NIGERIA DEPOSIT INSURANCE AND FINANCIAL INCLUSION

Abstract

Financial inclusion is currently hot topic in policy spheres because of its potency in encouraging economic growth. And because it improves the sensitivity of aggregate demand to interest rate it has been argued to be useful for the success of monetary policy. However, little attention has been devoted to computing the exact effect of financial inclusion on monetary policy. This paper presents a simple model showing the impact of financial inclusion on monetary policy in Nigeria. The result of the study supports the notion that growing financial inclusion would improve the effectiveness of monetary policy. However, the coefficient of the number of bank branches has the wrong sign and this is explained by the fact that, in opening branches, banks mainly pursue profits but not financial inclusion which is a policy objective, so that there are clusters of branches which are under-utilized while numerous locations which are considered not favorable for balance sheets are under-branched.

CHAPTER ONE

INTRODUCTION

Background of the study

There is currently high energy activity by policy makers in pursuing financial inclusion. This is because it has been shown that countries with higher degrees of financial inclusion tend to post higher economic growth. According to Khan (2011), “empirical evidence indicates a distinct rise in income level of the countries with higher number of branches and deposits of commercial banks and higher number of bank branches per 100,000 adults and more number of deposit accounts per 1000 adults is observed in high income countries than countries in the low and middle income countries”. At the micro level of the economy increasing financial inclusion portends so many positive developments with respect to improving the growth rate of the economy. There is evidence that people who are financially included tend to be more productive, consume more and invest more (Ashraf et al., 2006). Given the enormous advantages which come with financial inclusion and the desire of the Central Bank of Nigeria to advance financial inclusion, it is imperative that it (financial inclusion) is discussed in the plainest of languages in order to broaden the debate, not about the usefulness of financial inclusion as that is taken for granted; in fact, khan (2011) says that the pursuit of financial inclusion is not just a policy option but is compulsory; it is about the various workable strategies to accelerate its rate of reach, and deepen the acceptability of such policies and strategies. Definitions of financial inclusion sound cliché but we mention for emphasis sake that it simply implies enabling access to financial resource and services for economic agents, especially, those on the lower wrung of the income ladder at an affordable cost. Financial inclusion strategies aim at increasing the number of people with accounts in banks and other formal financial institutions savings, current and credit. It also pursues the promotion of the use of formal payment media, including cheques, ATM cards, internet payments, mobile payments and others by the populace. The financial inclusion strategy document states that “financial inclusion is achieved when adult Nigerians have easy access to a broad range of formal financial services that meet their needs at affordable cost.” Although there has been progress over time in the extent of financial inclusion in Nigeria, the country still lags other peer-level countries in many of the indicators of inclusion. In the period, 2008 to 2010 the percentage of completely excluded fell from 53 to 46, while those served by the informal sector fell from 24 to 17. At the same time, „formal other‟ doubled from 3 to 6% and formally banked rose from 21 to 30%” (CBN, 2012). Comparatively, Nigeria has a formal payments penetration of 21.6 per cent that is lower than the level of 46% in both South Africa and Kenya. In terms of access to savings products, Nigeria has 461 savings accounts per 1000 and this poorly compares with 2,063 savings accounts per 1000 in Malaysia. Credit penetration as an index of financial inclusion is worse in Nigeria compared to other peer countries. It posts only 2% access to formal products that is a far cry from 32% in South Africa. Also, insurance penetration in South Africa is about 30% and only 1% in Nigeria. These comparisons are intended to show a picture of where the country is in terms of financial inclusion. The government, with the instrumentality of the CBN has set specific targets with accompanying actionable plans to advance financial inclusion in the country

• STATEMENT OF THE PROBLEM

Financial inclusion is defined as the ability of an individual household or group to access appropriate financial service or products. Without this ability, people are often referred to as financially excluded. Financial inclusion can be regarded as the delivery of financial services at affordable costs to sections of disadvantaged and low income segments of society. Financial inclusion is further facilitated by an effective deposit insurance system that provides confidence and which allows financial institutions to provide services to a vast majority of people at affordable cost. It is the opposite of financial exclusion where those services are not available or affordable. Financial exclusion (people with limited use or access to formal financial services) is a big problem in the world (Abrahim 2013). Coordinated efforts to address the financial inclusion gap in Nigeria can be traced back to the development of the National Financial Inclusion Strategy in 2012. The Strategy defined financial inclusion as achieved “when adults in Nigeria have access to a broad range of formal financial services that are affordable, meet their needs and are provided at an affordable cost”. The Strategy set overall targets and specific targets for products, channels and enablers. It is against this backdrop that this study intend to examine the effect of Nigeria deposit insurance and financial inclusion in Nigeria.

• OBJECTIVE OF THE STUDY

The study has one main objective which is sub-divided into general and specific objective, the general objective is to examine the Nigeria deposit insurance and financial inclusion in Nigeria. The specific objectives are;

1. To examine the effect of financial inclusion on the economic growth of Nigeria
2. To examine the role of Nigeria deposit insurance corporation in ensuring financial inclusion in Nigeria

• To examine if there is any relationship between financial inclusion and economic growth in Nigeria

1. To proffer suggested solution to the identified problem
   • RESEARCH QUESTION

The following research questions were formulated by the researcher to aid the completion of the study;

1. Does financial inclusion have any effect on the economic growth of Nigeria?
2. Does Nigeria deposit Insurance Corporation play any role in ensuring financial inclusion in Nigeria?

• Is there any significant relationship between financial inclusion and economic growth in Nigeria?
  • RESEARCH HYPOTHESES

The following research hypotheses were formulated by the researcher to aid the completion of the study;

H₀: There is no significant relationship between financial inclusion and economic growth in Nigeria

H₁: There is a significant relationship between financial inclusion and economic growth in Nigeria

H₀: Nigeria deposit Insurance Corporation does not play any role in ensuring financial inclusion in Nigeria

H₂: Nigeria deposit Insurance Corporation does play a role in ensuring financial inclusion in Nigeria

• SIGNIFICANCE OF THE STUDY

It is believed that at the completion of the study, the findings will be of great importance to the Nigeria Deposit Insurance Corporation as the findings will help in policy formulation in ensuring extensive financial inclusion on Nigeria financial sector, the study will also be of importance to researcher who intend to embark on a study in a similar topic as the study will serve as a reference point to further studies. The study will also be of importance to student, teachers, lecturer’s, academia’s and the general public as the study will add to the pool of existing literature on the subject matter and also contribute to knowledge.

• SCOPE AND LIMITATION OF THE STUDY

The scope of the study covers the impact of Nigeria deposit insurance and financial inclusion in Nigeria, but in the course of the study, there are some factors that limit the scope of the study;

1. a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study
2. b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
3. c) Organizational privacy: Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities.

1.8 OPERATIONAL DEFINITION OF TERMS

NDIC

The Nigeria Deposit Insurance Corporation was established on 15 June 1988 to strengthen the safety net for the newly liberalized banking sector, following the recommendation of former Central Bank of Nigeria governor Ola Vincent.

Insurance

Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss

Financial inclusion

Financial inclusion is defined as the availability and equality of opportunities to access financial services. It refers to a process by which individuals and businesses can access appropriate, affordable, and timely financial products and services. These include banking, loan, equity, and insurance products

1.8 ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study

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