POLICY INITIATIVES FOR IMPROVED FINANCIAL SERVICE PROVISION IN THE RURAL AREA OF NIGERIA

Slide 1:POLICY INITIATIVES FOR IMPROVED FINANCIAL SERVICE PROVISION IN THE RURAL AREA OF NIGERIA PAPER PRESENTED BY MR. PAUL NDUKA ELUHAIWE DEPUTY DIRECTOR, DEVELOPPMENT FINANCE DEPARTMENT CENTRAL BANK OF NIGERIA, ABUJA AT THE AFRACA WEST AFRICAN ENGLISH SPEAKING SUB REGIONAL WORKSHOP AT BANJUL 31ST MARCH � 2ND APRIL 2008

Slide 2:Outline of Presentation Introduction- Nigeria economy and rural finance efforts. Conceptual issues in rural financial service provision. Rural financial policy measures in Nigeria. Challenges and ways to improve rural financial services. Summary and conclusion.

Slide 3:Introduction Cont� Nigeria, has a population of 140million, accounts for a � of total African population. Richly endowed, with land area of 924,000 sq. kms for agriculture, industry and mineral resources extraction including oil and gas, of this 304,920 sq kms as cultivable arable land.� Has two distinct socio-economic sectors- urban and rural. Rural sector contributes more than 40.00 percent to Gross Domestic Product (GDP) between 2003 and 2006 but receives less than 5% s of the total aggregate banks� credit to the private sector annually. Banks credit goes to 35% of total population, 65%, mainly rural dwellers, have little or no access to financial services from formal institutions.

Slide 4:CREDIT TO RURAL AND AGRICULTURAL SECTOR IN NIGERIA

Slide 5: Introduction Cont� Past policies, programmes, schemes and institutions enunciated by the Federal Government and the Central Bank of Nigeria to address the dearth of rural finance. Stipulation of credit guidelines in favour of agriculture and agro allied activities which constitutes 70% of activities in the rural areas. Sectoral allocation of credit, concessionary interest rate were compulsorily set at between 3 and 5 percent points below the market rate charged for other economic activities. Rural banking policy of the CBN in 1977 required commercial banks to open up stipulated numbers of rural branches in different parts of the country annually. 756 rural bank branches with total deposit in all the rural areas amounting to N5.7billion. were opened. 50% of the total deposit mobilized from the rural areas were advanced to rural borrowers.

Slide 6:2.0 Conceptual issues in Rural Financial Service Provision Rural Finance: Broad range of financial services provided to the rural populace. Credit is a component of this and includes the credit requirement of all rural retailing/wholesale non-farm activities, agricultural primary production and agro-allied businesses. It also include the following: ����������� Saving Mobilization:� Rural savings is very important for accelerated� agricultural� and rural development as it enhances the provision of credit, mitigate risks in time of emergency, used as collateral for loans. Most recent designed rural finance programmes and schemes�� always incorporates the savings by the borrowers. Insurance Services:� Provision of insurance facilities for various risk mitigating purposes is an integral of finance sector. Payment System: �Payment system is the most important aspect of financial market interaction.� It deals with the remittance, transfer and payment of funds.

Slide 7:Concept of Rural Finance Services Provision Cont�d 2.2 Rural Finance Intermediation Delivery of financial services in the rural areas was dominated by informal Rotating Savings and Credit Associations (ROSCA) e. g �esusu�, �adashi�, Self- Help Groups (SHGS), moneylenders, pawnbrokers, thrift collectors, local traders and suppliers of inputs and consumption goods, family members and friends. � �It has taken a new dimension and attracted much attention politically and socially.�Governments, semi-formal institutions e.g. credit unions, saving and credit co-operatives, multipurpose co-operatives and non-governmental organizations (NGOs), formal institutions such as development finance, poverty alleviation programmes and universal and microfinance banks.

