ELECTRONIC BANKING AS A TOOL FOR FINANCIAL INCLUSION IN NIGERIA (2006-2014)

ABSTRACT

This study sought to explore the impact of electronic banking as a tool for financial inclusion in Nigeria from 2006 to 2014 and in both urban and rural areas as cashless policies unfold in the Nigerian financial system. The specific objectives of this study were to: (i) determine the extent to which transactions using automated  teller  machine  and  point  of  sale  (POS)  machine  had  impacted  the  banking  adult,  (ii) investigate how far transactions using mobile/telephone banking impacted the banking adult, and (iii) determine the extent to which transactions using internet banking had impacted the banking adult in Nigeria. This study adopted ex-post facto and analytical designs. Time series data for nine year’s period (2006-2014), were collated from the Central Bank of Nigeria Statistical Bulletin and National Bureau of Statistics. Ordinary Least square regression technique (OLS)were employed in analysis and some other tests conducted at the significancelevel of 5%.The study discovered that while mobile/telephone banking and  ATM  transactions  shared  positive  but  non-significant  relationship  with  the  banking  adult, transactions through POS and Internet channels shared negative and non-significant relationship with the banking adult in Nigeria. The study therefore, recommends that CBN, BOFIs should embark on intensive campaign to promote trade and commerce through the electronic channels especially at the grassroots. There is need to educate rural dwellers on the importance of e- banking as it would facilitate the success of CBN financial inclusion policy, through public education and awareness.

CHAPTER ONE

INTRODUCTION

1.1  BACKGROUND OFTHE STUDY

Nigeria  is  an  immensely  endowed  country  in  both  natural  and  human  resources,  with  a population of over 140 million (2006 census) people, who are largely engaged in the informal sector. This sector is primarily dominated by micro, small and medium-scale enterprises (MSMEs) and peasant  farmers  who require financial services to  grow  their businesses and improve their livelihood. When duly empowered, they will to a large extent, impact positively on poverty reduction and engender economic growth and development in the country. However, lack of access to formal financial services can constrain their growth and contribution to the development of the country. The introduction of universal banking practice in Nigeria and the adaptation of electronic banking by deposit money banks have offered increased services to customers with attendant increase in customer risk exposure.

The prefix “e” which stands for “electronic” is constantly used in today’s global world; “e- business, “e-mail”, “e-learning”, e- commerce, “e – Electronic banking is the conduct of banking business electronically which involves the use of information communication technology banking” etc. to drive banking business for immediate and future goals. Daniel (1999) cited in Alhaji (2008) describes e- banking as the provision of banking services to customers through internet technology. According to Basel committee on banking supervision, electronic banking is defined to include the provision of retail and small value banking products and services through electronic channels as well as a large value electronic payment and other wholesale banking services delivered electronically though, Alsmadi and Alwable (2011) expressed that the definition of electronic banking varies among researchers partially because electronic banking refers to several  types of services through which bank customers can request information and carry out banking services.

The definition of e-banking varies among researches partially because e-banking refers to several types of services through which a bank customer can   request information and carryout most retail banking services via  computer, Internet or mobile phone. Burr (1996) describes e-banking as an electronic connection between the bank and customer in order to prepare, manage and control financial transactions. According to Nehmzow (1997) e- banking offers the traditional

players in the financial services sector the opportunity to add a low cost distribution channel to their numerous different services, e-banking is becoming increasingly globalized through the use of the internet and World Wide Web.

Internet is changing the global marketplace, including the banking industry. The use of the Internet  is  lowering  entry  costs  and  removing  barriers  to  entry  for  many  businesses.  The lowering of barriers has led to a flood of banks entering the industry, ultimately increasing competition and providing increased value to potential customers. However, most of the traditional banking industry has been slow to join the Internet bandwagon’ (Smith,2006). The wide penetration and personal nature of mobile phones, the overall stability of mobile communication technologies, and the positive experiences with m-commerce payments have made mobile solutions applicable for a variety of financial services. Current mobile financial applications include mobile banking and a variety of different micropayment solutions.

Today, mobile payments are mainly used to pay for popular mobile content and services since there are few alternative payment solutions available (Mallat, Niina, & Virpi ,2004). According to Maurer, Mobile network operators and device manufacturers, looking to increase revenue, turn towards a relatively untapped market among the worlds     poorest and, in the process, provide services that enhance financial access. Profitability and financial inclusion go hand in hand. Central to the BoP (‘bottom of the pyramid’)   framework is the idea of ‘the poor’ as consumers, a framing that depends on a prior formatting of large segments of the world’s population as an undifferentiated ‘poor’ capable of being turned into consumers. In this framing, the poor are rendered relatively passive, aside from their consumer choices.

