There cannot be financial inclusion without finances to include, and public resources should be dedicated towards direct poverty eradication efforts, which should in turn create an organic appetite among all stakeholders for financial inclusion. On the supply side, there is no incentive for private financial institutions to deploy resources to the poorest communities. Only as a social initiative will a lender bet on the creditworthiness of the most vulnerable, without applying lending rates reflective of the risk.
There is robust literature across the world of development economics reinforcing the causal link between financial inclusion and poverty alleviation. The conclusion is that access to financial services such as credit, savings, payments and insurance has a significant impact on the economic outcomes of people at the bottom of the pyramid. This has not been disproven, and it has informed massive and continuous investment in financial inclusion initiatives by both private and public institutions. I wonder, however, if the commonly-accepted direction of the causal relationship is the most optimal. Are people poor because they are financially excluded, or are they financially excluded because they are poor? Which phenomenon is the most efficient to solve to achieve the greatest marginal impact on the other?
The answer to these questions is hidden in the data comparing the poverty rate and living standards of Nigerians in rural and urban areas. In 2019, the National Bureau of Statistics (NBS) measured the rural poverty rate at 52.10 per cent and the urban poverty rate at 18.04 per cent. With a population estimated at about 200 million people, positively closing that gap will see tens of millions lifted out of poverty; it is therefore worth probing the factors that explain the difference in circumstances.
An elaborate Nigeria Living Standards Report (2018/2019) by the NBS and the World Bank collected dozens of descriptive data-points across demographics, education, health, employment and remittances, non-farm enterprise, farming and living conditions, and the consumption frequency of food categories and household shocks. The report revealed broad similarities between the circumstances of the rural and urban populations, especially with regards to items that can be related to financial inclusion metrics. For example, while about 76 per cent of urban dwellers source start-up capital for non-farm enterprise via their savings, about 71 per cent or rural dwellers also do the same, indicating that there is no significant variability regarding access to external capital across the country, despite varying poverty levels. Likewise, when it comes to domestic and international remittances, the medium of receipt (relatives, bank wire, mobile money, Western Union, etc.) is about the same between both groups, and the purpose of those remittances is also mostly the same between urban and rural dwellers (80-85 per cent for consumption).
Unsurprisingly…economic growth, corruption, national debt, inflation, investment (national), life expectancy, and unemployment rate are the major determinants of poverty in Nigeria. Most notably, a 1 per cent increase in corruption would lead to 3 per cent increase in poverty, as national resources are misappropriated to non-productive uses.
Why then are rural dwellers visibly poorer than urbanites? Could it really be explained to any tangible degree by differences in availability and awareness of savings, credit, insurance and payment services? The intuition of most urban readers, especially the urban poor, will not be very supportive. Afterall, it is clear that availability of these services is neither access nor utility.
In a paper by Ogebe et. al (2020) investigating the factors affecting rural poverty and its vulnerability in Nigeria, the authors use the NBS survey data and others to model the variables that contribute to poverty. Unsurprisingly, it shows that economic growth, corruption, national debt, inflation, investment (national), life expectancy, and unemployment rate are the major determinants of poverty in Nigeria. Most notably, a 1 per cent increase in corruption would lead to 3 per cent increase in poverty, as national resources are misappropriated to non-productive uses.
Besides the macro factors that explain overall poverty, the paper highlights areas where there are significant differences between urban and rural populations. Large household sizes (especially in rural areas) are more vulnerable to poverty; likewise, female-headed households – perhaps as an extension of the gender’s broader social vulnerabilities – are more prone to poverty. Literacy rates and number of years in formal education are key areas with major observable differences between rural and urban populations, and they were highlighted as major socio-economic determinants of vulnerability to poverty. Addressing these specifically should have a direct impact on poverty metrics in rural areas, e.g., through the promotion of lower birth rates, investment in formal education, and the social and economic empowerment of women.
On the demand side, there is little to no capacity for the poorest to utilise the most exotic financial services like savings, insurance and investments, as there is nothing to save, insure or invest. The theory that financial inclusion is a means to an end has informed several interventions by development institutions and governments. The recent e-Naira project in Nigeria comes to mind.
The providers of infrastructure for financial inclusion like banks and fintech companies are motivated by financial incentives, and they will cater to communities where they can make a business case. Populations with sufficient wherewithal will command the attention of banks, insurance providers, savings platforms, and credit providers, as can be observed in wealthier urban settings.
There cannot be financial inclusion without finances to include, and public resources should be dedicated towards direct poverty eradication efforts, which should in turn create an organic appetite among all stakeholders for financial inclusion. On the supply side, there is no incentive for private financial institutions to deploy resources to the poorest communities. Only as a social initiative will a lender bet on the creditworthiness of the most vulnerable, without applying lending rates reflective of the risk.
Also, only where there are creative ways to extract value in a low-cost manner (e.g, through offline agent networks) will certain services be deployed. On the demand side, there is little to no capacity for the poorest to utilise the most exotic financial services like savings, insurance and investments, as there is nothing to save, insure or invest. The theory that financial inclusion is a means to an end has informed several interventions by development institutions and governments. The recent e-Naira project in Nigeria comes to mind. It might be worthwhile to reverse the direction of causality between financial inclusion and poverty, and invest accordingly.
Olaoluwa Samuel-Biyi is a Partner at Hacked Ventures, Venture Partner at Greenhouse Capital and Doctoral Candidate in Cryptoeconomics at IE Business School, Madrid.
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