There are opportunities for new entrants looking to operate in the banking sector, as 4 out of 10 Nigerians are still underbanked in that they lack the access to a full range of basic financial services in Nigeria.
Financial inclusion is widely recognized as one of the most important engines of economic development. Coupling the lack of banking access for a lot of Nigerians with a growing middle class that is seeking an improved banking experience and businesses searching for lower and competitive interest rates, companies looking for opportunities in the sector of financial services in Nigeria definitely have an advantage.
Banking
The Nigerian banking system is currently comprised of 22 commercial banks, 942 micro-finance banks and 64 finance Companies and 6 development finance institutions. The Central Bank of Nigeria (CBN) regulates and supervises the activities of these institutions and others, such as Bureau-de-Change, Merchant Banks, and Primary Mortgage Institutions.
Although the Nigerian population and demographic lends a lot of opportunities to those interested in the financial services in Nigeria, there are a few challenges to remain aware of. These are the same challenges that have made local banks hesitant to take on additional risk in the current environment. One of these challenges includes the difficulty in proving creditworthiness. Without a properly built-out database to prove the creditworthiness of individuals and businesses, lending to the private sector requires a significant amount of collateral. Such requirements have caused a slow rate of lending to the private sector.
This sub-par rate of lending also comes with a significant interest rate, as most banks issue loans at a rate of 20-25% interest. High-interest rate makes repayment difficult for individuals and businesses.
Other issues that foster financial exclusion include the little confidence that Nigerians have in the transactional security of the country’s banking system and the apparent difficulty of connecting people in rural areas to affordable banking services.
Fintech
Rapid mobile adoption in West Africa since the turn of the decade has been a catalyst for rapid growth for the local mobile money industry. In comparison to local banks, the mobile money sector’s reach is now 13 times wider.
Nigeria is estimated to have more than 148 million mobile telephone subscribers and at least 92 million of whom access internet data services on their mobile devices. When it comes to how many Nigerians access online banking options for personal use, the facts are as follows:
- 77% of Nigeria’s banking customers now use social media for personal purposes
- 42% of Nigerian banking customers use online banking platforms for one or more banking activities
- 40% of Nigerians have interacted with their bank using social media in the past
Amongst the industries in Nigeria, there is a growing opportunity for financial services companies to use technology as a way to offer a secure way to conduct banking services. These companies bridge the gap between in-person banking and banking on one’s phone, easing the accesses to basic and important financial services in Nigeria.
Paga is one such successful fintech company, as they have 6 million registered clients and have seen significant returns on their mobile money transfer services, has processed $500 million in mobile payments in 2016 alone.
Despite how rapidly the fintech sector is growing, there are a few lingering challenges, such as Nigerians’ lack of trust in the Nigerian banking system. Also, regulatory constraints and conversion issues (i.e., getting citizens to use their phone outside of recreational and entertainment purpose) can make building a successful fintech brand in Nigeria a bit more difficult. However, companies like Paga are overcoming this challenge by boasting a network of nearly 15,000 agents that provides face-to-face interaction to match the needs of their customer base.
Payments
Making payments in Nigeria is still an issue, consumers are slowly adopting new methods of paying online in what otherwise remains a very cash-based market. Despite the increase in ATMs and point-of-sale (POS) systems as a way of increasing access to financial services in Nigeria, particularly in the urban areas, there is still a lot of payment friction since these systems rely mainly on telecommunication networks that are intermittent during the critical sale stage between business and customers.
This friction continues to depreciate “payment trust” and reduces the speed at which Nigeria moves towards a more cashless society. Collaboration between businesses, technology providers, regulators, and the network providers has to improve to facilitate this development.
Interswitch, a payment company founded in 2002, has led the way in cashless transactions, and currently owns the majority of market share in cashless payment processing in Nigeria. The company launched a $10 million ‘ePayment growth fund” for startups in the payment industry across Africa. Meanwhile, Paystack and Amplifypay are amongst the latest payment solutions that provide secure gateways for one-off and recurring payments between consumers and businesses in Nigeria.
