Financial Services Landscape Summary 15 September

8/6/2019 Financial Services Landscape Summary 15 September

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Financial Services Landscape in Nigeria Summary Document

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Figure 3 Access to finance by demographic sub-group

21

3914

2715

107

1321

3964

17

14242525

2221

24

1926

2226

2128

3031

2513

21

1926

2628

2621

53

4057

4957

6762

5245

3420

61

65484645

5156

0% 20% 40% 60% 80% 100%

Total

Urban (28%)Rural (72%)

Male (52%)Female (48%)

Incomeno income or le ss than 1000 (10%)

1001-3000 (12%)3001-6000 (13%)

6001 - 13000 (13%)13001 - 20000 (9%)

>20000 (9%)refused to an swer/ DK (35%)

Age group18-24 (27%)25-34 (27%)35-44 (18%)45-54 (14%)

55-64 (8%)65+ (5%)

Formal Banked Formal Other Informal Financially excluded

Source: EFInA Access to financial services in Nigeria 2008 survey

Financial institutions in Nigeria

The financial sector in Nigeria includes a range of institutions offering a wide range of

services such as savings, credit, currency exchange, microfinance, consumer lending, SMElending, mortgages and other products. The formal financial sector institutions regulated bythe CBN are listed in Table 2. 4

4 In addition, the Nigerian financial sector consists of 51 insurance companies, 25 pension fundadministrators, 6 closed pension funds and 4 pension custodians and many capital market playersincluding stockbroking firms, investment banking and asset management houses (non-bank) andseveral microfinance institutions (MFIs).


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Table 2 Financial institutions in Nigeria

Category Number

Deposit Money Banks 24

Microfinance Banks 901

Development Finance Institutions 5

Bureaus de Change (including 50 Class A) 126

Finance Companies (Non Bank Financial Institutions) 112

Primary Mortgage Institutions 98

Discount Houses 4Source: CBN (2010)

Deposit Money Banks (DMBs) are the most important providers in the financial sector.They were heavily affected by the consolidation process in the Nigerian banking system thatreduced the number of banks operating from 89 in 2004 to 24 in 2007. This consolidationwas the result of the CBN's decision in July 2004 to raise the minimum capital requirementfor all universal banks to N25 billion (US$ 204 million).

Consolidation and the post-consolidation reality checks of 2009 havecreated more solid financial institutions whilst access to finance has

actually worsened as banks have taken a flight to safety by drasticallycutting down on lending to the private sector, more especially

individuals and small enterprises, in preference to government lendingthrough very large investment in government securities.

Most bank lending to the private sector goes to bigger companies and less to smallbusinesses and individuals; high interest rates and short loan maturities also make creditless easily accessible to these categories of borrowers. Intermediation is still highly skewedtowards the public sector compared to other developing countries in particular, SouthAfrica, where private sector credit/GDP was 84.2% and 92.1% in 2006 and 2007 respectivelyas against 21.5% and 31.4% in Nigeria.

Although some banks are pursuing an aggressive branch expansion strategyas a means of reaching out to more customers, the distribution of branchesremains extremely uneven, with a great concentration in the southern states.


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Figure 4 Branches per million inhabitants of selected banks, by state 5

Source: OPM analysis of surveyed banks

Figure 4 shows that physical access is a major problem in most of the states of the NorthWest and North East, and in states such as Niger, Nassarawa, Taraba and Bayelsa thathave less than 8 branches per million inhabitants.

The analysis of the tariff structure of a sample of DMBs shows that there is no barrier effect

inhibiting access: that is, conditions such as minimum balances do not exclude lower incomepeople from accessing an account. There is, however, an inhibitor effect, meaning thatusing the account is likely to be too expensive for most low income people.

In terms of appropriateness, only UBA has a savings product targeted specifically at lowincome earners (though some of the banks have special accounts for children). Generallythe products of banks are targeted at salaried workers: for example, most of the loanproducts stipulate that potential borrowers must earn a minimum monthly income of

5 The map shows the distribution of branches of six of the large DMBs covered in the study: DiamondBank, First Bank, GTBank, Intercontinental, Stanbic IBTC and UBA. These were the only six banksamong the 12 interviewed for which full branch data were available, but we believe from the interviewsthat the pattern is consistent with the distribution of bank branches on aggregate.