Slide 8:Concept of Rural Finance Services Provision Cont�d 2.2 Rural Finance Intermediation Its� clients are engaged in economic activities such as agriculture, agro-allied processing, agricultural marketing, petty trading, craftsmanship, tailoring etc that employ 70 to 80 percent of the population in most sub Saharan African countries, Contributes between 40 to 60 percent of the GDP. � Economic activities are micro in nature, require small credits for their operations, transaction cost are high and business is highly risky too. Lack of tangible securities for credit facilities. �

Slide 9:Concept- Characteristics, Hindrances and Approaches to Development of �Rural Finance� Services 2.3.1 Characteristics of �Rural Finance� Services Most rural borrowers and enterprises rely on very limited resources of their owners, relations and friends Economically active rural people patronize the money lenders who are the traditional credit institutions while the very poor avoid them because of their callous approaches to recovery of loans. They often take out loans in groups (peer group pressure method) of five to ten individuals. Peer group encourages borrowers to repay loans in full and in time resulting in the higher than 95 percent repayment rates in rural finance industry.

Slide 10:Concepts Cont� 2.3.2 Hindrances Dispersed populations, poor infrastructural facilities, which make �unit delivery� costs very high for both small financial institutions and entrepreneurs, The high risk associated with the economic activities and the difficulties of diversifying because of segmented markets caused by the above� difficulties, The strong� seasonality associated with rural activity and resulting high probability� of �price� and income shocks, and The absence of traditional physical collateral normally required by banking system.� ���

Slide 11:Concepts Cont� 2.3.3 Modern Approaches to the Development of Rural Finance Services Paradigm shift since the 1980s from direct credit provision to the �financial system approach� It uses market principles to deliver financial services (demand driven). Treats rural finance as a way of expanding the financial infrastructure and integrating markets. It will also create efficient and effective and viable financial institutions. Based on the firm belief that it would make financial services available to the majority of the un-served on a sustainable basis (Gonzalez-Vega 2003)

Slide 12:Concepts Cont� For the above to deliver the desired result, some Scholars and institutions called for; - favourable policy environment, - eliminate bias against rural sector, - strengthening of legal and regulatory framework that would encourage secured transactions, adopt licensing requirements and regulation that will enable rural financial institutions to provide appropriate services, - build the capacity of rural financial institutions to deliver demand driven products and services and - also build capacity of clients in financial skills and business management to bring them close to the financial system.

Slide 13:Concepts Cont� 2.3 .4 Modern Approaches to the Development of Rural Finance Services Cont� Link rural finance to non financial activities in the rural areas, in particular to products processing, input supply and marketing activities etc.� Collateral substitutions through motivation for payments by self selecting groups of borrowers.

Slide 14:2.0 Concepts Cont� 2.4. Objectives and Targets of Rural Financial System Rural finance � tool for poverty reduction to achieve Millennium Development Goals (MDGs). �� Specific objectives of the rural financial system amongst others include: Promote measures to facilitate the access of all categories of rural economic agents to credit� on reasonable terms, Encourage the development of �saving and credit institutions and establish savings culture among rural dwellers, and Promote the establishment new financial institutions and motivate all relevant existing�ones to extend their operations to rural areas.

Slide 15:3.0 Rural Finance Policy, Programmes and Institutional Measures in Nigeria The Nigerian rural finance policies, programmes, schemes and institutions were enunciated amongst others to: Make financial service accessible to a large segment of the potentially productive Nigerians which otherwise would have little or no access to financial services, Promote synergy and mainstreaming of the informal �financial sub-sector into national financial system, Contribute to rural transformation, and Promote linkage programme between universal /development banks and microfinance banks (specialized institutions).

Slide 16:3.0 Rural Finance Policy, Programmes and Institutional Measures in Nigeria Cont� 3.1 Rural Finance Policy Measures. In the past direct measures as :credit ceiling, specified interest and exchange rates, sectoral credit allocations, the rural banking scheme (RBS) introduced by the Central Bank of Nigeria in 1977, commercial bill for financing schemes, regional commodity boards, export financing and rediscounting facility were deployed. Currently, two major innovative initiatives were developed. (i) National Economic Empowerment and Development Strategy (NEEDs) (2005) (ii) Microfinance Policy, Regulatory ans Supervisory Framework for Nigeria (2005)

