Financial inclusion as an imperative for national transformation
A few years ago I found myself in one of the souks in suburban Cairo. Those who have visited the Egyptian capital would recall how crowded and vibrant it can be. The traditional Arab souk, or open market, is where the word bazaar originally came from. From Amman to Tunis; from Fez to Tripoli, Casablanca and Khartoum; the souks can be noisy and quite disconcerting if you’ve never experienced them. I had gone to buy my favourite art works – imitation ancient Egyptian paintings made on papyrus. As is the custom, you sometimes have to bargain and shout your voice hoarse. At the end, a deal is struck and it all ends up in a win-win. On that particularly sweltering July afternoon in Cairo, I happily got what I wanted. The pleasant surprise was that a mobile ATM was swiftly brought out for me to complete my payment. It was quick, orderly and safe.
According to recent data, as much as 54.0% of the world’s population have no access to financial services of any kind. For developing countries, the percentage is as high as 70 percent of the population. According to McKinsey, the global management firm, an estimated 2.5 billion people and over 200 million businesses are excluded from access to banking and other financial services.
The situation, of course, varies from country to country. According to a recent international survey, in the Democratic Republic of the Congo, DRC, for example, less than 1% of households have bank deposits of any kind whereas in Japan the figure stands at 100 percent.
According to the World Bank’s 2014 definition: “Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.”
According to the Asian Development Institute, an affiliate of the Asian Development Bank (ADB), the attributes of an inclusive financial system is characterised by 4 elements: first, all families and enterprises have access to financial services (such as deposits, short-term and long-term loans, mortgages, insurance, pensions, payments, and domestic and international remittances) at fair and affordable prices; secondly, those financial institutions should have forward-looking and robust leadership and management systems, industrial performance standards based on robust market mechanisms under a fair and rational system of prudential regulations; and thirdly, the financial viability of those institutions should be clear and should be the anchor for provision of long-term financial services; and fourthly, there should be a diversified pool of financial service providers (including individual informal providers, nongovernment organizations, and formal financial institutions) that provide profitable and variable financial services under accessible as well as affordable terms.
An increasingly important element of financial inclusion is digital payment, i.e. the use of electronic means instead of outright cash for all payments and transactions. This is also an important factor in determining the level of financial deepening as well as inclusion. The 2017 report by the global consulting firm McKinsey ranks Norway (with 78%) in first place among a sample of countries that use digital payments in their financial system. The next five are all advanced industrial economies: Australia (77%); Denmark (62%); Belgium (61%); and Sweden and Netherlands (57% each). The bottom 5 were all developing or emerging economies, all of them scoring 1% (Indonesia, India, Nigeria, Pakistan and Ethiopia).
The paradigm of financial inclusion has come to the forefront of the lexicon of international development discourse in recent years for several reasons. First, there is the persistence of the challenge of global poverty, at a time when the world is approaching the new society of abundance; a new gilded age of widespread prosperity. The persistence of poverty, particularly in Africa, south Asia and Latin America, have led development experts to place greater focus on the phenomenon of socio-economic exclusion and disempowerment.
Secondly, the globalisation, which has turned our world into a single global marketplace, has within it a tendency to deepen inequalities by making the rich even richer while the poor continue to suffer even deeper immiserisation. The noted French economist, Thomas Pikkety, recently became an intellectual celebrity when he published his book, Capital in the Twenty-First Century (Cambridge, Massachusetts: Belknap Press of Harvard University, 2014). In that book Piketty makes a distinction between income inequality and wealth inequality. The first refers to what people earn while the other refers to what people actually own. While inequities are widening across the world in terms of income, the most worrisome inequalities are actually in terms of wealth. The most affluent people invest their incomes in assets which continue to increase even in defiance of inflation, while the workers and lower-income people with little or no investment assets are stuck in poverty.
It has become clear to many observers that lack of access to financial services is the principal factor explaining deepening equalities in both advanced industrial countries and in developing and emerging economies. There is yet a third consideration.
Thirdly, the opportunities opened up by the new ICT revolution have immense promise not only for improved welfare for all but particularly for the poorest of the poor in rich as well as poor countries. Mobile telephony, for example, has opened up new vistas for impoverished rural farmers who are now able to access information for fairer prices for their farm products as well as for inputs such as fertilisers, tractors, pesticides and affordable credit. The ICT revolution and its related fintech services, provide practical and cheaper ways of linking those who need financial services and those who can provide them.
But let’s get it straight: the logic underpinning financial inclusion today is not so much about growth, poverty and economic development. It is predicated on nothing less than the imperatives of national transformation. While it is true that access to affordable credit is vital to empowerment and economic development; it is, clearly, far more than that. It is about life itself and the human prospects of billions of people on our planet.
