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Nigerian regulators need to collaborate on financial inclusion 22 May 2019

Since 2018, various financial regulatory organizations in Nigeria have issued guidelines to promote financial inclusion. The goal of the various guidelines introduced by the Central Bank of Nigeria (CBN), National Insurance Commission (NAICOM) and National Pension Commission (PenCom) is to expand access to products and services to the low-income population or the financially underserved.  
    
According to the Consultative Group to Assist the Poor (CGAP), "Financial inclusion means that formal financial services – such as deposit and savings accounts, payment services, loans and insurance – are readily available to consumers and that they are actively and effectively using these services to meet their specific needs." Although this definition does not explicitly include pension, it is a key financial planning service for retirement that should be made accessible to the untapped markets.

The fragmented nature of the various initiatives of the CBN, NAICOM and PenCom as well as the stringent conditions for the industry players who are supposed to drive those initiatives would weaken the drive to scale up financial inclusion. Therefore, it is imperative for all the agencies to work together on a holistic framework on how the underserved population, largely in the informal sector, can have access to financial products and services at affordable cost.

The World Bank's Global Financial Inclusion (Global Findex) Database 2017 shows the unbanked population in the world is about 1.7 billion, and nearly half of this population live in seven developing countries, namely Bangladesh, China, India, Indonesia, Mexico, Nigeria and Pakistan. According to the CBN, as at 2016, only 48.6% of all adults used formal financial services in Nigeria. Therefore, the National Financial Inclusion Strategy (NFIS) of the apex bank aims to expand access to financial services to over 80% of the bankable adults in Nigeria by the year 2020.

As part of its NFIS, the CBN released its draft Guidelines for Licensing and Regulation of Payment Service Banks (PSBs) in Nigeria. The CBN requires PSBs to “enhance financial inclusion by increasing access to deposit products and payment/remittance services to small businesses, low-income households and other financially excluded entities through high-volume low-value transactions in a secured technology-driven environment.”

However, the minimum capital of N5 billion, non-refundable licensing fee of N2 million and non-refundable application fee of N500,000 for prospective operators are not requirements that are amenable to the provision of affordable products and services for the underserved segments of the population. These requirements will also limit the accessibility of financial services, a key objective of financial inclusion.

According to NAICOM, micro-insurance products "are insurance products that are designed to be appropriate for the low-income market, low valued policies, micro and small-scale enterprises in relation to cost, terms, coverage, and delivery mechanism."

NAICOM's micro-insurance policies are designed to cover minimal risks, thereby excluding special risks like motor insurance (except tricycles and motorcycles), professional indemnity, among others. Categories of micro-insurance companies are unit, state and national micro insurers, with minimum capital requirements of N40 million, N100 million and N600 million, respectively. Typically, micro-insurance policies exclude third party liabilities with sum insured above N2 million.

However, NAICOM's 25-page micro-insurance guidelines fall short in a need-gap analysis that indicates how various types of insurance products can help expand access to meet the needs of the underserved communities with regard to boosting their prosperity. The untapped markets are typically wary of traditional insurance operators because of fear of exploitation. A different approach of onboarding this market is needed to deepen penetration in the insurance sector.   

The Micro-Pension Plan (MPP), an initiative of PenCom, is aimed at the providing pension services to self-employed persons in the informal sector and employees of organisations with less than three staff. While pension assets in Nigeria have been increasing, an estimated 89.4% of the total working population of 69,470,901 Nigerian workers reportedly lacked pension plans – or any form of safety net – as of December 2016. PenCom said its goal is to achieve coverage of 30% of the working population under the Contributory Pension Scheme (CPS) by 2024 using the MPP.

However, it is unclear how pension administration using the Retirement Savings Accounts (RSAs) framework can boost contribution from the informal sector and the entire underserved population. The contributory system has limited immediate benefits for the poor given the ultimate goal of financial inclusion, being the use of financial services to meet individual needs and to achieve some level of prosperity.

This leads to a number of questions: What are the incentives the regulators have proposed for the short-term benefits of the consumers for paying premiums and making deposits and contributions? Put differently, at what point can the depositors be eligible for bank loans, advances and guarantees?

While the foregoing discussion does not imply an aversion to product rationing, there is a need for holistic approach to financial inclusion that integrates the needs of the untapped markets into national planning. A needs assessment is required with the aim to provide players in the financial services sector insights to design products that will match the needs of this vital population.

There is already a study that can serve as a springboard for undertaking this holistic approach that will provide far-reaching financial inclusion outcome. This study is the Human Account project – a research that focused on investigating the financial health of people in six developing countries (Pakistan, India, Myanmar, Nigeria, Kenya and Tanzania).

The Human Account was created and developed by Dalberg – a global group working to build a more inclusive and sustainable world – and Rockefeller Philanthropy Advisors – an American nonprofit organisation. Funded by the Bill & Melinda Gates Foundation, the Human Account is a robust information resource created to enable a better design of products and policies to boost a healthier financial life. It was designed to enable countries to come up with innovative products and services for the poor.

The Human Account developed a concept of financial health built around a three-dimensional framework, which captures the context, behaviour and psychological patterns of people's financial lives. The concept is a human-centered design that goes beyond financial inclusion. According to the findings from a survey of 11,500 low-income people in the six countries, “people are financially healthy when they are able to use financial tools and strategies to effectively and consistently meet their financial needs, cultivate financial and economic opportunities and stay resilient in the face of financial shocks.”

Seen from this viewpoint, it is clear that virtually all the guidelines provided by Nigeria's leading regulators in the financial services sector lack the ingredients to spur the development of products, which will serve the poor in the country. Indeed, businesses are set up to make profits and deliver real financial value to investors. But the poor will remain poor if products and services targeting that segment of the population don't address their plight.

This means products developed by the operators in the various sectors of banking, insurance and pension, should address the real needs of the poor and provide incentives they can trust. The Human Account's research looks into the traits of the underserved sector, which 106.6 million Nigerians are part of.

The task of reaching the critical mass of the underserved population with meaningful financial products and services requires joint efforts of the regulators and private and social sector institutions. Collaboration is especially key because pension, banking and insurance operators provide services in the financial services sector and the target markets are the same.  

A deeper understanding on how to best serve the poor in Nigeria is still required. A national pro-poor legislation that allows the poor unfettered use of their land and other property to access finance is crucial. As for the banks, incentives like tax-free transactions up to certain limits and lasting up to two years for micro-savings account holders can help to boost financial inclusion. Tax authorities can also extend similar waivers to micro businesses.