PROPOSAL ON NIGERIA DEPOSIT INSURANCE AND FINANCIAL INCLUSION

Abstract

Financial inclusion is currently hot topic in policy spheres because of its potency in encouraging economic growth. The Central Bank of Nigeria (CBN) adopted the National Financial Inclusion Strategy (NFIS) in 2012. The Strategy articulated the demand-side, supply-side and regulatory barriers to financial inclusion, identified areas of focus, set targets, determined key performance indicators (KPIs) and established the implementation structure 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.

 INTRODUCTION

The principle of financial inclusion has assumed greater level of importance in recent times due to its perceived importance as a driver of economic growth. Mehrotra et’al (2019). Giving access to the hundreds of millions of men and women (all over the world) who are presently excluded from financial services would provide the possibilities for the creation of a large depository of savings, investable funds, investment and therefore global wealth generation. In other words, access to financial services, that are well suited for low-income earners promote enormous capital accumulation, credit creation and investment boom. Usually the low-income earners constitute the largest proportion of the population and so control enormous chunk of the economy’s idle fund albeit held in small amounts in the hands of each of the several million members of this group. Harnessing and accumulating these resources provides a huge source of cheap long-term investable capital. Mehrotra et’al (2009). 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.

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

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