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Financial inclusion and the naira scarcity 22 Jan 2024

Nigeria is making incremental progress in financial inclusion as the Enhancing Financial Innovation and Access (EFInA) report released in December 2023 shows. Out of 111 million adult Nigerians, 64% were banked last year, up from 56% in 2020, according to the report. In 2008, the proportion of the adult population that was formally served was 24%. This growth in formal financial access is attributable to the Central Bank of Nigeria's efforts towards integrating non-bank entities like financial technology (fintech) firms, telecommunication companies, and other service providers into the financial services ecosystem.  

A key component of the CBN’s regulatory efforts is the adoption of financial service agents. Also known as agent banks or banking correspondents, these agencies serve as representatives of licensed banking institutions and mobile money operators. They help in broadening access to basic financial services among the unbanked and underbanked segments of the population, carrying out various services such as account opening, cash deposit, withdrawals, money transfer, airtime purchase, and bills payment. According to the 2023 EFInA Access to Finance (A2F) Survey report, the adoption of agent banks accelerated from 4.4% in 2018 to 54% in 2023.

Despite this progress, Nigeria’s banked population is below the global average of 76%, according to the World Bank's Global Findex Database 2021. The country is also behind many African countries like South Africa, whose proportion of banked adults is 85%, and Kenya (79%). With 40 million Nigerian adults still unbanked, 12 years after the CBN launched its Cashless Policy, significant work remains to be done in the country to achieve the apex bank’s objectives of driving financial inclusion by providing more efficient transaction options and achieving a greater reach in financial services. The bank's ultimate goal is to facilitate the attainment of universal financial services in the country over the long-term.     

The CBN's integration of non-bank service providers into its financial inclusion strategy has helped in the rapid expansion of digital payments. Nearly half of Nigeria’s adult population used digital financial services in 2023, up from 34% in 2020. The rise in agent banks has led to the ubiquity of point-of-sale (PoS) terminals, with the volume of financial transactions on the terminals skyrocketing. PoS transactions rose 40.69% year-on-year to N807.16 billion in January 2023, according to data from the Nigeria Inter-Bank Settlement System (NIBSS). Total cashless transactions in the same period rose 45.41% to N39.58 trillion.

Beyond this, there is significantly limited adoption of other financial services like credit, pension, and insurance. The EFInA report shows the adoption rates of these services were at 6%, 8%, and 3%, respectively, in 2023, a far cry from their 2024 target levels.

There are several reasons for the lingering financial exclusion in Nigeria, the greatest being poverty. The A2F report shows nearly 49% of adults lack account ownership because they have no income. For a country with 133 million multidimensionally poor people, this report is hardly surprising. Other reasons include unemployment (according to 16% of respondents), cost of banking (10%), lack of access to banks (33%), and people's attitudes and perceptions (33%).

Part of the attitude and perception issue involves lack of trust. Exemplifying this issue is electronic payment fraud that has become quite rampant. Also known as "fake alerts," criminals perpetrate this fraud by using certain apps to send SMS notifications that mimic valid transaction alerts sent by licenced banks. The merchants or payees would believe payments have been received, only to discover later on their accounts were not credited.

Indeed, addressing many of the financial exclusionary factors is outside the purview of monetary authorities. However, these factors were partly responsible for Nigeria’s failure to meet the CBN's initial target of reaching 80% financial inclusion rate by 2020. A revised strategy now aims to reach 95% inclusion by this year.

The importance of strategic planning in any sphere of human endeavour cannot be denied. One of its benefits is to track progress toward certain goals. Nevertheless, financial inclusion cannot be an end in itself. The end goal of universal access to financial services is the sustainable development of the nation. Over the last 12 years of implementing its Cashless Policy, the CBN has undermined the policy in several ways, including by imposing limits on over-the-counter cash withdrawals as a means of encouraging electronic transactions.

