Nigeria taps diversity in financial services to boost inclusion

Nigeria’s banking sector is highly diverse, with large players that follow a universal banking model and smaller actors that cater to certain niches. A regulatory push to consolidate the sector has helped to deepen banks’ ability to lend and fuel economic expansion – an important role for the sector to continue to play as the country recovers from the Covid-19 pandemic.

Meanwhile, an ongoing focus on financial inclusion has led to the emergence of new segments, including non-interest finance, microbanks, bancassurance and payment service banks (PSBs). Solutions such as mobile money and financial technology (fintech) are also a central part of expanding access for rural communities and women – two segments of society that are under-represented in the formal banking system.


Established in 1959, the Central Bank of Nigeria (CBN) regulates the banking and finance sector, with a mandate that includes ensuring monetary and price stability, issuing licences, maintaining external reserves and acting as a bank for the federal government. It operates 28 departments and five directorates: the Corporate Services Directorate, the Economic Policy Directorate, the Financial System Stability Directorate, the Governors’ Directorate and the Operations Directorate. It also manages long-term strategy and reform. One of the CBN’s most consequential reforms of recent years came in July 2014, when a programme of consolidation began after the regulator raised minimum capital requirements from an average of N2bn ($5.3m) to N25bn ($66.8m). Prior to the reform, the small size of the country’s many commercial banks restricted their lending ability and, as such, most banks were unable to finance projects across key sectors such as oil and gas, telecommunications, construction and power. Today, however, local banks and other financial institutions are playing an expansive role in financing infrastructure and housing developments.

In addition to the CBN, the Nigeria Deposit Insurance Corporation is responsible for overseeing the operations of commercial banks, ensuring their deposit liabilities and providing assistance in the interest of depositors in the event of business challenges. The Financial Reporting Council of Nigeria, meanwhile, enforces compliance with corporate governance, and accounting and auditing standards.

Sector Composition

As of May 2021 there were 22 commercial banks licensed by the CBN – a marked decrease from about 90 in mid-2004, largely due to stricter minimum capital requirements imposed in 2005. The central bank was also supervising three PSBs at that time, in addition to five merchant banks, five discount houses, six development finance institutions, 33 mortgage institutions, 45 finance companies, some 900 microfinance institutions and numerous foreign exchange dealers around the country. Two Islamic banks, called non-interest financial institutions in Nigeria, are regulated by the CBN as well.

PSBs, for their part, are a new category that the central bank hopes will boost financial inclusion through digital channels; the regulator issued guidelines for the licensure of such players in August 2020. PSBs – which run small-scale operations and carry no credit risk – are permitted to provide customers with current and savings accounts; payment, ATM and remittance services; and debit and prepaid cards.

Tier 1 & Tier 2

The sector is led by five Tier-1 banks, namely First Bank of Nigeria, Zenith Bank, Access Bank, United Bank for Africa and Guaranty Trust Bank. The CBN introduced a regulatory framework specific to this group in 2015, boosting capital adequacy requirements for domestic systematically important banks from 10% and 15% for those that held domestic and international licences, respectively, to 16% as of November 2020. In June 2020 the combined assets of Tier-1 banks stood at approximately N31.4trn ($83.8bn).

Smaller and mid-size banks struggle to compete with larger institutions on a variety of key metrics. Tier-1 banks generally have cash reserves that can be invested in riskier – and, therefore, more lucrative – assets and can attract more affordable deposits. Tier-2 banks have smaller cash bases that need to be conserved to build up capital buffers. Smaller players are also more vulnerable to bad loans. Guaranty Trust Bank, the largest bank by market capitalisation, had a return on equity (ROE) of 26% as of June 2020, while Zenith Bank and Access Bank recorded ROE of 21.7% and 19.1%, respectively. This rate was significantly lower for Tier-2 banks such as Fidelity Bank (12.9%), First City Monument Bank (9.4%), Sterling Bank (8.7%), Union Bank of Nigeria (8.4%) and Wema Bank (5.4%) that same month.

A handful of large foreign banks are active in the market as well, including the US’ Citibank, Stanbic IBTC Bank – part of South Africa’s Standard Bank – and UK-based Standard Chartered. Foreign players have long been attracted to the potential of the Nigerian market, given its tens of millions of unbanked citizens.


The economic effects of the Covid-19 pandemic reached Nigeria’s finance sector in mid-2020. Financial institutions under the finance and insurance sector measured by the National Bureau of Statistics experienced healthy quarter-on-quarter growth in the months leading up to the pandemic, at 22.3% in the fourth quarter of 2019, 24% in the first three months of 2020 and 28.4% in the second quarter. By the third quarter of 2020 expansion had slowed to 6.8% before contracting by 2.5% in the fourth quarter. Despite this, the value of financial institutions grew by 13.3% overall in 2020, up from 2.4% growth in 2019. The sector’s contribution to real GDP remained steady in 2020, at 3.1%.

