IMPACT OF FINANCIAL INCLUSION ON ECONOMIC GROWTH IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF STUDY.

Financial inclusion is realized when all persons have access to a competitive financial marketplace where they may get a complete range of financial services at moderate prices with little risk. In the words of Demirgüç-Kunt (2017), the service will provide client safety and accountability, as well as support economic sustainability. Financial inclusion involves ensuring that economically disadvantaged groups, such as those in rural areas, individuals with low incomes, and women, have access to a range of financial services like savings and payment accounts, credit, insurance, and pensions. Financial products and services should be accessible and inexpensive to consumers and enterprises spending, payments, savings, loans, and insurance in a sustainable and responsible manner (Yin, Xu, Chen, and Peng, 2019). Financial inclusion facilitates the creation of services that enhance monetary efficiency. Financial inclusion occurs when all members of a community have convenient and cost-effective access to a variety of financial services. Furthermore, possessing insurance encourages people with a high degree of financial inclusion to be more inclined to accept financial risks (Liu, Dong, &Meng, 2022).

According to Akhil (2016), financial inclusion is defined as delivery of financial services to the poor at affordable cost while ElSaid, Emara, and Pearlman (2020) posit that financial inclusion means access to, and use of financial products and services by house-holds or firms which is one of the main, albeit challenging priorities in Emerging Markets (EMs), and a key factor for financial development (Akhil, 2016, Elsaid, Emara, and Pearlman, 2020).

Increasing numbers of individuals are seeing the need to broaden access to financial services for a prosperous economy. An increasing amount of research suggests that inclusive finance might be a solution to both poverty and economic stagnation (Ali, Nazir, Hashmi, &Ullah, 2022). Increasing access to formal banking services is seen as an important objective in development policies globally, including in countries like Nigeria. Financial inclusion aims to offer affordable financial services to underserved segments of the population, in contrast to financial exclusion where these services are either scarce or expensive. The goal of financial inclusion is to ensure that all individuals in the economy have equal opportunities to access and use formal financial services.(Onaolapo, 2015). Financial inclusion refers to the ability of all economic participants to easily open bank accounts, and access credit affordably, and regularly utilize various financial products and services such as ATMs, credits to private sectors, insurance and point-of-sale systems without the need to interact with a teller or cashier.

Nwafor and Yomi, (2018) stressed that generally, the low and middle income earners make up the majority of the population and therefore control a large part of the working group of the economy; Although they are held in small amounts by several million members of this group, the exploitation and accumulation of these resources provides a huge basis for cheap, long-term investable capital (Nwafor and Yomi, 2018).

According to The Enhancing Financial Innovation and Access, Nigeria's financial inclusion status in 2020 showed a higher percentage of youth having access to financial services compared to the average. The adult population using liquid money, such as banks and ATMs, was at 51% in 2018. This increase was attributed to a growth in banking, with 45% of Nigeria's population being banked in 2020, consisting of 45% women and 56% men utilizing financial services. Despite progress over the past decade, the target of achieving 70% financial inclusion by 2020 was not met, with only 51% of Nigerians financially included by the end of that year, leaving 36% of adults, or 38 million individuals excluded from financial services, with 55% of women and 44% of men being financially excluded. Rural areas particularly felt the impact, with 78.5% of adults lacking access to formal banking services. To realize the benefits of financial inclusion for economic development, various policies have been experimented with and implemented. For instance, the government of Nigeria introduced the rural banking project in the 1970s to promote financial inclusion, followed by the central bank's initiative in 1997 to establish at least one bank branch in all localities to encourage banking in rural areas, foster small and medium-sized enterprises, and reduce rural-urban migration.(EFInA, 2020).

Nigerian Financial System Strategy 2020 (FSS 2020) identified six financial sector stakeholders, including banking institutions, non-bank financial institutions, insurance companies, capital market operators, pension institutions, and technology service providers, in addition to their regulatory bodies (Manasseh et al., 2023). Four of the six initiatives approved to strengthen domestic financial markets are directly related to financial inclusion. These initiatives include creating diversified financial products, improving payment processes, expanding the credit system and promoting a savings culture (Olusegun, Evbuomvan, and Belonwu, 2021).

