Improved Financial Intermediation seen as key to achieving Tinubu’s N1 trillion economy targets

The quest by the Tinubu administration to revive the Nigerian economy and grow it to a $1 trillion GDP will no doubt require massive local and foreign investments.

By inference, that means deepening financial intermediation in the country’s banking industry.

As of now, the banking industry seems to be in a sub-optimal position to provide adequate capital to meet Nigeria’s investment needs.

According to data disclosed by the Center for the Promotion of Private Enterprise (CPPE), the banking system’s credit to the private sector in Nigeria, as of 2022, was a mere 20.6% of the nation’s GDP, as sub-Saharan Africa averaged 28%, and the global average was 145%.

Besides, according to the data, small businesses which account for an estimated 50% of the GDP have access to just about 1% of the credit in the banking system.

The implication is that the Nigerian banking system is still largely disconnected from the investing community, especially the small businesses in the economy.

Special Advisor to President Bola Tinubu on PEBEC and Investment, Dr. Jumoke Oduwole said there are 39.7 million MSMEs in Nigeria today, which account for roughly 96% of businesses and 88% of jobs.

The financing gap in the small business space has been estimated at over N600 billion.

Reacting to the potential to increase Nigeria’s GDP if the banking industry provided adequate capital to Nigeria’s investors, the president of the Independent Shareholders Association of Nigeria, Moses Igbrude, said the impact would be so tremendous that wealth creation would increase, jobs creation would increase, and the business space would expand because the main driver of the economy is small businesses.

He said that’s the trend in India, China, and other Asian countries.

He, however, caveated that the cost of finance is huge; but noted that one cannot blame the financial institutions because the system is not well-structured to give credit and expect returns.

A critical aspect of economic development lies in deepening financial intermediation, a process that can significantly bolster the nation’s resilience in the face of economic shocks, promote inclusive growth, and create a more stable and prosperous future for citizens.

Financial intermediation, at its core, is the process of channelling funds from savers and investors to those who need capital for various economic activities.

This vital role is predominantly played by financial institutions such as banks, insurance companies, and microfinance institutions.

Deepening financial intermediation implies expanding the efficiency, accessibility, and inclusivity of financial services, thereby improving the allocation of resources and reducing economic vulnerability.

The need for Nigeria to deepen financial intermediation is underscored by several compelling reasons, including enhanced access to capital.

A financial economist at Nnamdi Azikiwe University, Dr. Felix Echekoba, noted that “By deepening financial intermediation, Nigeria can broaden access to capital, especially for SMEs and individuals. These businesses are the backbone of the economy and can thrive with improved access to affordable credit and financial services.”

He added that deepening financial intermediation can make Nigeria more resilient to economic shocks and fluctuations.

He stressed that a robust and diversified financial system can help absorb shocks and reduce the impact of economic crises, ultimately promoting stability.

Also, Dr. David Olaleye, a retired lecturer of economics, noted that deepening financial intermediation can engender inclusive growth.

He said a more inclusive financial system can reduce income inequality and promote equitable growth, stressing that when marginalized groups and regions gain access to financial services, they can participate more actively in economic activities, fostering balanced development.

He further said that a thriving financial sector can create jobs and boost employment opportunities, particularly in the fintech and banking sectors. “As the financial system expands, it provides job opportunities for skilled professionals and entrepreneurs,” he said.

Moses Igbrude also noted that deeper financial intermediation encourages higher levels of investment and savings, which are critical for long-term economic growth. Individuals and businesses are more likely to save and invest when they have confidence in the financial system.

He said adequate financing is crucial for infrastructure development.

A deeper financial system can provide the necessary capital for building and maintaining vital infrastructure, including roads, ports, and energy facilities.

Dr. Muda Yusuf, the chief executive of CPPE noted that it is especially imperative to deepen the financial intermediation role of the deposit money banks, which is their primary role in an economy. “This responsibility entails the mobilization of financial resources from the surplus end of the economy to the deficit segment of the economy. Financial conditions remain very tight for the private sector amid challenges of access and cost of credit.

“This anomaly needs to be corrected. All these underscore the need to deepen synergy and complementarity between the banking system and the economic players, especially the MSMEs.

“The key metrics of the depth of the financial system include the ratio of financial assets to GDP; the ratio of deposit liabilities to GDP; and the ratio of the money supply to GDP. Nigeria’s rating on account of these ratios is still very low, compared to other emerging economies. Therefore, deepening the financial system for stability is very critical.

“There is a need to reduce the ratio of non-interest income as a percentage of income of banks. The ratio was 42.5% two years ago and would have gone up by now given the numerous headwinds confronting investors in the economy. In most developing economies, the ratio is less than 30%.

“This income structure is a reflection of the failure of financial intermediation in the economy. This, therefore, needs to be addressed. The core function of the banking industry is financial intermediation. A situation where non-banking activities are crowding out the financial intermediation functions of the deposit money banks is detrimental to the growth of the economy,” he stated.

He further said the spread between deposit and lending rates in the Nigerian banking system is too high, stressing that it is an indication of serious efficiency issues in the banking system.

“In Nigeria, the spread is over 20%, one of the highest globally. The average for sub-Sahara countries is 10% and the global average is about 6.6%. The large spread is detrimental to investment growth and disincentive to savings,” he said.