ECONOMIC INCLUSION OF THE UNBANKED: NIGERIA’S EXPERIENCE

1. ECONOMIC INCLUSION OF THE UNBANKED:NIGERIA’S EXPERIENCE Ganiyu A. Ogunleye Managing Partner Jaffa Consulting IADI AFRICA REGIONAL COMMITTEE CONFERENCE HELD AT ARUSHA, TANZANIA JULY 29-31, 2010

2. Presentation Outline • Introduction • Concept of Economic Inclusion • Nigerian Experience • Lessons Learned • Conclusion

3. 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

4. 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)

5. 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

6. Nigerian Experience Overview of the Economy • Economy is characterized by large informal sector About 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

7. 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

8. 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

9. 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

10. 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

11. 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 • 606out 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

12. 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

13. 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

14. Nigerian Experience Economic Inclusion Through Microfinance Banking • Impact of Micro-finance Banking Initiative Source: OFID, Central Bank of Nigeria

15. 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

16. 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

17. 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

18. 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.