According to the Nigerian Financial Inclusion Strategy (NFIS 2018), Financial inclusion is considered achieved when adult Nigerians have convenient access to a wide range of formal financial services that are tailored to their needs and are affordable. This includes easy access to financial products, using a variety of financial services, having financial products that suit their requirements, and being able to afford these services even on a low income. Elements of financial inclusion encompass pensions, insurance, payments, credit, and savings. In Nigeria, as in many other countries, achieving an inclusive financial system is a key policy goal. The government and banking industry in Nigeria remain committed to promoting inclusive growth, as nations with higher inclusive growth rates tend to outperform those with lower rates in terms of economic growth. Various initiatives have been introduced by the Nigerian government and monetary authorities over time to enhance financial inclusion, such as community and microfinance banks, electronic banking products, electronic payment systems, and cashless policies. Measures like ATMs, POS, and mobile banking have been implemented to further financial inclusion, along with programs like non-interest banking, the National Economic Reconstruction Fund (NERFUND), and the Family Homes Funds.

According to Abbas and Atanda (2019), a review of the majority of scholarly submissions reveals that the goal of financial inclusion is to boost economic growth by improving the economic well-being of those at the bottom of the economic pyramid and those who are unbanked by making affordable financial services available to them (Abbas and Atanda, 2019).

Rural residents using ATMs increase bank customers due to fewer branches in rural areas. Residents without bank accounts can be included by equipping them with ATMs. ATMs allow citizens to withdraw money anywhere, anytime. Lack of nearby cash withdrawal facilities reduces liquidity. Tapping into rural savings potential by providing ATM security can motivate opening and managing bank accounts. Increased bank deposits lead to credit creation, promoting economic development.

The goal of Rural banking programs like the Economic Advancement Program (FEAP) is to promote banking habits among the predominantly rural population in Nigeria. Economists widely agree that there is a strong connection between financial progress and economic development, highlighting the importance of the financial sector in driving economic growth. Despite Nigeria's status as one of the largest economies in Africa, there has been limited focus on financial inclusion, with only a small fraction of the adult population having access to financial services. The Central Bank of Nigeria (CBN) has implemented various reforms to position itself as a key player in the economy by 2020. Factors such as poverty and lack of education contribute to the lack of financial inclusion in the country. The aim of this study is to explore how financial inclusion impacts economic growth in Nigeria.

1.2 STATEMENT OF PROBLEMS.

Nigeria is the most populous African nation with a population of about 223 million. In a 2020 report, it was found that among adults aged 18 and above, totaling 106 million, the main obstacles to accessing financial services included irregular income (31%), distance to banks (27%), unemployment (21%), illiteracy (10%), low interest on deposits (3%), and high interest on loans (3%). The report also revealed that in 2020, 64% of adults were banked, leaving 36% unbanked, which equates to 38 million people. Despite efforts, a large part of the population was still excluded due to limited banking access. The government and financial institutions recognized this challenge and worked together to increase banking penetration through initiatives like establishing more branches and mobile banking services (EFInA, 2020). In order to meet their banking needs, these unbanked or under-banked Nigerians often resort to patronizing the informal and inefficient financial intermediaries like the money lenders which are very risky and costly than the formal institutions. Most of them in the process have lost huge sums of money to these informal financial institutions. The issue of low financial literacy among Nigerians has also encouraged the practice of hiding technique of banking and patronage of non-formal institutions.

Abbas and Atanda (2019) posit that financial inclusion is vital for the increase and improvement of any financial system due to the fact that making plans and coverage systems with the aid of using choice makers is less difficult whilst greater human beings are covered with-inside the formal financial system. This indicates that financial exclusion may also lessen or maybe slow down financial offerings contributions to making plans to coverage making and withstand the long run, monetary increase and improvement.

