How CBN hampers financial system innovation
The traditional financial system is broken and does not work for Nigerians. EFINA’s 2018 survey provides the clearest example of this, as over 36.6 million or 37.0 per cent of Nigerians are still financially excluded. This means that the country has a number of people, larger than the populations of 44 African countries, who do not have access to financial services such as payment, credit, insurance, savings, and many more.
Academic studies often cite increased economic growth, prosperity and lower poverty levels as a good outcome of financial inclusion. Without access to financial services, households and businesses would fare considerably worse. This is why financial inclusion has been a big goal for governments across the world and is featured as an enabler in achieving eight of the 17 targets of the SDGs.
With these potentially transformative benefits, one cannot but wonder why progress towards financial inclusion goals has been slow in Nigeria. However, a closer look at why the financial system does not serve a lot of Nigerians would show that the regulatory approach has been a major setback.
The CBN launched Nigeria’s Financial Inclusion Strategy in 2012 with financial inclusion targets for payment and savings at 70.0 per cent (2010 baseline: 22.0 per cent) and 60.0 per cent (2010:24.0 per cent) respectively by 2020. The target for credit (2010: 2 percent), insurance (2010: 1 per cent) and pension (2010: 5 per cent) was set at 40 per cent. As of 2018, there was still a huge gap as outcomes were 36.2 percent for payment and savings and 5.5 per cent, 2.0 per cent and 8.5 per cent respectively for credit, insurance and pension. While we do not have access to 2020 statistics because EFINA is yet to conclude the report, it is unlikely that these targets have been met.
With evidence from other countries indicating fast-paced progress towards financial inclusion, the Nigerian situation becomes worrying. For instance, Kenya and Ghana have seen remarkable progress, with the share of adults with bank accounts rising to 82.0 per cent and 58.0 per cent from 42 per cent and 29.0 per cent respectively between 2011 and 2017. Meanwhile, the share of adults with access to accounts has increased at a slower pace to 40.0 per cent from 30.0 per cent over the same period. As Nigeria’s population and GDP are more than double that of both countries, the costs of financial exclusion must be staggering. The results from both countries suggest that this can be done successfully and rapidly. This has also been clear for some time, so why is Nigeria no closer to meeting its objectives?
The regulatory environment is mostly culpable because there is no scarcity of funding or innovative companies that can push Nigeria ahead. In Kenya, Safaricom’s mobile money business is responsible for most of the growth. In Ghana, MTN’s mobile money business has been huge in scaling financial services. In Ghana and Kenya, the reach of mobile money is 39.0 per cent and 73.0 per cent respectively in 2017, from 13 per cent and 58.0per cent in 2014. Rural reach in Kenya is the same as the national level while it is slightly lower than national at 35.0 per cent in Ghana. In Nigeria, mobile money account ownership is negligible even though it has improved from 3.0 per cent to 6.0 per cent over the same period – rural reach barely improved at 3 per cent from 2 per cent.
The common denominator is that both Safaricom and MTN are telecommunications businesses, which have a robust reach, infrastructure and deep pockets. There is no shortage of such businesses in Nigeria, with the same MTN present in Nigeria, as well as Airtel – another multinational telco – and locally owned Glo and 9-Mobile. The difference between Nigeria and peer economies that have done well is that the regulator, in this case, the CBN, has been reluctant to grant mobile money licences to telecommunications companies who are best placed to accelerate financial inclusion. The CBN has become increasingly flexible but it is still moving at a slow pace. The agency banking system is gathering pace after years of underperformance.
The Payment System Bank licence, which allows telcos to offer banking services (mainly payment, deposits etc) was launched in 2019 but it is not operational yet. The licence has only been issued to about three operators, even though there were over 23 applicants. Perhaps the clearest indication yet of lack of urgency is that MTN Nigeria and Airtel – which both hold a market share of 70.0%+ – and are yet to receive approval for theirs.
One area where the CBN has also failed to heed past lessons is in the regulation of Financial Technology (FinTech) companies. While the CBN is now showing interest in supporting FinTechs, its regulatory sandbox for the industry was only just published in January 2021even though FinTech has been blossoming over the past five years. This is despite the fact that Nigeria had the most funded FinTech scene in Sub-Saharan Africa and the same segment received more foreign capital compared to start-ups in other sectors. Over the same period, Paystack was started and acquired for $200m by Stripe, and Flutterwave reached Unicorn status ($1.0bn+ valuation) from inception.
This year alone, the CBN has banned banks from doing business with cryptocurrency exchanges for the most absurd reasons that show a lack of interest in understanding the technology. Yet Cryptocurrency trading continues to thrive through the peer-to-peer system, with Nigeria reported as one of the leading countries in this area. The implication is that CBN has less oversight over the sector and would not have access to crucial data about the behaviour of Nigerians.
In fact, a digital bank, Rubies, was kicked off the national switch earlier in the year for still offering services to International Money Transfer Operators (IMTOs), helping them circumvent a new regulation. In a financial system, which needs to continue to build trust and expand reach, creating problems for customers is surely too much price to pay for such an action. The new regulation that briefly stopped the provision of virtual accounts to FinTechs by traditional institutions and new rules around BVN usage are also clear examples of how the policy environment has been restrictive.
The clampdown is not limited to regulated formal channels. It also includes unregulated formal and informal channels that are best positioned to deliver financial services. Recent examples include the campaign against receiving diaspora remittances through cheaper and faster means outside CBN’s oversight and accessing FX from the parallel market.
To accelerate financial inclusion, this policy approach must not last for longer. A new order in financial regulation is required to encourage innovation that moves Nigeria closer to its financial inclusion ambitions. In this regard, the CBN does not have to reinvent the wheel as progress in many peer countries provides a strong path.
Akinwale is a Lagos-based financial analyst.