Although the banking sector expanded in 2020, the effects of the global health crisis did have an impact – particularly the low oil prices that partially stemmed from industrial shutdowns. Oil accounts for over 90% of foreign exchange earnings, 60% of government revenue and is a leading source of liquidity. Because banks are highly exposed to the oil and gas industry, which typically receives the highest credit allocation in the private sector, low prices for crude on international markets threatened asset quality and some energy players struggled to repay loans. According to a December 2020 report by credit ratings agency Fitch, a number of factors, including debt relief, stabilised oil prices, the hedging of financial exposure and loan restructuring, eased the rise in non-performing loans (NPLs) throughout the financial system in 2020 (see analysis). However, the agency expects the NPL ratio to rise from 6% as of December 2020 to 10-12% by the end of 2021 as government relief measures are lifted, returning to a rate seen prior to the pandemic.


Credit to the private sector totalled N20.35trn ($54.3bn) in the fourth quarter of 2020, 2.55% more than in the previous quarter. Credit for service activities was N11.7trn ($31.2bn), industry N7.6trn ($20.3bn) and agriculture N1.05trn ($2.8bn). The individual activities that received the most credit in the final months of the year were oil and gas (N3.9trn, $10.4bn), and manufacturing (N3.2trn, $8.4bn).

Outstanding consumer credit, for its part, stood at N1.6trn ($4.3bn) at the end of 2020, up 9.9% from the previous quarter and 17.7% for the year, according to the CBN. Consumer credit as a share of private sector credit expanded from 8.1% in September 2020 to 8.9% in December due to an increase in the volume of loans and advances granted to individuals.

Lending remains concentrated in urban areas, with Lagos – the country’s commercial centre – receiving 78% of total credit allocated in the third quarter of 2020, the most recent period for which this breakdown was available. The state received N15.1trn ($40.3bn) that period, with Rivers State attracting the second-largest allocation, at N977.1bn ($2.6bn), followed by Abuja (N594bn, $1.6bn), Delta (N216.4bn, $577.8m), Oyo (N206.8bn, $552.2m) and Kano (N187.9bn, $501.7m). Yobe State in north-eastern Nigeria recorded the smallest credit allocation, at N19.4bn ($51.8m).

In a January 2021 report by Lagos-based pan-African ratings agency Agusto & Co, the company stated that it expected lending to increase by 12-15% that year. Much of the growth is likely to stem from the depreciation of the naira and CBN intervention funds, as well as efforts by banks licensed since 2015 to meet required loan-to-deposit ratios. With regulatory measures put in place in 2020 to help stem the rise of NPLs expiring in March 2021, the company forecast that the NPL rate would rise but not exceed 9.6% for 2021.

In July 2020 the CBN asked banks to restructure 65% of loans without non-performing penalties after it placed a moratorium on interest charges and principal debt repayments. The move was designed to both help borrowers deal with the economic headwinds of the pandemic and facilitate recovery via the strategic distribution of loans. That same month Godwin Emefiele, the governor of the CBN, announced that 41% of total outstanding loans – worth N7.8trn ($20.8bn) – were already being restructured.

Financial Inclusion

Boosting financial inclusion is one of the most important goals of Nigeria’s banking sector. In August 2019, when the financial inclusion rate of the country was around 63%, the CBN announced a target of 95% by 2024 – pushed back and expanded from a goal of 80% by 2020. The CBN also aims to eliminate the gender gap in financial inclusion, issuing guidelines in September 2020 for advancing the participation of women in the formal banking system. According to the CBN, the financial inclusion rate for women was 58.9% in 2018, compared to 67.4% for men. The gender gap was especially pronounced in rural areas, where 24% of women and 54% of men had formal accounts. The framework targets bank account ownership in the short term, but in the longer run aims to build a culture of women using financial services for a variety of needs. The CBN outlined eight strategic imperatives for eliminating the gender gap: improving financial and digital literacy, creating delivery channels that serve women, using disaggregated data-collection systems with a focus on gender, establishing an environment conducive to inclusion, offering financially sustainable products and delivery systems, leveraging fintech solutions, supporting women in leadership and staffing at financial institutions, and implementing measures to help women open an account.

The authorities have also been working to bring micro-, small and medium-sized enterprises (MSMEs) into the formal financial fold. Most recently, the Nigerian Economic Stability Plan, issued in June 2020 as a short-term roadmap to navigate the Covid-19 pandemic, included credit facilities to support the working capital of MSMEs, the continuation of existing facilities, term loans to finance expansion and credit-remediation measures. Targeted measures should also aim to benefit employees of smaller businesses, according to Anthony Edeh, managing director and CEO of Nörrenberger Financial Services. “The financial services sector is dealing with the challenge of informal cash payments. Policies could be enacted to mandate that companies pay employees through the banking system to avoid alienation from the formal economy,” he told OBG.

The early months of the pandemic benefitted the inclusion drive. The number of active bank accounts rose by 32.3m between January and May 2020, a likely reflection of the growing use of online and mobile channels to open accounts amid lockdown measures and social-distancing protocols. This brought the total number of bank accounts to 160m.