The changing environment of bank management in Nigeria has impacted much on the number of services and risks which Nigeria bank face. However, the revolution in the banking industry in Nigeria started with the advent of electronic devices to assist in the discharge of quality services to bank customers. The introduction of this electronic device has increased competition in the industry  which  has  gone  a  long  way  to  reducing  customers,  waiting  time  for  banking transactions.  This  innovation  is  brought  in  by  the  use  of  computers  and  other  networking gadgets. In Nigeria, the networking started with the LAN (Local Area Network) MAN (Metropolitan Area Network) and subsequently the WAN (Wider Area Network).

Generally, the automation of banks makes transaction and data processing very easily accessible for quick management decision making. This led to another level to benefit which ushered inn what is today referred to as electronic banking. Electronic banking helps the banks to speed up their retail and wholesale banking services. The banking industry believes that by adopting the new technology – e banking, the banks will be able to improve customer services level and tie their customer closer to the bank. According to Simpson (2002), what actually motivates the investment  in  electronic banking is  largely the  prospects  of  minimizing operating cost  and maximizing operating revenue.

Nevertheless, the adoption of electronic banking has brought major challenges to the banking industry in terms of risk exposure. The volume of deposits has increased as well as the fraudulent practices by Nigerian bank since its adoption in the economy. This is the reason why Ovia (2001), posits that Nigerian banking scene has witnessed phenomenal changes, especially in the mid-1980s and these have manifested in the enormous volume and complexity in product or service delivery, financial liberalization and business process re-engineering.

The effectiveness of developing information technology in banks therefore cannot be put to doubt. The fact remains that the reality of using IT in banks is necessitated by the huge amount of information being handled by these banks on daily basis. On the customers side, cash is withdrawn or deposited, cheques are deposited or cleared statement of accounts are provided money transfers etc. At the same time, banks need up to date information on accounts, credit facilities and recovery interest, deposits, charges, income, profitability indices and other control of financial information. The focus of the present study is more on the effect of e-banking on profitability/performance of banks in the industry. The transformation from the traditional banking to-e-banking has been a “leap’ change. The evolution of e-banking started from the use of  Automated    teller  machines  (ATMS)  and  telephone  banking  (tele-banking),  direct  bill payment, electronic fund transfer and the revolutionary online (internet) banking (safeena, Abdullah; 2010) Internet is the cheapest delivery channel for banking products as it  allows the entity to reduce their branch networks and downsize the number of service staff. (Thereby increasing the level of employees’ job insecurity in the industry).

In the era of privatization, liberalization and globalization, change has become only the constant. Technology has in fact given new dimensions to banks’ service delivery mechanism and the banks are enthusiastically absorbing the latest technological innovations for devising new products and services. The conventional brick -mortar banks are giving way to virtual banks in last one decade. The advancement in software tools, computer hardware and telecommunications has shifted the focus of the banks towards computerization from data processing to information services. The breathtaking advances in computers and telecommunications have enabled banks to adopt these technologies for banking applications to drive competitive advantages. There is marked shift in the technology which has transformed the concept of branch banking to anytime anywhere banking (Nath, 2005).

The  theme  of  the  financial  inclusion  has  been  preached,  professed  and  propagated  by  the different apex financial regulatory bodies as well as by the Ministry of Finance,   Government of India for a long period of time. According to Deputy Governor of Reserve Bank of India, Chakrabarty  (2010)  “Financial  Inclusion  is  the  process  of  ensuring  access  to  appropriate financial products and services needed by all sections of the society in general and vulnerable groups such as weaker sections and low income groups in particular at an affordable cost in a fair and transparent manner by mainstream institutional players”  .The scope of the terminology of

‘Financial Inclusion’ is not confined into merely opening a no frill account.

Financial inclusion is a state where financial services are delivered by a range of providers, mostly the private  sector;  to  reach  everyone  who  could  use them,  specifically,  it  means  a financial system that serves as many people as possible in a country. In recent times, financial inclusion has assumed a critical development policy priority in many countries, particularly in developing   economies.   Nations   should   therefore   implement   initiatives   that   take   into consideration the peculiarities of their environments and most critically its local people.

