LIKE other Nigerians, I was very excited with the launching of the long-awaited National Identity Card due to the socio-economic benefits that can be achieved from a well developed and managed National Identity Card system. These include tax revenue generation, data and security management among others. However, during the launching, it was presented as if the energy and resources spent and to be spent were mainly for the use of the ID cards to increase financial inclusion. It was described as a “game changer” in the financial inclusion drive given the possibility of issuing about 13million Nigerians with MasterCard-branded identity cards.
With this possibility, it was further described as the biggest financial inclusion project in Africa. While the ID card might contribute to the financial inclusion drive, I am very concerned that its potential to do so might be a misrepresentation and highly exaggerated.
In the explanation of how it will enhance financial inclusion, two key components were identified. First is its function as a form of identity and second is its possibility to serve as a transaction or payment card due to the involvement of MasterCard. While a form of identity and a payment platform will be helpful in a financial inclusion drive, they are neither fundamental nor the key barriers or solutions to financial inclusion in Nigeria. Pursuing financial inclusion and other policies with flawed models or approaches can only result in limited outcomes. Some people will inevitably be included but the outcome will be highly below the target. This is the reason why the number of formal bank accounts is below 40million in a country of 170million with insurance penetration about one percent of the population even when formal financial sector has been in Nigeria for over 122 years.
TO achieve a sustainable and effective financial inclusion in Nigeria, there is a fundamental need for a change of our approach to banking and other financial services. It will require a change from our present economic approach to a sociological (socio-cultural/economic) approach. With a sociological understanding of the meaning and causes of financial inclusion and exclusion, the ID card as currently presented will neither be a “game changer” nor will it be the biggest financial inclusion in Africa. For it to meaningfully contribute to the financial inclusion drive, it has to be restructured and presented within the sociological framework. It is therefore fundamentally important that the key issues and concepts are properly understood so as to plan effectively to avoid disappointment and waste of resources.
Defining financial inclusion as increasing access to financial services and products to those that are excluded is fundamentally flawed. This definition presents financial services and products as only possible from the formal banking sector and as such ignores the vibrant functioning of the informal finance/banking sector to which millions wrongly described as financially excluded use and belong. Expectedly, as the meaning of financial inclusion is improperly understood, so are the causes and suggestions of possible solutions. It is through this type of shallow understanding of the definition, causes and solutions of financial inclusion challenge that the ID card is perceived and presented as a game changer in the financial inclusion drive.
Unsurprisingly, it is the same flawed approach that is being used in the current financial inclusion drive of the government as documented in the 2013 CBN Financial Inclusion Strategy.
To get the appropriate definition, it might be important to clarify that those erroneously presented as financially excluded are not in the real sense of it financially excluded. As majority of them use the informal financial sector, it is wrong to describe them as financially excluded. Interestingly, as the informal finance sector users in Nigeria are over 100 million people as compared to less than 40million within the formal banking sector, our approach is further flawed. A situation where the minority dictates for the majority describing them as excluded can therefore be argued to be undemocratic and dictatorial if we use democratic principles. The reality is that Nigeria has two functional but limitedly interconnected sub-economies: the formal and the informal economies. As both are functionally vibrant due to good population of economic participants, any effort to promote more interaction of the economies will require first a genuine and comprehensive appreciation of the inherent institutional peculiarities of the two sub-economies and then a carefully planned and effective integration strategies.
Even if we in the formal sector argue that we know better than those using the informal banking sector and as such can make suggestions for them, I think that the best approach will be to genuinely engage and ask them why they don’t use the formal financial sector. In 2013 CBN financial inclusion strategy, no ‘formal financially’ excluded person or group were deemed important to be included as stakeholders in the financial inclusion drive.
The lucky and important 3 stakeholders include first, the providers such as formal banks and insurance companies, second are the enablers which are the regulatory institutions such as CBN, NDIC. The third group of stakeholders are the supporting institutions such as development partners such as World Bank and other agencies and experts. The situation is like a team of medical doctors that prescribe medication for a patient without interacting with the patient to find out his/her symptoms. Expectedly, the patient might improve but will not be effectively cured due to improper diagnosis of his/her ailment. This is what has been happening in our financial and other sectors of the economy. We keep adopting policies and models without careful examination of the suitability and amenability of the policies to our peculiar contexts.
If we can effectively appreciate our contextual peculiarities in our policy proposals and implementation, then the appropriate term should be ‘Formal Financial Inclusion’ and the definition should be ‘increasing access to formal financial services and products to those that do not use the formal financial sector especially those that use the informal banking sector’. This clarification will help us in understanding the causes of formal financial inclusion/exclusion and possible solutions and contribution such as the National ID Card.