Mobile Money & Fintech

One part of the debate over how to increase financial inclusion focuses on mobile money and other forms of fintech. In August 2020 the CBN enacted a $13m minimum capital base rule for mobile money licences, a level that could prove prohibitive to telecoms providers and other players that wish to enter the market. However, opportunities in this sphere are substantial, as mobile payment transactions increased from 724,803 in January 2019 to 7.4m in January 2020. The pandemic fuelled this trend, with the number of mobile money transactions rising from 377.3m for the whole of 2019 to 449.7m in the first eight months of 2020, according to CBN data.

Fintech in general is central to the authorities’ plans to enhance financial inclusion. Between 2011 and 2018 around $204m was invested in local fintech companies, with that figure measuring $55m in the first quarter of 2020 alone. Start-ups attracted over 80% of the fintech funding that quarter, with the bulk of financing coming from international investors. This trend is expected to continue, as social-distancing measures designed to contain the pandemic increased Nigerians’ awareness of the benefits of digital solutions. Awareness, however, is just one part of facilitating inclusion. “Fintech companies should focus on accessibility and affordability in order to thrive. Products need to be easy and intuitive to use, as well as relatively accessible to the public,” Odunayo Eweniyi, co-founder and COO of savings and investment app Piggyvest, told OBG.

Non-interest Banking

In addition to technology-focused solutions, new and emerging service lines such as non-interest banks, bancassurance and microfinance banks are helping to deepen inclusion. Non-interest banking, based on Islamic principles, is in the early stages of development in Nigeria, but has ample scope for growth: the country is home to the world’s fifth-largest Muslim population. Non-interest options are also an important tool to expand financial inclusion to those who previously declined to take part in the banking system due to religious reasons. The CBN first issued guidelines for the operation of non-interest banks in July 2011, and as of early 2021 there were two such entities licensed in Nigeria: Jaiz Bank and TAJ Bank. At the end of the first half of 2020 the segment was valued at N214.8bn ($573.5m), accounting for under 1% of total bank assets in the country, according to the Islamic Financial Services Board.

In July 2020 the CBN issued guidelines to help non-interest financial institutions expand their offerings, such as boosting their involvement in programmes like the Accelerated Agricultural Development Scheme (AADS), the Non-Oil Export Stimulation Facility and a N50bn ($133.5m) targeted credit facility (TCF). Under the AADS, for example – which aims to bring 370,000 youth into the agriculture sector by 2023 – participating institutions act under the purview of the CBN to provide beneficiaries non-interest financing via murabaha (cost-plus financing) and istisna’a (deferred delivery) contracts at a 9% rate of return. Meanwhile, non-interest banks’ involvement in the TCF allowed them to support households and businesses affected by the Covid-19 pandemic at a rate of return of 5% through February 2021 and 9% thereafter.


The authorities are also looking to bancassurance to enhance financial inclusion, expanding the reach of both banks and insurance providers while easing access for consumers. The National Insurance Commission (NAICOM) and the CBN approved a referral model for bancassurance in 2017. Used in countries such as India, Indonesia and South Africa, it allows banks to refer customers to partner insurance firms and receive a commission in return. This gives insurers access to a wider market; customers receive services at one central point; and banks leverage the partnership for additional revenue. However, banks are prohibited from creating their own products that incorporate insurance features, as well as from offering free premium payments in any of their products.

There has been healthy activity in the segment in recent years. Zenith Bank partnered with Prudential Zenith Life to offer life insurance in branches throughout Lagos State in May 2018, while that same year Old Mutual General Insurance Company and Old Mutual Nigeria Life Assurance Company signed bancassurance agreements with Ecobank Nigeria to offer general and life products in Lagos, Port Harcourt, Abuja and Ibadan. Also in 2018, AAIICO Insurance partnered with Wema Bank to offer retail insurance products via the bank’s digital platform, ALAT – the country’s first fully digital bank. More recently, in January 2020 NAICOM approved 18 applications for insurance firms to provide services via banks, and in December of that year Access Bank entered into business with Coronation Insurance.

In addition to commercial banks, microfinance banks are approved to offer bancassurance products, reaching individuals who may be less familiar with financial tools and offering them access to affordable policies. The country’s insurance companies stand to benefit significantly from the network of 900 microfinance institutions. This is especially important as most insurance companies focus on serving urban areas such as Lagos and Abuja. By allowing microfinance banks to offer insurance products, penetration should increase in areas outside of Nigeria’s major cities.


The economic effects of the Covid-19 pandemic are expected to continue to affect the banking system in the short term. Issues with loan quality, profitability and currency stability were behind a December 2020 report by Moody’s Investor Service that gave a negative outlook for African Banks in 2021. Even so, the CBN has identified banks as central players in a sustainable recovery due to their ability to strategically allocate credit to fuel widespread growth. To that end, the measures to restructure loans, enhance oversight and boost accountability that were implemented in 2020 are expected to lay the groundwork for expansion and create stronger sector players in the longer term.

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The Report: Nigeria 2022

Financial Services chapter from The Report: Nigeria 2022

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