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Financial Inclusion in Frontier Markets

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Introduction

As much as Nigeria has a high poverty rate, it still has a higher GDP in comparison with other countries of Africa like Egypt, Libya, and South Africa.  Till now, Nigeria has been trailing behind Western economies. Today, almost fifty years after gaining independence, Nigeria should compete with the economies of the world rather than just African economies. The country is rich in natural resources and has identified the fact that taking appropriate measures can speed its economic development. Northern Nigeria is a border area for financial inclusion, and only some individuals have admission to financial services. Standard Microfinance Bank is an organization of municipal property, which operates in the financial inclusion field in the Adamawa State of North-Eastern Nigeria. In this region, the bank has four exclusive problems in frontier markets. They are the following: the lack of role models for future micro entrepreneurs, deficit of trust between the bank and its customers, dashing money (“free” money), and the socio-cultural practices relating to money.

Financial inclusion in Northern Nigeria is facing huge challenges from the community around the same practice. Knowledge of financial literature is very low since these individuals believe that it is their right to attain loans from the banks. The community in Northern Nigeria considers that it is not under any obligation to repay its loans as they are simply grants and aid from the international community in the perception of some of these individuals. Northern Nigeria is indeed one of the fastest developing states in Nigeria. It brands itself as the “giant of Africa”. Nowadays, the country needs to prove its potential by raising its standards to the level of other fast-growing economies in the world. Therefore, this implies that the northern part of the country must be incorporated in the overall system of country’s development. The Vision 20:20:20 program, which this country is currently pursuing, is a major step towards achieving this goal. According to its 7 point agenda, Nigeria is focusing on the development of its financial sector as an important strategic move. This paper uses trend analysis and various descriptive methods in order to analyze the development of Nigeria through each decade since its independence in 1960 and examine the factors, which had an impact on its financial position.

Despite the growth of its economy, the financial sector in the North faces a number of challenges that makes it hard for various commercial banks operating within the region to carry out their activities effectively. Some of these challenges can be attributed to the social cultural background of people in the North as well as the religious beliefs of the Northerners. Majority of the Northern Nigeria residents are Muslims, who strictly follow the Islamic faith when it comes to financial matters. The issue of faith has greatly hindered many commercial banks operating in the North as the residents of the region believe that the banks should not change the interest on the money that they lend to the inhabitants. This makes it hard for commercial banks to operate in the region given that their main source of income is the interest that they charge on various loans provided to their clients.        

In the context of the Northern Nigerian economy, the issue of free money refers to the idea that money obtained from the banks is indeed free and act as a grant rather than a loan as it is perceived in other sectors of the economy and other parts of the country. They view this mechanism as the one of charitable organizations, grants, or aids for various individuals (Khandker, 2003). A lot needs to be done in the North for a complete solution of problems faced in the financial sector within the region in order to make financial inclusion in frontier markets within the region effective. Some of the challenges that must to be urgently addressed include the lack of role models for prospective micro entrepreneurs, trust deficit between the bank and clients, dashing money, and the socio-cultural practices in matters of money.

Literature Review

The Sociocultural Beliefs of the Northern Nigerians

Free money refers to the notion that the money that the Nigerians collect from microfinance banks is free. The Nigerians perceive microfinance banks as international aid money, charity, or grants. There is practically no culture of banking and loans with an interest attached to it. The Northern Nigerians believe that money is given for free with no obligation to pay it back. The socio-cultural practices suggest that there is no concept of money management. Northern Nigeria has the concept of the extended family. In such a way, money must be used to support the entire clan/tribe. Money should not be saved but spent (Giroh et al., 2008).

There is a little banking knowledge among the Northern Nigerians at all. They simply feel that money is not returnable and end up faulting the payments of cash to the banks, especially Standard Bank that operates in the region as the sole financial institution. There is little or no money handling concept in the Northern Nigeria. They believe in the concept of the extended family. Thus, money is shared communally, which indeed breaks the law of financial freedom among these individuals.

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Money is used to support the entire clan or family as opposed to individual property as practiced by other individuals in the same country. Money is supposed to be spent and never to be saved at all. These individuals are very philanthropic to the use of money, especially in non-profit projects of the country. The region is also dogged with a lot of issues bordering the whole idea of the elites and the paupers in the society. Royalties mint money from the little privileged in the society. The gap between the poor and the rich continues to widen every day with the passing tides and winds.

Cultural evasion is a serious problem in the financial stability of the Northern Nigerian economy. Agriculture is the backbone of the economy of Northern Nigeria. This requires a lot of understanding of the factors underlying this issue, especially the financial attributes. In order to guide itself on the path to development, Nigeria should examine which factors hindered the development of the finance sector and which one was regarded as the basis for the country’s economy before the era of oil boom. It has to correct the mistakes made in the last fifty years by immediately putting these strategic plans into action. The people of Nigeria can uplift themselves from poverty and distress by eradicating corruption and devoting themselves to progress (Anyanwu, 2004).

The Lack of Trust between Financial Providers and Clients as a Result of Collusion

In all financial sectors of the world there is a problem of mistrust between financial service providers and customers. This challenge usually results into the failure of the majority of people in embracing financial services. In turn, it prevents the growth of the financial sector in question. In Northern Nigeria, mistrust of service provides has been blamed on the culture of collusion on the part of banks with the aim of exploiting customers (Central Bank of Nigeria, 2003). Collusion is one of the techniques that are used by various business organizations in order to avoid competition in their operations. Therefore, it can be said to be an agreement that is entered by a group of individuals, which is sometimes illegal association. Hence, the agreement tends to be very secretive with the aim of limiting open competition through by means confusion, deception as well as default the legal rights of other individuals. The main goal of collusion is to ensure that the firm or individuals in question make some unfair gains over other firms or individuals. The firms that enter into collusion usually aim at sharing the existing market among themselves, setting unfair prices and limiting production for others in order to make a number of benefits in the long run over their competitors.

There are a number of indicators, which show that collusion exists in the financial sector of Northern Nigeria. First of all, studies point out that always uniform price in the financial sector is an indicator of collusion. Secondly, recent studies show that usually set penalty by the market players for giving price discounts is evidence of collusion in the Northern Nigerian financial sector. Another common indicator of collusion in Northern Nigeria has been the advance notice of consumers regarding price changes in the future. Finally, information exchange between rival commercial banks in the region has been an indication of collusion, as well.

Other Issues of the Financial Sector

The lacks of role models for prospective micro entrepreneurs, dashing money - a Nigerian expression that refers to “free” money - and the socio-cultural practices in matters of money are other challenges that have been identified in past studies as factors that hinder financial inclusion in the northern part of Nigeria. The lack or role models in the financial sector within the region hinder its growth. For the long-term growth of the sector, research shows that a lot needs to be done. Despite various efforts of encouraging people to invest in the financial sector within the region, the lack of individuals, who have succeeded by investing in the sector and can act as role models, has been a significant obstacle to the growth of the financial sector in the northern part of Nigeria (Iheduru, 2002).

Conclusion

It is established that much has to be done in North Nigeria in order to resolve the problems of the financial sector in the region. The purpose of this task is to make financial inclusion in the region’s frontier markets active. Thus, the socio-cultural practices relating to money, dashing money as “free” cash, deficit of confidence between the bank and its clients and the lack of role models for potential micro entrepreneurs are considered to be the issues of concern, which should be urgently addressed.

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