There is unanimity of opinion in the financial sector that the best way to ensure greater financial inclusion in the developing world, especially for a country like Nigeria, is through digital financial technology (fintech).
This is because access to physical financial services in these countries continue to be hampered by various barriers to access such as long distances to access financial services, bureaucratic bottlenecks and the sometimes prohibitive costs of banking services in a country like Nigeria where the banks charge exorbitant fees for routine and normal services like email and SMS alerts, account maintenance fees and the huge interests charged on loans. What is more, traditional financial services seem not to be designed to meet the needs of small depositors and borrowers. That is why, according to a McKinsey Global Institute report titled: “Digital Finance for all: Powering Inclusive Growth in Emerging Economies”, “…56 percent of adults (in Nigeria) do not have a bank account, and 80 percent of cash in the economy is not deposited in a bank. Trust in banks is low, and many citizens, particularly those living in rural areas, are not familiar with financial services.” The report was emphatic in its conclusions that digital finance “has an opportunity to flourish in emerging economies because network coverage is near ubiquitous and rapidly increasing in quality.”
We need not look far for examples of successes of fintech in bringing financial services to the poor. Kenya – and indeed the entirety of East Africa andother emerging markets – provides key lessons here. Digital mobile services in Kenya, for example, are widespread with over 17 million active users conducting more than $50 billion in cashless transactions yearly.
However, regulatory bottleneck has continued to stifle the growth and flourishing of most fintech companies – which incidentally are start-ups that should be supported to grow – in Nigeria. For instance, a key CBN regulatory requirement for fintechs to be licensed to operate include 3 years tax clearance of each of the founders, draft agreements with technical partners, participating banks, switching company, merchants, telcos and any other party; payment of non-refundable application fee of N100,000 to CBN; and evidence of shareholders’ fund of N2 billion before a licence is issued. The initial capital requirement used to be N500 million but was recently jacked up to N2 billion.
Should a mobile money start-up even manage to provide the tax clearance, draft agreements from banks, telcos, partners, merchants and pay the N100,000 non-refundable application fee, where would it get the N2 billion shareholders’ fund just to be licensed?
The requirements may also explain why over 80 percent of the licensed companies are based in Lagos. Meanwhile, the greater percentage of financially excluded Nigerians do not reside in Lagos but in the far interior of the country – where fintechs find it difficult to survive due to the strangling regulatory requirement.
In January 2018, the CBN threatened to revoke the licence of more than 15 mobile money operators for failing to meet up with the N2 billion capital requirements. The operators’ grace period will end on July 1, 2018. Currently, Nigeria has just 21 mobile money operators. If the CBN makes good on the revocation threat, the country will be left will less than 10 licensed operators servicing the over 60 million unbanked population in Nigeria.
The CBN needs to create a robust regulatory environment for both big and small players in the industry to flourish and thereby help capture all the financially excluded in Nigeria. It could also create a multi-tier license process with different capital requirements for players in each tier or segment. This will not only energise the fintechs, but will give the small fintechs not based in Lagos a chance to contribute to the onerous task of bringing financial inclusion to all Nigerians.