The five-year strategy (2019-2024) plan of the Central Bank is ultimately to ensure that a 95 per cent financial inclusion rate is achieved by 2024. The introduction of the N50 charge would discourage more people from using mobile banking and thus defeat its purpose. If you want to retain your customers, you cannot afford to add such money. These developments have triggered very aggressive changes in the financial services industry, introducing significant dynamism into the industry's value chain - changing mode the production, delivery and consumption of financial products and services, the regulators that is the Central Bank of Nigeria (CBN) has been at the forefront of entrenching in the Nigerian banking industry through the implementation of the Nigerian Sustainable Banking Principles (NSBP), which has formally been adopted by the CBN and 33 banks, discount houses and Development Finance Institutions.

According to the World Bank, two billion individuals do not have access to organized financial services. Therefore, financial inclusion attempts to increase the poor's chances for growth by granting them access to fundamental financial services, particularly microcredit. Despite the fact that sophisticated economies like the UK, Sweden, and France have started making explicit legal and political statements of inspired resources (mainly from banks) to ensure continued growth and sustainable financial inclusion; In developing countries like Nigeria, the situation is reversed Therefore, Kama and Adigun (2013) argued that economic exclusion in growing economies is about 70 percent. For example, in Nigeria, CBN (2012) reported that at the end of 2012, there were a total of about 39 million adult Nigerians, which is about 46 percent of the total adult population of 84.7 million were financially excluded this makes the rate of Nigerian adults financially included among the lowest in Africa (Ajakaiye and Olowookere, 2013).

Financial institutions in Nigeria have neglected the financial demands of the economically active poor and rural residents despite their clear need for financial inclusion. Nigeria does not prioritize developing the economy and enabling financial transactions in rural regions. Inadequate budgeting resulted in continued economic suffering for the working poor and rural residents. The rural sector and active poor may enhance any country's capacity for growth and economic stimulation via their distinctive small businesses. Hence, the sector's contributions to economic growth would be compromised if this problem was not recognized.

Limited access to formal financial services for small and marginalized communities in Northern regions poses a significant threat to the economic development of countries like Nigeria. As per Mohan (2009), a nation's economic capabilities cannot be accurately assessed if a large portion of its population is financially excluded. Financial exclusion refers to the absence of affordable basic banking services for vulnerable segments of society (Du et al., 2022). Overcoming the barriers to financial exclusion is crucial for promoting financial inclusion, ensuring timely access to financial services, and providing sufficient credit to at-risk groups, including low-income populations, at reasonable costs. The banking system in Nigeria, as outlined by Mohammed, Ibrahim, and Muritala (2022), involves the Central Bank of Nigeria, commercial banks, and credit unions. Financial services include a comprehensive range of offerings such as savings, loans, insurance, and payments, aimed at assisting small-scale farmers and vulnerable communities in alleviating poverty. Access to credit is vital for households to support their livelihoods, fostering a sense of inclusivity that can drive economic growth. Additionally, sound financial management in housing and emergency situations can provide further benefits. Therefore, adults and families require financial services to access diverse savings and investment options to build wealth, which hinges on financial literacy and understanding the root causes of financial exclusion (Muhammad Dauda and Mamman, 2019).

Based on the findings of EFinA's 2018 Access to Finance Survey, rural areas experience the highest levels of financial exclusion due to the impracticality of traditional bank branches in these locations. The number of individuals lacking access to a bank account sheds light on the extent of financial exclusion. Bank accounts are essential for obtaining other financial services and have increasingly become a necessity. While the 'unbanked' make up a relatively small portion of the population, they significantly contribute to those who are financially excluded. One reason someone may be unbanked or unable to access other financial services is the inability to meet identity verification requirements. For instance, individuals without a driver's license, passport, or permanent address often struggle to fulfill these strict identity standards; moreover, those already facing financial exclusion may lack the means to obtain such documents, placing them in a difficult situation.