However, the unintended effect of this policy has been the hoarding of cash by individuals and small businesses who want to avoid incurring charges on cash withdrawals above the limits set by the apex bank. Many also hold cash due to lack of confidence in digital payment channels, which occasionally fail to complete transactions, sometimes leading to loss of funds.

Another reason for cash hoarding is the emotional connection that people have to their money. This attitude towards money, which is more prevalent among low-income people, leads many to prefer holding cash, instead of putting it in a bank account. For many low-income people, cash is more than just a medium of exchange: they have the perception that it is a preeminent store of value.

Incidentally, cash is not only king in developing countries like Nigeria. According to the European Central Bank (ECB), cash is the dominant means of payment within the euro area. "Cash is also essential for the inclusion of socially vulnerable citizens, such as the elderly or lower-income groups," writes the ECB on its website, adding "It is useful for small person-to-person gifts and payments. Cash also contributes to the financial literacy of children."

The CBN also undercuts its objective of fostering financial inclusion by its imposition of a N50 stamp duty, which merchants pay on each PoS transaction. For this reason, some merchants accept only cash from customers intending to purchase items valued at N1,000 or less.

But an action the CBN took that may have lasting negative impacts on its efforts to drive financial inclusion was the chaotic implementation of its new banknotes policy, which led to the scarcity of naira notes in the first quarter of 2023. Nigerians later got a reprieve from the naira scarcity following the Supreme Court’s rulings and the CBN's announcement that allow the old naira notes to remain valid indefinitely. But in December, another episode of debilitating cash crunch ensued due to what the CBN described as "capping and hoarding" by banks and PoS operators.

During the naira scarcity, which bookended 2023, banks imposed below-regulatory limits on over-the-counter withdrawals. Cash withdrawals via ATMs were also rationed. Africa's largest economy was brought to a point where many businesses and individuals were depending on mobile money operators for naira liquidity. The episode that occurred last December took place in spite of the CBN's assurance that over N3.4 trillion in cash was in circulation.

The CBN itself alluded to the fact that it was a contrived cash shortage aimed at creating opportunities for the arbitrage. Depending on the demand and location, PoS operators increased their withdrawal fees from N100 to N400 per N10,000, for instance. This meant that arbitrageurs could buy naira cheaply on the "black market" that emerged and sell it at higher prices in areas with higher demand.

This totally negates a key objective of the CBN’s Cashless Policy, which is to more effectively manage inflation and encourage economic growth. With consumer inflation rising to 28.20%, an 18-year-high, in November, and the shortage of money leading to an increase in its price, it is incumbent upon the CBN to improve the management of its policies to achieve their stated objectives.

As stated earlier, financial inclusion is not an end in itself. Limited access to banking infrastructure and technology as well as low digital literacy in rural areas means that cash will remain the primary mode of exchange for trade and the daily needs of the people. Hence, the implementation of the financial inclusion policies needs to give consideration to low-income and the most vulnerable populations who depend on cash for basic necessities and financial transactions.

One of the negative impacts of the limited availability of naira banknotes is the exacerbation of financial exclusion. Businesses and individuals who rely heavily on cash, particularly in rural areas, have faced difficulties conducting daily transactions. This has had ramifications on their livelihoods and well-being.

For many, their weak confidence in banking has been further eroded due to the frustration and inconvenience caused by the naira scarcity. This could slow down or hinder their ability to adopt formal financial services and participate in the formal economy.

The Nigerian informal sector, where vast amounts of cash is used for transaction, is estimated to contribute over 50% of the GDP. Increased reliance on the informal economy caused by reduced confidence and participation in formal financial services would further diminish government revenue from taxes and make it harder to track and regulate economic activity.

Financial inclusion is expanding in Nigeria. However, as EFInA identified in its report, the growth in access to payment must be accompanied with significant improvement in access to credit, savings, pensions, and insurance. The holistic usage of broader financial services is what will drive the real social impact of financial inclusion.

Martins Hile is a sustainability strategist and editorial consultant.