The fundamental problem with our current economic approach is that the use(s) of formal financial sector are dictated mainly by instrumental needs. Examples of instrumental needs include for instance the need to save, transfer money to a friend, pay school fees, buy a property and pay for flight tickets etc. Expectedly, if the above needs can be met without using the formal financial sector, the need to use the formal financial sector or to be ‘formal- financially’ included is therefore absent. Incidentally, this is the situation in Nigeria with those wrongly classified as financially excluded. Majority of their financial instrumental needs can be met within their respective vibrant informal financial groups in addition to our cash dominated economy. Even their basic financial needs (savings and lending) can be better met within their informal finance groups than within the formal financial sector. For instance, the rotating local savings and loans provides a more effective and reliable financial system to the ‘formal financially excluded’ than the formal banking sector. So there is no incentive or benefit to use the formal banking sector. Not only is there no incentive or benefit to use the formal banking sector, there is inherent mismatch between the needs of the ‘formal financially excluded’ and the services/products of the formal banking sector. Their savings and loans are of very small amounts, volatile and short-term which the formal banks are unwilling and unable to provide or service due to the high administration costs.
In addition to the instrumental needs, the informal finance sector also provides for the intrinsic needs of the majority of those classified as financially excluded- the poor and uneducated. Examples of intrinsic needs include sharing in the joys and sorrows of members like bereavement, child dedication, daughter’s marriage etc. As these intrinsic needs are culturally oriented and encouraged, the preference of the informal finance groups is guaranteed. Moreover, the regulations and operations of the informal finance groups are properly understood, accepted, internalised and complied with due to the normative (cultural) origin and approach of the rules.
IN promoting formal financial inclusion, there are certain questions that our policy makers need to evaluate and possibly answer. Some of the questions include: (i). why a poor village man will prefer to use the formal financial sector instead of his well understood informal sector, (ii). Does he need a national ID/Master-card for his daily existence and especially for his financial transactions, (iii). Even if he decides to use the ID/Master-card, where will he use it and will he understand the terms and conditions of the card, (iv). Will the card be pre-paid or will it be like a normal credit card, (v). If it will be pre-paid or a normal credit card, what will be the minimum amount to be loaded into the card to guarantee a profit for Master-card. There are so many unanswered questions to which the answers will help us in appreciating the importance of adopting a sociological approach to banking and especially for financial inclusion.
In the explanation of how it will enhance financial inclusion, two key components were identified. First is its function as a form of identity and second is its possibility to serve as a transaction or payment card due to the involvement of MasterCard. While a form of identity and a payment platform will be helpful in a financial inclusion drive, they are neither fundamental nor the key barriers or solutions to financial inclusion in Nigeria. Pursuing financial inclusion and other policies with flawed models or approaches can only result in limited outcomes. Some people will inevitably be included but the outcome will be highly below the target. This is the reason why the number of formal bank accounts is below 40million in a country of 170million with insurance penetration about one percent of the population even when formal financial sector has been in Nigeria for over 122 years.
TO achieve a sustainable and effective financial inclusion in Nigeria, there is a fundamental need for a change of our approach to banking and other financial services. It will require a change from our present economic approach to a sociological (socio-cultural/economic) approach. With a sociological understanding of the meaning and causes of financial inclusion and exclusion, the ID card as currently presented will neither be a “game changer” nor will it be the biggest financial inclusion in Africa. For it to meaningfully contribute to the financial inclusion drive, it has to be restructured and presented within the sociological framework. It is therefore fundamentally important that the key issues and concepts are properly understood so as to plan effectively to avoid disappointment and waste of resources.
Defining financial inclusion as increasing access to financial services and products to those that are excluded is fundamentally flawed. This definition presents financial services and products as only possible from the formal banking sector and as such ignores the vibrant functioning of the informal finance/banking sector to which millions wrongly described as financially excluded use and belong. Expectedly, as the meaning of financial inclusion is improperly understood, so are the causes and suggestions of possible solutions. It is through this type of shallow understanding of the definition, causes and solutions of financial inclusion challenge that the ID card is perceived and presented as a game changer in the financial inclusion drive.
Unsurprisingly, it is the same flawed approach that is being used in the current financial inclusion drive of the government as documented in the 2013 CBN Financial Inclusion Strategy.
To get the appropriate definition, it might be important to clarify that those erroneously presented as financially excluded are not in the real sense of it financially excluded. As majority of them use the informal financial sector, it is wrong to describe them as financially excluded. Interestingly, as the informal finance sector users in Nigeria are over 100 million people as compared to less than 40million within the formal banking sector, our approach is further flawed. A situation where the minority dictates for the majority describing them as excluded can therefore be argued to be undemocratic and dictatorial if we use democratic principles. The reality is that Nigeria has two functional but limitedly interconnected sub-economies: the formal and the informal economies. As both are functionally vibrant due to good population of economic participants, any effort to promote more interaction of the economies will require first a genuine and comprehensive appreciation of the inherent institutional peculiarities of the two sub-economies and then a carefully planned and effective integration strategies.