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years ago. The new capital requirements are N2bn for Life Services, N3bn for GeneralServices, N5bn for Composite Services and N10bn for Re-Insurers. Presently, there are 2 re-insurers and 48 underwriters. There are 600 registered insurance brokers with only a fewcontrolling a significant proportion of risks and, hence, premium income of the industry. Thereare over 5,000 part-time or full-time registered insurance agents and 42 loss adjusters thatprovide technical advice to insurance companies on valuation.

The study shows that except for the oil and gas industries and mandatory insurance products(e.g. buildings, motor vehicles), there is very low awareness of the need for insurance.Exacerbating this situation is the recent financial sector turmoil that affected the insurancebusiness in several ways:

Reduced project financing has resulted in reduced demand for project related insuranceMany customers closed their voluntary insurance (e.g. life) and opted for cheaperinsurance products for mandatory insurance (e.g. third party rather than comprehensivevehicle insurance) leading to higher redemption and liquidity pressuresReduced asset prices and market activity has also impacted on demand for insurance

Other financial institutions include:

Pensions providers. The total assets in the Nigerian pension industry as at May 2010was N1.8 trillion (US$ 12.6billion) with 4.3 million workers registered with Pension FundAdministrators under the contributory pension scheme 9 Asset ManagementDiscount HousesFinance companies

Bureaux de ChangeDevelopment Finance Institutions

The landscape of access

The landscape of access or exclusion is mapped in such a way that it is possible, at aglance, to see how effective the financial system is at providing services across the fourfunctions of finance savings, transaction services, credit and insurance. Figure 6 is asimple representation of the landscape of financial exclusion based on demand side datafrom EFInAs Access to financial services in Nigeria 2008 survey dataset.

9 Mohamed Ahmed, DG, PenCom. Businessday, August 2010


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Some insurance companies have indicated interest in developing microinsuranceproducts although this is more of an aspiration rather than a concerted strategy and, inany case, Nigeria does not have a formal regulatory framework for microinsuranceA key constraint on the expansion of access to insurance products appears to be the

difficulty of distribution in Nigeria

For pensions :

The pension fund market in Nigeria is still very small, accessed by only 2.3% of Nigerianadults. This is partly because of the reluctance of SME employers to set up employeepension schemesThe Pension Reform Act 2004 makes it difficult for people who move jobs to amicroenterprise or to start their own business to retain the pension benefits they havebuilt up in employment

For investments in securities :

Surprisingly, more people hold investments in securities (in shares or in unit trusts) thanhave insurance policies or pension schemes: 6% of the adult populationThe market appears to be recovering from the problems of 2008-2009, and the numberof investors is picking up again. Participation in the market is still, however, largelyconfined to relatively prosperous, mainly urban investors

The access constraints

Contextual Constraints- Demographic and poverty pressures- Complex political organization- Poor level of infrastructure- Financial culture- Public interventionism- Lack of policy coordination

Regulatory constraints- Mobile payment regulation- Know Your Customer- Interest rate caps- Secured transaction law- Bankruptcy laws- MFB regulation

Systemic constraints- Skewed delivery infrastructure- Lack of financial sector data- Lack of credit information- Absence of an integrated ID system- Skills shortage

Organization and Product basedconstraints- Physical accessibility- Appropriateness- Affordability

Demand constraints- Gender-related constraints- Income-related constraints- Ethnicity- Financial capability

Source: OPM analysis


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Contextual constraints

Demography and poverty pressures with a growing, urbanising and overwhelminglypoor population, the expansion of the markets in absolute terms is not enough to reduce

the proportion of the unbanked population A complex political organization of the state , which has implications for theformulation and implementation of policies at the macro level to tackle financial exclusion.The countrys federal structure has contributed to an environment in which information onthe financial sector is not centralized, which inevitably makes the job of investors,operators and regulators much more difficult