Financial inclusion focuses on the poor who do not enjoy the formal financial institutional support. The branchless banking is an innovative concept where account can be opened and operated without going to bank branch.

This definition is anchored on four thrusts. The first is ease of access to financial products and services which implies that financial products must be within easy reach for all groups of people and should avoid rigorous requirements, such as challenging Know-Your-Customer procedures.

Secondly a broad  range of financial product and services  should be made available to the unbanked too. Financial Inclusion implies access to a broad range of financial services such as payments, savings, credit, insurance and pension products.

Thirdly, the products are expected to be designed according to the need of the unbanked, taking their income levels and access to distribution channels into consideration and lastly, it must be provided at an affordable cost. Formal financial services should be affordable even for low- income groups, particularly when compared to informal services, e.g. Esusu or money lenders (CBN-NFIS,2012)

Fourthly, the profiles of business facilitator and business correspondent have been created so that they can work as the agent of the banks who are directly dealing with poor villagers. In the era of information technology, a person is called poor not because he has no money but for the fact that he does not have adequate information about what is happening in his surroundings. Electronic banking has made a major breakthrough in the sphere of banking and finance.

1.2      STATEMENT OF THE PROBLEM

Financial inclusion strategies initiated by successive government over the years, through the establishment  of  specialized  banks  have  not  yielded  a  meaningful  result;  hence  electronic banking operation is accessed as an alternative solution to the problem.

In  pursuance  of  financial  inclusion  target,  successive  governments  since  1970s  intervened through establishment of specialized banks (for instance, within the context of rural banking scheme) which recorded limited success. Micro finance bank services are skewed towards the urban population, leaving out large segments of the rural population. The Microfinance bank, as one of the specialized financial institutions for low-income and rural dwellers are faced with high refinancing cost, compounded by a low focus on deposits although driven by profitability which led to high concentration in urban areas against the populous unbanked in rural areas, high operating expenses and low staff capacity, leading to poor asset portfolios. As such the vast majority of MFBs lack the scale and operating capacity to have a strong impact on financial inclusion. (EFInA Access to financial service in Nigeria 2010)

The peculiarities and characteristics of the target population for financial inclusion has shown over the years that the structures and platforms of the conventional and specialized banks are inappropriate and inadequate to successfully capture the financial needs of the financially excluded low-income and rural  groups.  The informal sector  could be  a range of voluntary organizations, including community groups, private clubs, faith groups and tenant or resident groups and could also take the form of mutual, community interest groups, and trade organizations, industrial and charitable organizations.

The people living in rural and urban areas need basic transaction services like making deposits, accessing  credits  for  current  expenses  or  for  investment,  effecting  money  transfers  and settlement of payments. Financial inclusion means access to these basic financial services. Banks and other formal financial institutions have few branches or service outlets in rural areas, small sized transactions with the poor being costly and un-remunerative for them.

The systematic exclusion of households and/or businesses from ‘financial citizenship’—on the basis of race or ethnicity, geographic area, gender and so on—compromises their ability to participate fully in the economy and to accumulate wealth. The world over, most lower-income households and  areas have been served  largely by informal  financial institutions, at higher transaction  costs  and  more  onerous  loan  terms  than  others  pay  (Dymski,2005).Financial Exclusion has manifested prominently in Nigeria with the bulk of the money in the economy staying outside the banking system. The issue of financial exclusion has therefore been a major challenge that has received the attention of the various governments over the past four decades,

Nigeria at present operates a predominately cash based payment system and has more money circulating outside the banking system than the money within the banking sector. This cash based economy is characterized by the psychology of the people to hold cash and conduct most of their transactions in cash. The credit habit of an average Nigerian is low .Nigerians have developed the culture to hold cash as against holding credit instrument.

Sanusi,(2011)had attributed the rise in poverty level in Nigeria to the challenges of financial exclusion. According to him, achieving optimal level of financial inclusion in Nigeria means empowering 70.% of the population living below poverty level, and this would boost growth and development. Inclusion of this segment of the society would generate multiple economic activities, cause growth in national output and eventually reduce poverty.

Chang  and  Chan(2010),noted  further  that  access  to  a well-functioning  financial  system,  by creating equal opportunities, enables socially and economically excluded people to integrate into the economy and actively contribute to economic development. This ensures that the financial system plays its role of inclusive growth which is one of the major challenges of emerging and developing economies.