Even if we in the formal sector argue that we know better than those using the informal banking sector and as such can make suggestions for them, I think that the best approach will be to genuinely engage and ask them why they don’t use the formal financial sector. In 2013 CBN financial inclusion strategy, no ‘formal financially’ excluded person or group were deemed important to be included as stakeholders in the financial inclusion drive.
The lucky and important 3 stakeholders include first, the providers such as formal banks and insurance companies, second are the enablers which are the regulatory institutions such as CBN, NDIC. The third group of stakeholders are the supporting institutions such as development partners such as World Bank and other agencies and experts. The situation is like a team of medical doctors that prescribe medication for a patient without interacting with the patient to find out his/her symptoms. Expectedly, the patient might improve but will not be effectively cured due to improper diagnosis of his/her ailment. This is what has been happening in our financial and other sectors of the economy. We keep adopting policies and models without careful examination of the suitability and amenability of the policies to our peculiar contexts.
If we can effectively appreciate our contextual peculiarities in our policy proposals and implementation, then the appropriate term should be ‘Formal Financial Inclusion’ and the definition should be ‘increasing access to formal financial services and products to those that do not use the formal financial sector especially those that use the informal banking sector’. This clarification will help us in understanding the causes of formal financial inclusion/exclusion and possible solutions and contribution such as the National ID Card.
The fundamental problem with our current economic approach is that the use(s) of formal financial sector are dictated mainly by instrumental needs. Examples of instrumental needs include for instance the need to save, transfer money to a friend, pay school fees, buy a property and pay for flight tickets etc. Expectedly, if the above needs can be met without using the formal financial sector, the need to use the formal financial sector or to be ‘formal- financially’ included is therefore absent. Incidentally, this is the situation in Nigeria with those wrongly classified as financially excluded. Majority of their financial instrumental needs can be met within their respective vibrant informal financial groups in addition to our cash dominated economy. Even their basic financial needs (savings and lending) can be better met within their informal finance groups than within the formal financial sector. For instance, the rotating local savings and loans provides a more effective and reliable financial system to the ‘formal financially excluded’ than the formal banking sector. So there is no incentive or benefit to use the formal banking sector. Not only is there no incentive or benefit to use the formal banking sector, there is inherent mismatch between the needs of the ‘formal financially excluded’ and the services/products of the formal banking sector. Their savings and loans are of very small amounts, volatile and short-term which the formal banks are unwilling and unable to provide or service due to the high administration costs.
In addition to the instrumental needs, the informal finance sector also provides for the intrinsic needs of the majority of those classified as financially excluded- the poor and uneducated. Examples of intrinsic needs include sharing in the joys and sorrows of members like bereavement, child dedication, daughter’s marriage etc. As these intrinsic needs are culturally oriented and encouraged, the preference of the informal finance groups is guaranteed. Moreover, the regulations and operations of the informal finance groups are properly understood, accepted, internalised and complied with due to the normative (cultural) origin and approach of the rules.
IN promoting formal financial inclusion, there are certain questions that our policy makers need to evaluate and possibly answer. Some of the questions include: (i). why a poor village man will prefer to use the formal financial sector instead of his well understood informal sector, (ii). Does he need a national ID/Master-card for his daily existence and especially for his financial transactions, (iii). Even if he decides to use the ID/Master-card, where will he use it and will he understand the terms and conditions of the card, (iv). Will the card be pre-paid or will it be like a normal credit card, (v). If it will be pre-paid or a normal credit card, what will be the minimum amount to be loaded into the card to guarantee a profit for Master-card. There are so many unanswered questions to which the answers will help us in appreciating the importance of adopting a sociological approach to banking and especially for financial inclusion.
This approach will ensure that any financial inclusion policy contains both instrumental and intrinsic needs of the target group to generate the required buy-in and effectiveness of the policy. It will require using some of our development priorities such as education and agriculture to innovate strategies to enhance the integration of our formal and informal financial sector. In some instances, the informal finance sector should serve as role models for the formal sector. Avoiding or delaying in adopting this approach will sustain our limited financial sector development especially financial inclusion evident in our in-ability to achieve more than 40million formal bank account holders in over 122 years existence of the formal banking sector.
Dr Ngwu is a Lecturer in a UK University
Dr Ngwu is a Lecturer in a UK University
Culled from http://www.ngrguardiannews.com
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