The motivation for this study is the resulting knowledge. It is likely that over time more advanced technologies will be built to help expand the knowledge that has been created. There are other elements of financial inclusion that must be considered in any further research in this area and it is also necessary to make comparisons with other countries both developed and developing countries. This study can provide elements for those who want to do research on similar works and also provide a direction for those who want to develop. Again, this study adds variables such as the number of ATMs, the number of bank branches, online banking, and insurance products in rural areas, etc., which are not common variables used in previous results. Although the research showed an unstable short-term effect of ATM in rural areas on economic growth, it produced a long-term result not statistically significant. This shows the need to increase the number of vending machines in rural areas of Nigeria.

Financial exclusion can greatly affect an individual's life, hindering their ability to handle bills, save, or obtain credit. As a result, they may struggle to enhance their financial situation over time. Without help, the inability to access financial services can lead to social exclusion, poverty, and inequality. This is primarily because limited financial resources make it challenging for individuals to move towards a healthier, more sustainable, and fulfilling life.

What causes financial exclusion for individuals?

There are several factors at play:

Income Discrepancies: People with lower incomes often find it difficult to access financial services due to potential neglect from banks and other institutions.
Geographical Barriers: Many rural and remote locations lack physical bank branches or ATMs, making it challenging for residents to access banking and discouraging engagement with traditional financial institutions.
Documentation Issues: Some individuals may not have the necessary forms of identification or paperwork needed to open bank accounts, which excludes them from official financial systems. The process to acquire such documentation can be time-consuming and burdensome, leading many to avoid banking altogether.
High Fees: Certain financial institutions impose high fees or require minimum balances that can make their services unaffordable for certain groups. Financial inclusion should work to incorporate all segments of society, regardless of their economic status.
Limited Financial Literacy: A lack of understanding of financial services and products can cause individuals to hesitate or avoid using them entirely, exacerbating their exclusion. Therefore, promoting financial education is a collective responsibility.
Dependence on Informal Financial Solutions: Relying on informal financial avenues, like loan sharks or unregulated savings groups, keeps individuals from entering formal banking systems.

Unfortunately, many individuals who are financially excluded are often from lower socio-economic backgrounds. Nonetheless, the National Bureau of Statistics reports that 63% of Nigeria's population (133 million people) lives in multidimensional poverty.

A previous research highlighted the challenge of limited cash availability, including the absence of financing alternatives like credit lines, as a significant barrier for small and medium enterprises in African nations. Important measures of financial inclusivity in Africa encompass the availability, accessibility, and utilization of financial services. The utilization of extensive financial inclusion strategies is essential in Africa, especially in Nigeria, as simply possessing a bank account is insufficient. Many individuals in Nigeria are either unbanked or underbanked, despite having ties to reputable financial institutions, as they are deterred by issues like the distance to the nearest branch and associated charges. The economic landscape in Nigeria and other African nations is dominated by a select few individuals, leading to a majority of the population being excluded from formal financial services. The current situation poses a threat to the economy. According to the Central Bank of Nigeria News, currency outside banks have also increased progressively during the first quarter, growing from N3.28tn in January to N3.41tn and N3.63tn in February and March, respectively.The data revealed that over 90 per cent of currency in circulation is held outside of the banking system, indicating Nigerians are holding more cash. The cause for this investigation was clear in this context.(OluwakemiAbimbola, 2024).

1.3 RESEARCH QUESTIONS

The following research questions are raised in this study:

1. To what extent does insurance products from rural areas impact economic growth in Nigeria?

2. To what extent does ATM transactions impact on economic growth in Nigeria?

1.4 Objectives of the Study

The general objective of the study is to examine the impact of financial inclusion on the economic growth of Nigeria.

The specific objectives include:

1. To examine the impact of insurance product from rural areas on economic growth in Nigeria.

2. To examine the impact of ATM transactions on economic growth in Nigeria.

1.5 RESEARCH HYPOTHESES

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