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Summary: Many of Nigeria's economic woes stem from its overreliance on hydrocarbon exports, which still comprise the vast majority of the country's government revenues. The banking sector has historically remained narrow in its focus too, relying on offering products to the government, large corporates and metropolitan consumers, to the detriment of financial inclusion and economic diversification.

Working to make the banking system fit to drive progress by offering services to other growth sectors and unbanked individuals has been a key part of the CBN's strategy under its outgoing governor, Sanusi Lamido Sanusi. "We are trying to turn the banking industry into Nigeria into a thought leader for the Nigerian economy, saying we have got to go beyond our role of managing bank balance sheets and into being an agenda setter for Nigeria," Sanusi said.

The industry has signed up to a set of sustainability guidelines that touch upon environmental, social and economic factors, and the CBN has taken on a role as an activist for wider economic development.

Expanding access to credit for the agribusiness sector has been one leading focus, in support of a broader government strategy to leverage the country's agricultural potential and reduce the reliance on costly food imports. Agriculture is the largest employer in the country and contributes around 40% of gross domestic product. Since 2009, the bank has worked with the Ministry of Agriculture to provide billions of naira in credit to agricultural enterprises and small-scale farmers through the Commercial Agriculture Credit Scheme, offering below-market interest rates.

"We basically designed and analysed value chains to work out how to promote lending to agriculture," Sanusi said.

Infrastructure, in particular the provision of power, has been a huge limiter of economic growth and diversification. The CBN has also participated in the sector, making $1.8bn available to stimulate credit for the power sector and the airline industry, through the Power and Aviation Intervention Fund.

"The banking industry took the lead in pushing for the power reforms that led to privatisation. The central bank actually funded the privatisation process, and the banks provided the funding. We trained bankers in providing finance for power," Sanusi said.

The central bank has also actively worked to promote the roll-out of services to underserved individuals and communities. In a population of 170m, as many as 46% remain without access to formal financial services. Despite its economic size and resources, Nigeria lags behind several other African countries in the provision of banking services to the poorest, in part due to its geographical size and diversity. Until the mid-2000s, domestic banks had also often neglected retail markets outside of major urban centres. The sector, which was fragmented and inefficient, had instead focused on the lucrative business of banking government entities.

Financial exclusion is a serious drag on individuals' ability to rise out of poverty and is an inhibitor of economic growth. Basic financial services allow for better management of risks and better financial planning, reducing societies' vulnerabilities. Access to lending products enables smallholders and entrepreneurs to expand their businesses and employ others. Financial exclusion is also a driver of inequality. More than 80% of those outside the formal financial system live in rural areas; 54% are women and 74% are under 45. The barriers to financial inclusion are complex and varied. Many individuals have no physical access to branch networks and lack basic financial literacy. Others have no formal identification and struggle to meet the simple requirements for opening bank accounts.

Recognising that financial inclusion was an important part of its wider mission to promote inclusive growth in Nigeria, and that some of the challenges to achieving it could be addressed through its existing strategies for reforming the banking sector, the Central Bank of Nigeria made a commitment in 2011 that it would reduce its rate of financial exclusion to 20% by 2020. The apex bank signed the Alliance for Financial Inclusion's "Maya Declaration", joining 35 other countries in committing to four action areas: creating an enabling environment for innovations that reduce the cost of financial services; implement a "proportional framework" to balance the integrity and stability of the financial system with opening access; integrate consumer protection into its strategies; and use data for better policy making and reporting.

Since 2005, the CBN had supported the establishment of a regulatory body for microfinance, credit bureaux, rating agencies and the Micro, Small and Medium Enterprises Development Fund (MSMEDF), which provides wholesale funding for MFIs. The new strategy was launched in 2012, in partnership with other institutions, including the Nigerian Postal Service and the Nigerian Communications Commission. Produced with international input and following assessments of similar strategies from around Africa, South Asia and Latin America, it outlined a number of interventions, including:

* Improving Know Your Customer regulations to allow individuals without formal identification to enter the banking system;

* Articulating a new regulatory framework for agent banking, to assist in the expansion of banking services across the country;

* Creating a financial literacy framework, to improve the understanding of financial products and services;

* Implementing a consumer protection framework, to give clients confidence in the banking system;

* Driving the continued adoption of mobile payments and cashless transactions; and

* Creating and expanding funds and systems for the empowerment of micro, small and medium enterprises.