Slide 17:3.0 Rural Finance Policy, Programmes and Institutional Measures in Nigeria Cont� 3.2 Rural Finance Programmes and Schemes. Past initiatives include: Agricultural Development Programme (ADP), National Economic Reconstruction Fund (NERF), the Directorate of Food , Road� an Rural Infrastructure (DFRRI), Better Life for Rural Women, Family Economic Advancement Programme (FEAP). Existing innovative programmes and schemes: I) National Directorate of Employment (NDE), (ii) Credit Guarantee Scheme Fund (ACGSF), (iii) Interest Draw Back Programme (IDP), (iv) Agricultural Credit Support Scheme (ACSS), (v) Small and Medium Enterprises Equity Investments Scheme (SMEEIS), (vi) National Poverty Eradication Programme (NAPEP). (vii) World Bank FADAMA 1&2, (viii) World Bank Micro, Small Medium Enterprises Project, (vx) IFAD - Rural Finance Institution�Building Programme (RUFIN), (x) Micro Credit Development Fund and (xi) Small and Medium Enterprises Development Agency of Nigeria (SMEDAN),�

Slide 18:3.0. Rural Finance Policy, Programmes and Institutional Measures in Nigeria Cont� 3.3 Financial Institutions Involved Rural Financing. Up to the �80s rural finance (synonymous to agricultural finance) was the exclusive preserve of the non-profit organization, development finance institutions. Currently the commercial and microfinance banks provide an increasing percentage of funds that go to rural enterprises see the banks� credit to private sector by activities between 2003 and 2007 (tables 2 & 3). Community banks (converted to microfinance banks), deposit money banks (DMBs), Nigerian Agricultural Cooperative and Rural Development Bank Ltd (NACRDB), (NAIC) and Bank of Industry (BOI), Current initiative: microfinance banks,

Slide 19: Banks and the Nigerian Economy Sectoral Share in Total Real GDP and in Private Sector Credit (Note; figures in parenthesis are share of credit to the private sector (%); Source CBN. Table 2

Slide 20:Banks� Credit to Private Sector by Activity (N� Billion) Table3

Slide 21:4.0 Challenges and Ways to Improve Rural Financial Services in Nigeria. 4.1 Challenges Inherent risk which hinder financial institutions from lending to the rural communities: the seasonality of agribusiness and climatic change, Lack of collateral for small rural borrowers, � High cost of obtaining information on rural borrowers, High interest rate charged by financial institutions, Inability to afford insurance coverage by poor rural people, Lack of good business plan to convince banks to lend,

Slide 22:4.0 Challenges and Ways to Improve Rural Financial Services in Nigeria Cont� 4.1 Challenges Cont� Inconsistency in the rural financial policy and sometimes lack of appropriate policy, Poor infrastructure such as water� for irrigation, electricity, good roads for evacuation as well as warehousing and storage facilities, Repayment problem, Improper client services and delivery strategies and Lack of� Re-financing facilities

Slide 23:4.0 Challenges and Ways to Improve Rural Financial Services in Nigeria Cont� 4.2 Suggested Ways to improve Financial Services in the Rural Areas Effective policy mix: the interplay of fiscal, monetary and financial policies in the economy to influence the flow of credit into the rural areas.� Favourable macro and microeconomic environment: Reform of rural finance institutions Promote conducive policy and effective regulatory and supervisory environment

Slide 24:4.0 Challenges and Ways to Improve Rural Financial Services in Nigeria Cont� 4.2 Suggested Ways to improve Financial Services in the Rural Areas Development appropriate and effective payment system Creation of Wholesale Development Banks/ Microfinance Banks and other Credit Retail Institutions. Development of Special Financial Product � Agricultural Microfinance

Slide 25:5.0 Summary and Conclusion Summary: The paper examined the characteristics, hindrances and approaches to doing rural finance, reviewed the past and current initiatives adopted to provide the rural dwellers financial services in Nigeria. It also looked at the challenges such as poor and inadequate infrastructure, environment, inconsistencies in rural policy, and proffered some measures such as effective policy mix, reform of rural finance institutions, development of appropriate ICT based payment system and specialized financial products as ways to improve rural people access to financial services Conclusion: No doubt, the development of appropriate market based innovative products and strategies��are likely to enhance the level and quality of financial services rendered the rural sector of the African continent. This would require the government to address the issue of environment, especially, the provision of adequate infrastructure, develop appropriate and enduring policies and programmes that work for the majority and allow privately managed institutions to evolve.

Slide 26:Thank You