Poor level of infrastructure , in particular electricity, with its obvious impact on banksability to maintain a functional network or to process transactions in real time. It alsoincreases the cost of producing virtually anything, which has an effect on demand forservices

Financial culture : the speculative bubble in the banking sector burst in 2008/9 at great

cost to the country in terms of bail-out costs and lost output. That has created a deeplycynical financial culture in which debts are not taken seriously and so banks are reluctantto lend. This is probably exacerbated by the ready availability of government-suppliedloans (e.g. for agriculture) that are guaranteed and often subsidized, as discussed below,and very often not repaid

Public interventionism more emphasis needs to be placed on evidence based policy-making: designing intervention schemes appropriately, monitoring their effectiveness,enhancing their operational effectiveness on the back of good quality data, and closingthem down if they underperform

Lack of policy coordination despite some progress, there does not appear to be anintegrated CBN policy on financial access, nor a full appreciation for why access matters

from a regulatory or developmental perspectiveRegulatory constraints

Mobile Payments Regulations: there is some concern that by forcing telcos to collaboratewith banks, the CBN is restricting m-banking potential. Although there is some evidencethat a bank-led model can make a significant contribution to financial inclusion, as inMexico and Brazil. The most successful branchless financial services model in Africa isSafaricoms M-PESA in Kenya, a telco-led model that has gained over 10 millioncustomers and has been praised as an example of the potential for expanding access tofinance through a combination of a visionary business model and an open-mindedregulator. M-PESA was only a money transfer service until May 2010, when Equity Bank

partnered with Safaricom to launch M-KESHO a savings account. There are currentlyover 400,000 M-KESHO accountsKYC: In response to comments from the Consultative Group to Assist the Poor (CGAP)and others that noted apparent conflicts among the various Anti-Money Laundering &Combating the Financing of Terrorism (AML/CFT) regulations, the CBN issued a revisedAML/CFT Manual in March 2009 to consolidate the various circulars and documents inone manual. 10 However, in response to stakeholder comments, the CBN issued arevised draft AML/CFT Manual in October 2009 and requested comments. It is unclear

10 Circular BSD/Dir/Gen/Aml/03/009/1, Anti-Money Laundering/Combating Financing of Terrorism(AML/CFT) Compliance Manual for Banks and Other Financial Institutions in Nigeria , accessed July2010


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whether this manual (or an amended version thereof) has yet been finalized. 11 Althoughthe CBNs efforts to consolidate and clarify the AML/CFT framework are laudable it is stilltoo soon to say that all KYC constraints have been totally and effectively removedInterest Rate Caps: the combination of periodic policy changes, noncompliance by

certain financial service providers, and difficulties with enforcement have contributed toan environment of uncertainty with respect to interest rate caps. Some providers believethat caps are still in effect, while others do notSecured Transactions Law: the process for registering loan collateral is both costly andtime-consuming. This, combined with the currently limited coverage of the credit bureaunetwork and the lack of other sources for reliable information about customercreditworthiness, discourages banks from providing loans and consumer credit to theNigerian mass marketBankruptcy Law: creditors rarely initiate individual bankruptcy proceedings, largelybecause they would have to obtain a judgment and serve a notice of judgment againstthe debtor prior to initiating bankruptcy proceedings. As a result, this procedure is

cumbersome and costly for creditors to enforce their rights against debtorsRegulation of Microfinance Banks (MFBs): Critics of the draft framework contend that thecurrent framework has already led to an MFB subsector that consists largely of small,poorly-capitalized institutions with low capacity and high risk of failure. There is a need toreduce the number of institutions. Geographic restrictions also limit growth opportunities

Systemic constraints

Lack of accessible consolidated financial sector data: the lack of readily accessiblemarket and financial institution performance data undermines the decision-making of allstakeholders in the banking industry: policy makers, regulators, investors, and the public