Among the more striking policies that the CBN has pursued is a drive for cashless payments, beginning with a pilot programme in Lagos. Cash transactions and cash handling add considerable costs to banks' operations. Mobile payment systems have become ubiquitous in other parts of Africa, but their uptake has been relatively slow in Nigeria. By lowering the cost of transactions, the central bank hopes to improve efficiency across the entire financial system and assist banks in rolling out services to clients that would currently be considered uneconomical.

As a result of the overall strategy, the adult financial exclusion rate reduced from 46.3% in 2010 to 39.7% in 2012, with all regions of the country showing improvements.

The CBN has also made strides in addressing the absence of women in mainstream finance. Cultural and social barriers have historically limited the participation of women in the financial system. In rural areas, women comprise the majority of the labour force, but many drop out of education after leaving primary school. Women often lack property rights and assets, preventing them from offering collateral when trying to access financial products. This limits the ability of rural entrepreneurs to obtain capital to grow businesses. According to the World Bank, just 1% of women had obtained capital from the formal financial sector.

With women representing around half of the Nigerian population, giving them the tools and skills to become successful entrepreneurs could unleash an enormous latent potential in the economy, and simultaneously reduce the burden on government services.

"It is simply not possible to create an economy that will sustain itself without looking at the economic conditions of women," Sanusi said.

As part of a broader government initiative to empower women in the economy, the CBN supported targets in the microfinance industry that actively promote women's participation. The microfinance policy, agreed with the bank's support, stipulates that women's access to microfinance should grow by 15% annually. At least 60% of the MSMEDF is expected to support female entrepreneurs.

The central bank has also actively tried to promote the role of women in senior roles within the financial industry. The Bankers' Committee created a subcommittee, headed by Bola Adesola, the CEO of Standard Chartered Bank Nigeria, dedicated to improving the number of women who make it to executive and board level in Nigerian banks. By the end of the current governor's tenure, 40% of senior management and 30% of board level positions were expected to be occupied by women.

The CBN has also determined that it has to take a lead on environmental factors, which Sanusi believes are partly responsible for some of the social and economic tensions that still dog Nigeria's progress.

"We are in a world in which we have got to look at the environment, and changes to the environment do have an impact on how we do business and the future of the banking industry and the economy," he said. "We have developed very clear guidelines for lending to three sectors: energy, power and agriculture. We have developed a set of principles that we expect all banks to adhere to, that should restrict the flow of credit to certain types of activity, for example, bush burning... In power, we try to encourage lending to companies that build renewable energy.

"The banking industry alone cannot do it, but by setting this agenda, it opens up new lines of collaboration with other parts of government." n

Key Initiatives

* The Agricultural Credit Guarantee Scheme Fund

* Interest Drawback Programme

* Agricultural Credit Support Scheme

* Entrepreneurship Development Centres

* Commercial Agriculture Credit Scheme

* Small and Medium Enterprises Credit Guarantee Scheme

* Nigerian Incentive-based Risk Sharing System for Agricultural Lending

"We are trying to turn the banking industry into Nigeria into a thought leader for the Nigerian economy, saying we have got to go beyond our role of managing bank balance sheets and into being an agenda setter for Nigeria"

The Numbers

$1.8bnThe amount made available by the CBN to stimulate credit to the power sector

"The banking industry alone cannot do it, but by setting this agenda, it opens up new lines of collaboration with other parts of government"

"It is simply not possible to create an economy that will sustain itself without looking at the economic conditions of women"

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Publication:African Banker
Geographic Code:6NIGR
Date:Feb 17, 2014
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