Dr. Olayinka David-West is a Senior Fellow, Operations, at the Information Systems and Marketing Division of the Lagos Business School. In this interview with ABIOLA ODUTOLA, David-West discloses her findings on Nigeria’s digital financial services, explaining how governments and companies can reduce processing costs and increase productivity. Excerpts:
Recently, you released a report on the state of Nigeria’s digital financial services. What led to the report?
Some of the challenges that gave rise to the initiation of the Sustainable and Inclusive Digital Financial Services Initiative include the low financial inclusion rates, the lack of a substantive evidence base and the financial inclusion gaps in the country.
Hence, since 2015, we have been engaged in research activities that provide evidence of sustainable business models for delivering digital financial services to low-income Nigerians that are usually unbanked and poor.
What are the issues the report addressed?
The reports address three fundamental questions: what characteristics distinguish the customers? What business models and assets, resources and capabilities are required for operators to deliver DFS to low-income Nigerians? What market-enabling policies are necessary to enhance DFS and financial inclusion?
What specific challenges did you encounter while preparing the report?
In this report, we present market-enabling policies for DFS and financial inclusion. Our approach to soliciting the policy proposal recommendations involved various stakeholder consultations and involvement.
However, I must say the most challenging one was the convening of the consultative working group session we hosted in August 2017. This workshop brought together stakeholders across the ecosystem and government ministries, departments and agencies, to identify and discuss policy solutions aimed at enhancing financial inclusion through DFS. We held this event at the Radisson Park Inn in Abeokuta and the logistics, I believe, were the most challenging. In addition to the logistics, we also had to ensure the discussions were holistic and progressive towards identifying inclusive solutions.
How many Nigerians lack access to formal financial services and to what extent would you say this challenge has slowed down economic growth?
Based on the demand-side survey conducted by EFInA in 2016, about 60 million Nigerian adults are financially excluded. The low financial inclusion rates have several implications for the economy. The first of these is the limited credit pool for lending, that leads to the unavailability of long-term credit facilities for micro, small and medium enterprises and subsequently, higher interest rates.
As we know, MSMEs are the engines of growth for the economy and the inability to fund these entities limits job creation and capital accumulation that ultimately impacts on real economic growth (GDP) and income. Furthermore, in a bid to estimate the impact, McKinsey Global Institute, projects that formal financial inclusion could increase GDP by up to 12 per cent (about $88 billion).
How would you assess the Central Bank of Nigeria’s cashless policy?
I would not entirely agree that the cashless policy focuses on driving financial inclusion. I believe the concepts are interrelated but different. While the cashless policy seeks to digitise payments and reduce the amounts of cash in circulation, financial inclusion’s mandates aim to provide underserved citizens access to formal financial services, either through bank accounts or digital wallets. Thus, once citizens are included, then the intention is to have them conduct their transactions digitally, hence reducing their need and usage of cash.
Therefore, financial inclusion precedes cashless system. To further enhance the cashless policy, we need to have more payments conducted digitally. Hence, if you think of the ability to pay for goods and services digitally, using Point of Sale terminals, how can we also digitise payments at all types of retail storefronts? Not just the payments at large and formal storefronts. How can we digitise payments in our open markets where the lion share of our transactions take place? The ability to efficiently digitise such payments will broaden the concept of cashless system beyond deposit and withdrawal restrictions.
How can businesses explore digital finance?
Digital finance is the future, and we believe that businesses and governments can leverage this by employing digital payments. By digitising, these payments use cases. Governments and companies can reduce processing costs and increase productivity. For example, the digitisation of business-to-person payments, such as wages and dividend payments could amount up to $56 billion, while business-to-business payments like supplier/distributor payments and investments could total up to $317 billion. Hence, the transaction estimates demonstrate the value of the demand-side market for digital payments.
What about the supply side?
We are also witnessing the emergence of new-technology businesses providing financial services on the supply side. These new companies are developing new business models and technology-based financial products and services, leveraging on meeting consumer needs beyond the capabilities of conventional financial service providers. For example, these fintechs are providing platforms for low-value credits to individuals and MSMEs. The agility and innovation these fintechs bring to the financial services ecosystem offers an opportunity for traditional service providers, depending on the engagement models implemented.
Poverty and literacy issues are major challenges in developing countries and they do not go smoothly together with digitisation. How much of a problem do they present for ongoing efforts at driving financial inclusion through digital financial services in Nigeria?
Poverty is a global scourge that is more prominent in developing countries. Digitisation, as we know it, is beneficial to all and is truly inclusive. Hence, from a reach perspective, I would argue that digitisation goes smoothly with poverty. Nonetheless, let’s dig deeper as to how digitisation benefits poverty. Digitisation is really about the access to and use of digital products and services. The emergence of GSM in Nigeria broke this barrier, and if we look at our internet usage statistics, the majority of Nigerians access using mobile devices.
The impact of poverty and literacy on financial inclusion vary. Let’s take poverty. The poverty classification thresholds defined by the World Bank are based on the household income. Current statistics indicate that over 90 per cent of Nigerians live below the poverty threshold of $2.50 per day. Notwithstanding the earning power, all Nigerians (rich and poor) are all conducting various types of economic activity, albeit at lower values. For example, poor people buy goods and services like transportation, airtime, petrol, etc. Hence the big challenge for financial inclusion is how we can ensure we can cost-effectively digitise these low-value payments