There has been vast study on the benefits the bank customers will derive in the adoption of electronic banking, there is however, less research outputs in the area of its impact on financial inclusion in Nigeria.

1.3     OBJECTIVES OF THE STUDY

The general objective of this study is to assess the impact of electronic banking (e-banking) on financial inclusion in Nigeria. The specific objectives are as follows:

1.  To determine the extent to which transactions through the Mobile/Telephone banking services has impacted the banking customers such as easy access to financial services in Nigeria.

2.  To  investigate  the  extent  to  which  transactions  through  the  Point  of  Sale  machine impacted banking customers in terms of easy access to financial services Nigeria

3.  To determine how far transactions through the Automated Teller Machine impacted banking customers in terms of easy access to financial services in Nigeria

4.  To determine how far transactions through the Internet banking services has impacted on banking customers in terms of easy access to financial services in Nigeria.

1.4   RESEARCH QUESTIONS

In line with the specific objectives, the research questions are:

1)  To what extent has transactions through the Mobile/Telephone banking services impacted banking customers in terms of easy access to financial services in Nigeria?

2)  To what extent have transactions through the Point Of Sale machine services impacted banking customers in terms of easy access to financial services in Nigeria?

3)  To  what  extent  have  transactions  through  the  Automated  Teller  Machine  services impacted banking customers in terms of easy access to financial services in Nigeria?

.

4)  How  far  have  transactions  through  the  Internet  banking  services  impacted  banking customers in terms of easy access to financial services in Nigeria?

1.5

HYPOTHESES

RESEARCH

In search of answers to the research questions raised above, these hypotheses are stated as follows;

1.        Transactions through the Mobile/Telephone banking services do not have a significant impact on banking customers, such as easy access to financial services in Nigeria.

2.        Transactions through the Point of Sale machine do not have a significant impact on banking customers in terms of easy access to financial services in Nigeria.

3.         Transactions through the Automated Teller Machine do not have a significant impact on banking customers in terms of easy access to financial services in Nigeria.

4.        Transactions through the Internet banking services do not have a significant impact on banking customers in terms of easy access to financial services in Nigeria.

1.6      SCOPE AND LIMITATIONS OF THE STUDY

The study examines the impact of selected e-payment instruments on financial inclusion in Nigeria. It covers all the deposit money banks operating in Nigeria, using e-banking system for domestic and international operations.

The study covers the period 2006 to 2014 with 2006 as the benchmark year and 2014 as the end year. The beginning year was considered more appropriate because full adoption of electronic banking in Nigeria started between 2003 and 2004, hence, the effect cannot be felt within just few years of adoption. Additionally, data on internet and mobile banking were available from

2006.In the course of our study, the period chosen was limited to availability of relevant data and

uneasy access to data bank of some regulatory authorities, and therefore we used time series data of 2006 – 2014.

In the course of our study, lack of credit card for on-line payment limited the quantum of the downloaded materials, and limited funds used to print all the downloaded materials, influenced the research work.

1.7      SIGNIFICANCE OF THE STUDY

This study will be of benefit to various groups as stated below:

1.  Bank

The outcome of the study will provide evidence for banks to improve their service delivery. This could be achieved where banks partner with their service providers to network remote areas so as to reach the unbanked through mobile/telephone and internet banking. Bank can easily harness the opportunity through mobilization of negligible idle funds in Nigerian villages and communities for viable investments which will result to increased profitability, returns on equity and better savings culture for customers. The cost of cash management will be reduced by banks and customers.

1.        Government Agency

The study will provide government agency (Central Bank of Nigeria, Security & Exchange Commission (SEC) etc.) the resultant effects of the cashless policy as at 2014.

2.         Investors

The study will expose investors to the idea of making a wise financing and investment decisions regarding investible funds to package timely portfolios through the use of an electronic channels.

3.        Researchers

The need to provide reference document for further research will not be over emphasized especially for further research where gap has been identified. This work will serve as part of materials which could be used for further research on electronic banking in Nigeria and the world in general.

4.        The General Public

These are – the students, unemployed, civil servants, trade unions, public servants, organized private sector, non- bank financial institutions. NGOs (Non-governmental organizations.), the study will improve their knowledge, confidence and trust on workability of our modern banking operations which will assist them to embrace the system,  especially  students  through  the  use  of  e-wallet  (mobile  phone)  for  money transfers and payment of goods and services conveniently at any time and date.

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