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ECONOMIC INCLUSION OF THE UNBANKED:

NIGERIA’S EXPERIENCE

Ganiyu A. OgunleyeManaging PartnerJaffa Consulting

IADI AFRICA REGIONAL COMMITTEE CONFERENCEHELD AT ARUSHA, TANZANIAJULY 29-31, 2010

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Presentation Outline

Introduction Concept of Economic Inclusion Nigerian Experience Lessons Learned Conclusion

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Introduction Economic inclusion is critical to achieving

sustainable economic growth and development

As a strategy for sustainable growth and development, it is imperative that all sectors (formal or informal, rural or urban) should be engaged in economic activities

Many countries achieve this goal through: Increased access to factors of production

especially credit Savings mobilisation Employment generation Improved allocative efficiency Poverty reduction

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Concept of Economic Inclusion

Economic inclusion is the process of overcoming the barriers that prevent a segment of the populace from participating in the economic growth of their country of residence

Economic inclusion encapsulates financial inclusion

Financial inclusion can be defined as the process of ensuring access to financial services and timely and adequate credit, where needed, by vulnerable (especially low income) groups at affordable cost (Prahlad C. K 2005)

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Concept of Economic Inclusion

In developing countries, a large segment of the populace (mainly the low income groups) have little access to financial services, either formal or semi-formal. The formal financial sectors serves no more than 20-30 % of the populace in most developing countries (Asia Development Bank)

In contrast, most of the population in developed countries (96% in Canada – Bill Knight, 2007) while 99% in Denmark, 96% in Germany, 91% in USA and 96% in France have bank accounts (Peachy and Roe, 2004)

Given the focus of this presentation on the “unbanked”, emphasis will be on financial inclusion

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Nigerian Experience Overview of the Economy Economy is characterized by large

informal sectorAbout 35% of economically active population have access to financial services while 65% rely on informal sector

Less than 2% of rural households have access to formal finance/ banking services

Aggregate micro-credit facilities account for 0.2% of GDP and less than 1% of total credit to the economy

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Nigerian Experience Supply-Led Strategy

In pursuance of economic inclusion, successive governments since the 1970s intervened through supply-led credit strategy. The initiatives implemented include:

Rural Banking Scheme Sectoral allocation of credit Agriculture Credit Guarantee Scheme Peoples Bank Community Banking Scheme National Directorate of Employment Family Economic Advancement Programme (FEAP) Nigerian Agricultural Cooperative and Rural Development

Bank National Poverty Eradication Programme (NAPEP)

The Supply-Led credit strategy of government recorded limited success

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Nigerian Experience Role of NGOs

The ineffectiveness of the government economic inclusion strategies left a huge gap which NGOs sought to fill. Most NGOs are credit only, member-based institutions

NGOs adopted demand-driven strategy with main focus on micro and rural entrepreneurs

NGOs obtain funding from grants, fees, interest on loans and members’ contributions

NGOs have limited outreach due largely to inadequate sources of funding

The demand driven strategy of NGOs generated little impact

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Nigerian Experience Economic Inclusion Through Microfinance Banking

Objectives of Micro-finance Policy Framework (2005) include: Provision of financial services to economically

active poor Promoting synergy and mainstreaming of

informal sub-sector into the national financial system

Enhance service delivery to micro, small and medium enterprises (MSME)

Contributing to rural transformation Promoting linkage programmes between

universal/development banks and micro-finance banks

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Nigerian Experience Economic Inclusion Through Microfinance Banking

Mandate of micro-finance banks include: Providing diversified, affordable and

dependable financial services to the active poor, in a timely and competitive manner

Mobilising savings for intermediation Creating employment opportunities and

increased productivity of the active poor Providing avenues for administration of

micro-credit programmes of governments on non-recourse basis

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Nigerian Experience Economic Inclusion Through Microfinance Banking

Micro-finance Regulatory Framework Two categories are permitted – unit bank or state-wide franchise

with minimum capital of N20 million and N1 billion respectively Community Banks already in existence were allowed to convert

to micro-finance banks provided they met the licensing requirements

606 out of 1259 community banks converted to microfinance banks as at Dec 31, 2008

345 new micro-finance bank licences have been issued as at June 2010

1 universal bank terminated operations and returned its MFB licence in 2010

950 micro-finance banks are currently in operation Only 8 have state-wide franchise. The rest are unit banks. Distribution of MFBs was skewed in favour of urban and semi-

urban centres Prudential Guidelines were issued Both on-site and off-site supervision were being conducted Liberal licensing policy created supervisory challenge

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Nigerian Experience Economic Inclusion Through Microfinance Banking

Regulatory Incentives for Micro-finance Programme Tax exemption in the form of VAT and non-

taxable interest income Central Bank support through a Rediscounting

and Refinancing Facility Creation of a N50 billion Micro-Credit Fund in

February 2008 State Governments were required to allocate

not less than 1% of their annual budget for micro-credit finance activities

Deposit insurance coverage

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Nigerian Experience Economic Inclusion Through Microfinance Banking

Role of Deposit Insurance Nigeria Deposit Insurance Corporation (NDIC) extended

coverage to micro-finance banks in 2008 to engender public confidence in them

NDIC Act makes membership compulsory Insurance cover of N100,000 per depositor covers 95% of

depositors of MFBs Separate Insurance Fund (SIIF) was created for MFBs as at

December 2008, NDIC contributed N8.5 billion to SIIF from its operating surplus

NDIC participates in supervision of micro-finance banks (on-site and off-site)

Capacity building for NDIC staff was undertaken in collaboration with Social Enterprises Development Partnership Incorporated (SEDPI) from Philippines

Public awareness of deposit insurance coverage was undertaken

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Nigerian Experience Economic Inclusion Through Microfinance Banking

Impact of Micro-finance Banking Initiative

Dec 2006 Dec 2009Total Assets N55 billion N159 billion

Net Credit N16.5 billion N56 billion

Deposit Liability

N34 billion N73 billion

No. of Customers

1.82 million 3.64 million

Source: OFID, Central Bank of Nigeria

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Nigerian Experience Economic Inclusion Through Microfinance Banking

Challenges faced by Micro-finance Initiative Inappropriate business model – MFBs operating as

conventional banks High operating cost Low capital base Poor managerial skill Poor corporate governance Ineffective regulation/supervision Absence of exit mechanism for unlicensed community

banks (about 650) Low deposit base of MFBs Skewed distribution of MFBs Poor borrowing culture

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Lessons Learned Liberal licensing policy inhibits effective

regulation. There is need for stricter licensing regime

Policy design should identify the target population, their needs and obstacles to accessing financial services

Acquisition of requisite skills by major stakeholders (regulators, financial institutions and their clientele) is critical to achieving economic inclusion objectives

Financial literacy advocacy is imperative

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Lessons Learned Lack of exit mechanism for unlicensed and/or illegal

financial intermediaries fosters unhealthy competition, erodes public confidence and inhibits economic inclusion

The urban/semi-urban concentration (skewed distribution) of micro-finance banks undermine the policy objectives of rural transformation

The business model of micro-finance banks requires a radical review: Rather than rely heavily on the money and capital market for funding, they should develop innovative products for deposit mobilisation

There is need for greater discipline from both borrowers and lenders

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Conclusion

With a large unbanked populace, there is a huge potential for deposit mobilization for economic growth and development. Economic inclusion remains a veritable strategy for Nigeria’s development. The lessons learned from the past and present initiatives should guide future direction.