Potential Impact of Financial Inclusion on Economic Growth in Nigeria

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Potential Impact of Financial Inclusion on Economic Growth in Nigeria


At a time when Nigeria’s economic growth is slowing down, financial inclusion could not be more important. Financial inclusion ensures that irrespective of income level, all individuals, households and businesses have access to appropriate financial services products.

Given that low-income earners constitute a significant portion of the population and have a huge chunk of the economy’s idle funds, increased access promotes capital accumulation, credit creation, increased economic activity, and increased investment. It’s estimated that Nigeria could even have a growth potential of 374% if 100% financial inclusion could be achieved (political and socioeconomic factors are kept constant).

Nigeria has made significant progress in this area but 39.5% of Nigeria’s adult population remains financially excluded, with an additional 11.9% only informally included. Accordingly, the government has set financial inclusion as a key pillar of the Financial System Strategy 2020 to make Nigeria one of the major global economies by 2020. However, a number of challenges remain including low literacy levels, rising inflation, increasing poverty and poor salaries.

The government and financial authorities need to take a more proactive approach to ensuring increased financial inclusion. Such an approach would involve eschewing any banking regulation or cost that could discourage people from saving or effecting banking transactions.

Financial Inclusion in Nigeria

Financial inclusion has been an integral part of Nigeria’s financial industry reforms for over 30 years. From the rural banking pro-gram in 1977 to the establishment of community and microfinance banks in the 1990s and early 2000s, the government and monetary authorities have delivered policies aimed at increasing financial inclusion.

Progress made with these policies includes: the establishment of over 300 banks in rural areas in the 1970s and 1980s; the provision of N300million ($80 million) to small and medium scale businesses between 1988 and 1994; a significant increase in borrowing rates thanks to community banks and the government-run People’s Bank; and additional initiatives since 2005 such as the National Microfinance policy, non-interest banking, a financial literacy campaign, electronic banking and the cashless policy that saw financial inclusion rise from 23.6% in 2008 to 48.6% in 2014.

As a result of this nearly 5-decade long effort the ratio of currency outside the banking sector to narrow money supply has risen from 61.1% in the 1960s to 38.2% in 2005 and 20.8% at the end of 2015. However, the success has not been without challenges.

Moving Nigeria towards greater financial inclusion

A recent study by the IMF, which examined data from Uganda, Kenya, Mozambique, Malaysia, Philippines and Egypt, demonstrated that by leveraging three aspects of financial inclusion, a country can positively impact economic growth and affect income distribution.

The aspects of financial inclusion were access to credit, depth of credit and credit intermediation efficiency. Access to credit was determined by examining fees, transaction costs and documentation requirements. Depth of credit was determined by examining collateral requirements and borrowing costs while credit intermediation efficiency was determined by examining interest rate spreads as well as monitoring costs for banks.


Potential Impact of Financial Inclusion on Economic Growth in Nigeria

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