropriately regulated level playing field that supports the building and growth of a services market with a focus on the activity, not the actor. Secondly, impact is likely to be greatest when each actor focuses on activities that best suit its capacity whilst all maintain an inclusive lens as much as possible.
The priority actions are therefore fivefold: Creating a conducive environment for the expansion of DFS; Enabling the rapid growth of agent networks with nationwide reach; Reducing KYC hurdles to opening and operating a bank account; Creating an environment conducive to serving the most excluded, so that inclusion efforts do not focus solely on the ‘lowest hanging fruit’ (and thereby increase inequality) and lastly, driving adoption of cashless payment channels, particularly in government-to-person and person-to-government payments. The strategy derives actions for each of these priorities and assigns them high-, medium-, or low priority status, lays out a time frame for completion and suggests entities responsible for leading or supporting each action.
Released in exposure draft format so far, the reviewed draft remains subject to stakeholder input, with a final draft due to be adopted in the next few months.
Commitments by the telecoms industry
The Association of Licensed Telecoms operators (ALTON) has outlined commitments that the telecoms industry is willing to make materially improve financial inclusion rates and to deliver access to financial services to 90 million customers over the next 30 months. The commitment demonstrates a staggered approach to how the telecoms industry will collaborate to deliver 600,000 mobile money agents and also commits to deepening financial literacy across the country through a financial inclusion secretariat within the Association of Licensed Telecommunications Operators of Nigeria (ALTON).
A basis for future success?
While it is clear that there has been a significant amount of activity from a regulatory perspective on financial inclusion, the level and type of intervention does not align with the outcomes that we assessed in our initial focus article on the statistics of the World Bank Findex 2017 report.
With respect to access to formal financial services by its population, Nigeria is regressing and much will depend on the final content, recommendations and implementation of the refreshed National Financial Inclusion Strategy. Change can be achieved quickly using the right regulatory levers. Other countries have successfully seen major increases in inclusion levels within a short time frame, including India and Ghana in recent years. Whether Nigeria can achieve the same will be the topic of our final feature, which will assess the robustness of Nigeria’s planned interventions and whether they can deliver the change that is needed.
This is the second of a 3- part weekly series, on analyzing the Global Findex Database for Nigeria. The next piece will focus on the robustness of Nigeria’s efforts to achieve its financial inclusion targets.
By Our Analyst