Financial inclusion is said to be achieved when citizens of a country have easy access to a range of formal financial services that meet their needs at affordable costs.
These services should be broad enough to enable access, choice and usage and include but not limited to payments, savings, and credit, insurance, pension and capital market products.
The major goal of Nigeria’s National Financial Inclusion Strategy is ‘’to reduce the proportion of adult Nigerians that are financially excluded to 20 per cent in the year 2020 from its baseline figure of 46.3 per cent in 2010’’.
Financial inclusion goal
Since its launch in 2012, policies implemented in line with the strategy have encouraged financial inclusion in the country. Among others, tiered KYC requirements, ATM expansion and agent banking have resulted in enhanced financial possibilities for small enterprises and households in Nigeria.
While these initiatives have brought more people into the banking ecosystem, attaining the goal of financial inclusion continues to pose a challenge not least because the efforts so far seem to have focused on the money market channels with little attention on the role of the capital market. An analysis of financial inclusion status as at 2016, contained in the revised NFIS report, showed that a total of 40.1 million of Nigeria’s 96.4 million adult population were financially excluded with over 80 per cent resident in rural communities.
Financial inclusion and capital market
The ultimate goal of financial inclusion is inclusive growth and for this to happen the place of capital markets cannot be undermined. Capital market products such as mutual funds play an important role in mobilizing household savings.
Relative to the size of the economy, the Nigerian mutual fund industry is small and lags behind those of peers. In a country reputed to be the most populous in Africa, participation by retail investors remains very low while the uptake of capital market products, through equity, debt or other structured instruments, is nothing to write home about. On the positive side though, the implication is that there is ample room for growth.
Indeed, the capital market can serve as a veritable channel for enhancing financial inclusion including through new products and services tailored to suit investors’ preference for risk and return as well as borrowers’ project needs and risk appetite.
The China example
This challenge has since been recognized in other jurisdictions. In China for example, as a way of reducing the exclusion rate of Small and Medium Enterprises, an interbank bond market exists offering a number of innovative products such as the SME Collective Notes (SMECN) which is a special financial bond.
The China Banking Regulatory Commission (CBRC) grants approval to commercial banks to issue special financial bonds for the purpose of increasing the size of loans to SMEs.
Another initiative that recommends itself, with respect to improved financial access, was undertaken by the Securities & Exchange Commission of Pakistan which came up with the idea of establishing Capital Market Business Hubs (CMBH) in smaller cities in Pakistan. Designed to expand the outreach of capital market institutions, the CMBH is a central location where all capital market related activities can be initiated.
The first such Hub was established in the city of Abbottabad with participation of 12 institutions comprising asset management companies, brokerage firms, a bank and the Karachi stock exchange which opened their branches in the area. Empirical studies confirm that the establishment of CMBH has helped in no small measure to increase outreach to smaller cities, enhance awareness and uptake of capital market products and by extension increase the level of financial inclusion in Pakistan.
Creating capital market awareness
Back home in Nigeria, such one-stop financial centres are needed in many of our state capitals. At present, provision of capital market services is concentrated in the major cities leaving investors residing in smaller towns and villages at a disadvantage especially with respect to awareness about capital market products and services needed for improving their economic well being.
For example, the network of stock broking firms and other capital market operators is spread only in Lagos and a few other major cities and are yet to outreach many state capitals in a country where online access for many retail investors remains a big challenge.
It goes without saying that the Nigerian capital market suffers from the absence of a strong retail investor base. To expand the pool of such investors, it is important to recognize that capital market literacy is a major component of financial inclusion. No doubt, the Securities and Exchange Commission and Nigerian Stock Exchange have done a lot in this regard.
While some progress has been made, a lot still needs to be done as recent research indicates low level of capital market awareness in Nigeria. To buttress this point, the case of the Alternative Securities Market (ASeM), a specialized platform of the NSE with flexible listing rules and requirements for SMEs readily comes to mind.
Many emerging businesses with high growth potential are not taking advantage of this window to access long-term capital due, in part, to lack of awareness of such Platform.
Enhancing participation level
Further, with enhanced investor education, the level of participation in the Federal Government of Nigeria Savings Bond that accommodates low income earners will certainly be higher.
Given the high exclusion rate of SMEs in the country and the large informal sector, the development and delivery of capital market products in partnership with Fintech companies, will go a long way in on-boarding these excluded groups.
In this regard, the plan by the National Pension Commission to commence the micro-pension scheme for the informal sector is laudable. In order to reduce the high exclusion rates especially in Northern Nigeria, sub-national governments and corporate organizations should see the need to complement the efforts of the federal government in the area of providing non-interest capital market products such as the Sukuk.
As mentioned earlier, mutual funds are ideal products for increasing financial inclusion because they offer the low-income and less informed investor professional management, diversification and safe custody of assets. The government can come in here by providing fiscal incentives for the mutual fund industry.
Incentivising the process
By the same token, the supply of capital market products can be stimulated through fiscal incentives such as instituting preferential tax treatment of corporate profits for listed companies.
The role of the government should equally extend to putting in place a structured, feasible and time-bound privatization programme through the Nigerian Stock Exchange targeting eligible large cap government Enterprises in key sectors of the economy.
As part of initiatives to fast-track financial inclusion in Nigeria, the Securities and Exchange Commission should consider adopting rules and proposing amendments to the CAMA and the Investment and Securities Act 2007 that will permit companies to raise funds through equity or debt-based crowdfunding.
The Commission should also strengthen implementation of existing Investor Protection Frameworks to mitigate the risk of fraud and engender confidence in the market space. All said, financial inclusion in Nigeria can indeed be accelerated through the capital market.
Uche Uwaleke of Nasarawa State University Keffi is Nigeria’s first Professor of Capital Market and the President of the Association of Capital Market Academics of Nigeria.