Pensions
The Pension Reform Act of 2004 (PRA 2004) and the subsequent review and enactment of PRA 2014, introduced the Contributory Pension Scheme (CPS), which made it mandatory for employers and employees in both the public and private sectors to contribute towards employee retirement benefits. The CPS has pension fund assets that amount to over $25 billion with a contributor base of over 6.9 million workers. The 6.9 million people with pension coverage represent 8.1% of the Nigerian working population, which means that there’s a huge opportunity for growth within one of the thriving industries in Nigeria.
The current challenges the sector is facing is whether the CPS can ensure that retired Nigerian workers receive adequate benefits in the future. There’s also the question of coverage and compliance, which speaks to how accessible CPS is to most Nigerians since only 8.1% of the population has obtained pension coverage. The last issue deals with financial stability and if CPS will be able to meet its financial obligations in both the short-term and long-term.
Remittance
Although we often discuss and hear about FDI (Foreign Direct Investment) into Nigeria, the World Bank reported Nigerian diaspora sent $22 Billion to the country in 2017. Remittances to the region (sub-Saharan Africa) are expected to grow by 7 percent in 2018.
To capitalize on, and incentivize Diasporan investments, Nigeria’s Debt Management Office (DMO) set out to issue a Diaspora Bond which will help Nigerians in the Diaspora contribute to the development of the country.
Private enterprises are also taking up the charge to capitalize on the huge global remittance market, where remittance fees are still high. On global remittance fees, Sub-Saharan Africa pays the highest fees — roughly 10 percent per $200 — of any other region. SureRemit is one of the companies offering its crypto token solution to global immigrants that send money back home. By connecting its crypto product — which is not redeemable by consumers for cash — to a network of pre-approved merchants in Nigeria, Kenya, and Rwanda, SureRemit end-users can present tokens as payment for things such as utility bills, student tuition, and online consumer goods.
Cryptocurrency
The choice by SureRemit to use cryptocurrency comes along with the increase in popularity of the digital currency in Nigeria. The global interest in cryptocurrency spiked in December 2017, according to trends on google. As of January 2018, Nigerians were trading about $4.7 million in Bitcoin a week, up from about $300,000 per week a year ago. That’s No. 23 globally, according to researcher CryptoCompare — comparable to the volume of activity in Chinese yuan or Indian rupees.
A handful of companies have started up to capture the growing trends and opportunities of cryptocurrencies. Among them is country’s leading bitcoin exchange – NairaEx. NairaEx offers a quick and easy way for Nigerians to purchase the digital currency using credit cards, debit cards, or bank deposits using local currency.
Although the digital currency is liberating Nigerians sidelined by the global financial system by dramatically increasing the access to financing, improving the ease of doing business, and acting as a hedge against a depreciating local currency, there is still a lot of skepticism about the digital currency as a tool for access to financial services in Nigeria.
In January 2017, The Central Bank of Nigeria issued a circular to banks, similar to a statement released by the Nigeria Securities and Exchange Commission to the public, warning against the usage of digital currencies like bitcoin as it is not a legal tender in the country and any bank or business that deals and invests in such would do so at their own risk. The CBN joins other global regulatory bodies that are aware of the potential of cryptocurrency but are taking a more conservative approach in understanding and regulating the digital tender.
Conclusions
The contributions of financial inclusion to GDP, individual and social welfare, and business creation and expansion – particularly small and medium enterprises – have been amply documented.
To increase financial inclusion to a growing population in Africa’s largest economy several factors have to be considered to improve financial services in Nigeria, such as, enhancing access to low-interest capital for businesses, fostering collaboration amongst key stakeholders to improve payment systems, educating people about traditional and new forms of financial instruments, and most importantly improving the the trust between the populace and financial services providers.
