The impact of banking crises on consumer trust and financial inclusion

 The role trust plays in the drive for an inclusive financial services ecosystem can’t be overemphasised. The recent developments in the banking sector have elevated the need to revisit the topic, this time drawing our insights from the body of evidence available.

Trust means being confident that a person or an institution will deliver on their promises and is, therefore, a powerful driver of human behaviour and a foundation of all relationships.

Research studies have repeatedly identified lack of trust as a major inhibitor to the adoption of formal financial services and most people would admit that trust is a fundamental pillar in driving financial inclusion. However, it may not be immediately apparent just how important trust is to the Nigerian financial service customer.

We decided to juxtapose the EFinA Access to Finance measure of financial inclusion in Nigeria (2008–2016) with the dates of the banking industry incidents, namely 2009 and 2016. Our aim is to explore the impact of the Central Bank of Nigeria (CBN) interventions on the level of trust among the populace and its further impact on financial inclusion.

2009 — Sanusi Lamido’s banking reforms
This was the year five bank Managing Directors and board of directors were summarily removed by the CBN governor for various infractions including weak corporate governance practices.

The 2010 EFinA Access to Finance Survey reported about 54 million Nigerian adults were without bank accounts, and about 4 million of them — 8.3 percent — attributed this to the lack of trust in the banking system. Another 1 percent — more than 500,000 — did not feel their funds were safe in the bank.

Unsurprisingly, the shakeup of the previous year was  top-of-mind, hence attributed to the relatively high levels of mistrust.

2011 — Three bank licenses revoked
Two years after the infamous 2009 “banking tsunami”, Afribank, Spring Bank and Bank PHB tapped out of the Nigerian banking sector due to the CBN revocation of their operating licenses.

The 2012 EFinA survey reported that 6.9 percent — about 3.9 million adult Nigerians — preferred to live without a bank account due to the lack of trust in the banking sector. An additional 2.8 percent (1.4 million people) didn’t feel their funds were safe in a formal financial institution.

While the percentage is relatively lower than reported in 2010, the absolute numbers of adults lacking trust in the banking system are equivalent. In addition, perceptions of the safety of funds domiciled in banks almost tripled.

2016 — Board of Skye Bank sacked, CBN takes over
By 2016, financial exclusion levels worsened to 41.6 percent from 39.5 percent in 2014. Attributes of this spike include, but are not limited to, the economic recession, the BVN enrolment exercise, and others.

However, it appears that consumers were also still reeling from the effects of the banking industry’s tumultuous journey through the years. With 40.1 million adults excluded, 2.6 percent of them (about 1.04 million people) still did not trust banks enough to open or maintain an active bank account. In spite of these improvements, trust remains a concern.

2018 — Skye Bank bows out, along with 154 microfinance banks
The news of the revocation of Skye Bank’s operating license in September sent shockwaves through the entire ecosystem. This was soon followed by the revocation of operating licenses from another 182 financial institutions, 154 being microfinance banks. While the Skye Bank intervention has been in operation since 2016, the reasons for revoking microfinance banking licenses range from insolvency to distress.

Through these crises, depositors continually question the safety of their funds, especially access to these monies amidst regulatory incursions.  The CBN, on its part, through these interventions has averted the complete closures we witnessed with the likes of Savannah Bank and ABC Bank. The process of deposit insurance, especially for depositors with vast amounts, still leaves a sour taste in the mouths of the affected and their families.

Trust as one of the tenets of banking needs to be continually strengthened in the banking industry.

This responsibility is nonetheless shared between the operators and their regulators — CBN and the Nigerian Deposit Insurance Corporation (NDIC). The depth of supervision needs to ensure an adherence to prudential guidelines as well as managing the possibility of systemic risk that occurred in the 2008 global financial crises. This has led to a call for new legal and regulatory frameworks to prevent future financial crises as well as build confidence in financial markets. This becomes even more imperative as Nigeria continues to witness the influx of fintechs into the financial services space.

While various factors led to the failure of these financial institutions, the philosophy of rent-seeking without recourse to society is not only harmful but also erodes confidence.

Finally, consumer education is also an essential third leg to the trust conversation.

Has your level of trust in Nigerian financial institution grown over the years? What are the factors responsible for this?

Dr Olayinka David-West and Ibukun Taiwo are members of the Sustainable and Inclusive Digital Financial Services initiative of the Lagos Business School