According to the McKinsey report that we referred to earlier, financial inclusion based on deployment of digital finance could add some US$3.7 trillion to the GDP of emerging economies by the year 2025, amounting to about 6% of GDP. An additional job-creation for 95 million people could also be created by deploying digital financial solutions while widening access to financial services. An estimated US$4.2 trillion in new deposits could be hauled into the financial system that would in turn generate US$2.1 trillion in additional loans. Public finances will also be improved through plugging leakages of more than US$110 billion in government revenues. And depending on their starting points, it estimated that for some countries, notable among them Nigeria, Ethiopia and Nigeria, the relevant reforms could add between 5 – 10 percent to their GDP.
In a recent survey of 26 countries, Kenya came top with a score of 86% in terms of financial inclusion. The country was rated as having 89% mobile telephony capacity while the regulatory environment scored 94% and country commitment was scored 89 percent. The top 5 in the sample were Kenya, followed by Brazil, Mexico, Colombia, and South Africa. Nigeria was number 10 in the sample, with a financial inclusion score of 74%, mobile capacity of 83%, a country commitment of 94% and regulatory environment of 89 percent. Egypt came last with a financial inclusion score of 53%, mobile penetration of 67% and a regulatory environment of 72% and government commitment of 61 percent. According to CBN, only 58 million Nigerians out of our 195 million people have access to financial services of any kind. This translates to a mere 29% financial inclusion rate. In fact, it has been quite a regression for a better figure of 40% that was achieved in the past.
Several factors account for success in financial inclusion.
First, leadership and commitment matter. Countries with leaders committed to development of their people tend to show more positive outcomes than those who do not. Secondly, a vibrant financial sector anchored on mobilisation of savings and deployment of new technologies provide avenues for greater financial inclusion than others. Particularly important in this context is the development of microfinance institutions that are both well managed and well regulated to ensure vehicles that provide affordable as well as safe savings and credit for the poor. Thirdly, public-private partnerships enhances capacity of countries to mobilise for financial inclusion. And finally, availability of robust data for monitoring and coordination of policies is vital.
But there are no quick-fix solutions. A solution that may work in Kenya might not necessarily work in Nigeria or Ghana. What is crucial is to understand the specificity of national conditions and to design solutions that work for that country.
Several barriers need to be overcome.
There is, first, the issue of distribution. The geography of some developing countries compounds the access to financial services. A good example is Indonesia, a sprawling archipelago consisting of thousands of small islands. It is estimated that developing countries have an average one bank branch and one ATM machine per 10,000 people.
Secondly, there is the question of human capital. People in private and public sector organisations need to be equipped with the right skills to drive the financial inclusion process.
Thirdly, the requisite infrastructures need to be put in place: sustainable energy systems, roads, in addition to physical security.
Fourthly, understanding the nature of risk in the informal sector remains a real challenge. Financial providers need to be able to design effective risk systems, including robust customer-relationship-management solutions that ensure sustainability over the long-term.
And finally, the regulatory environment needs to be appropriate to nurturing financial inclusion programmes. Central banks and other monetary authorities need to understand financial inclusion as well as microfinance institutions and how to regulate them for the benefit of all.
The implications for Nigeria are considerable. Since the banking consolidation reforms of 2005—2007 the CBN has been committed to creating a robust and stable banking and financial system for all Nigerians. Several policy initiatives are being undertaken ranging from FSS2020 that aims to make our country the financial hub of the continent to reform of microfinance institutions, articulation of financial inclusion policy, overhauling of the payments system and the so-called “cashless policy”.
To be fair, some progress has been made in certain areas. But, I think, most people will agree with me that we are not yet where we ought to be. Millions of our countrymen and are women are still outside the financial loop. Indeed, as a result of the recent economic recession, several bank branches, particularly in rural areas, have been closed down, thereby worsening the incidence of financial inclusion. The fight against corruption, welcome as it is, has forced many Nigerians to withdraw from the banking system. Many in the informal sector prefer to keep their money at home.
From the foregoing, it is clear that we need not only to restore confidence in the banking system but also provide adequate incentives to get millions of subscribers back into the financial system. Access to banking services, as we have maintained, ought to be a fundamental economic right for all citizens. We need robust policies that will not only expand access but also provide credit and resources at rates that are reasonable, fair and affordable. We also need to rapidly digitize payments systems.
And if I may conclude by echoing the legendary founder of Microsoft, Bill Gates, ours is an age where we ought to do business at the speed of light. Digitalised financial inclusion is not only good for human welfare; it is good for the overall economy and for enhancing the quality of lives for all citizens – good for business and good for economic freedom of all our citizens.
- Text of a Presentation During the 24th Session of the Nigerian Economic Summit Group (NESG) Annual Conference Held at the Transcorp Hilton Hotel, Abuja, 22 – 23 October 2018.
Obadiah Mailafia