There is clearly a great thirst for data among financial institutions -many of the institutions surveyed said that they valued very highly the

data provided by EFInA

Lack of credit information: although there are two functional privately run credit bureaux CRC in Lagos and XDS in Abuja and a third has been licensed (Credit Registry), thereis still insufficient credit information in the system, and for MFBs it is expensive at amembership cost of N175,000Lack of an integrated national ID system: because not all Nigerians have a National IDcard, relevant agencies have developed their own identification systems and so there hasbeen a proliferation of parallel ID systems in the market which is clearly inefficientSkills shortages: Currently there are simply not enough qualified bank staff with therequisite skills to serve a mass market as large as Nigerias, still fewer with the morespecialised skills required to serve the market at the bottom of the pyramid

11 Circular BSD/DIR/GEN/CIR/03/027, Revised CBN Anti-Money Laundering/Counter TerrorismFinancing (AML/CFT) Manual, 2009 (Draft) , accessed July 2010


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The response of the industry

In a market as large and diverse as Nigeria it is no surprise that there is an extraordinaryrange of responses by the financial sector (in particular deposit money banks) to the

challenges that constrain access.The response from the banking industry is partly shaped by the banking crisis. Thosebanks that were rescued by CBN have curtailed some of their expansion plans. Of those thatdid not need to be rescued, some of the more established players are consolidating theirmarket positions, concentrating on absorbing the influx of new customers who, in a flight toquality are deserting the weaker institutions, but not yet expanding outreach aggressively.And, finally, there is a small group of newer institutions that are growing rapidly with whatappears to be real enthusiasm for underserved market segments.

Among the MFBs , many are struggling with the financial implications of their previous growthstrategies. Many are now actively looking for capital. In some cases, MFBs were founded

without a coherent and viable business model, soon used up their capital and fairly quicklyran out of money. Others have grown successfully but have reached the limit of what theircapital base will allow them to do. 12

The insurance industry is both financially and reputationally weak. Its capacity forexpansion and diversification is limited and appears more focussed on stabilising itsmainstream business than on expanding outreach into unserved markets, although there aresome microinsurance related initiatives now underway.

Some of the main innovative strategies proposed by the financial sector to expand theoutreach of their financial services are as follows:

Basic savings accounts no minimum balances etcUsing 3 rd party companies to operate agent networksMobile banking (in various forms)Using informal-type networks to mobilise savingsReaching out to younger people through schools, cooperatives, okada ridersPrize savings accountsVirtual touch pointsEnhancing the functionality of ATMs, E-branchesMicroinsurance

Call centres to enhance effectiveness of distributed banking modelsLow cost bank branches; Hub and spoke branching strategiesNon-interest (Sharia) bankingSavings accounts for Muslim and Christian pilgrimagesChildrens savings accountsBank-on-wheelsTie-ups (potentially) with the post officeLeasing products for farming tools; Agricultural products for cooperatives

12 This conclusion is based on interviews with MFBs and CBN, and an analysis of MFB data providedby CBN on an anonymous basis.


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in Nigeria 2008 survey found that over 25 million people that have access to a mobilephone are unbanked. Experience in other African countries shows the potential of M-Banking services to expand the frontier of financial services. 16 Banks are aware of thissituation and they see the combination of agent banking with e-banking as the most likelyroute to downscale their services

Creating an enabling and trusting environment for public-private dialogueis often seen as a pre-condition to develop safe and successful m-banking

models. The development of pilots aimed to (a) validate the feasibility ofthe proposed model, from a technical, business model, and processes

perspective; (b) validate the potential positive impact of the model in termsof adoption, usage, etc.; and (c) enable stakeholders to gain experience

and allow regulatory framework to evolve in tandem with market, can alsocontribute to develop more successful m-banking systems.

16 M-PESA has experienced rapid growth and currently enjoys a subscription base of more than 10million registered customers (more than half the adult population of Kenya many previouslyunbanked). The usage of semi-formal financial services (including m-banking platforms such as M-PESA) has increased from 8.1% in 2006 to 17.9% in 2009, while the proportion of the population withaccess to only informal financial services, decreased from 35% to 26.8% and the share of thepopulation excluded from any financial service decreased from 38.3% to 32.7% suggesting stronggains in financial inclusion coinciding with the introduction of M-PESA. (Information from FinancialSector Deepening Trust Kenya and OPM research)


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Financial Services Landscape Summary 15 September

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