The Impact of Banking Crises on Consumer Trust and Financial Inclusion

How CBN interventions influence the level of trust among consumers

The role trust plays in the drive for an inclusive financial services ecosystem has been identified as critical to financial services adoption. In spite of the various dimensions of trust, the recent developments in the banking sector have elevated the need to revisit the topic, this time drawing our insights from the body of evidence available.

Trust is the firm belief in the reliability, truth, or ability of someone or something. It means being confident that a person or an institution will deliver on their promises. Trust is a powerful driver of human behavior and a foundation of all relationships. In the case of money, the importance of trust cannot be over-emphasized. For instance, since 1964, all paper currency issued by the US Government is marked with the phrase “In God We Trust”, as a public declaration of where citizens’ confidence lies — in God and in the US economy.

Research studies have repeatedly identified trust as a major inhibitor to the adoption of formal financial services and most people would admit that trust is a fundamental pillar in driving financial inclusion. However, it may not be immediately apparent just how important trust is to the Nigerian financial service customer.

We decided to juxtapose the EFinA Access to Finance measure of financial inclusion in Nigeria (2008–2016) with the dates of the banking industry incidents, namely 2009 and 2016. Our aim is to explore the impact of the CBN interventions on the level of trust among the populace and its further impact on financial inclusion.

2009 — Sanusi Lamido’s banking reforms

This was the year five bank MDs and board of directors were summarily removed by the CBN governor for various infractions including weak corporate governance practices.

The 2010 EFinA Access to Finance Survey reported about 54 million Nigerian adults were without bank accounts, and about 4 million of them — 8.3 percent — attributed this to the lack of trust in the banking system. Another 1 percent — more than 500,000 — did not feel their funds were safe in the bank.

Unsurprisingly, the shakeup of the previous year were top-of-mind, hence attributed to the relatively high levels of mistrust.

2011 — Three bank licenses revoked

Two years after the infamous 2009 “banking tsunami”, Afribank, Spring Bank and Bank PHB tapped out of the Nigerian banking sector due to the CBN revocation of their operating licenses.

Fortuitously the 2012 EFinA survey reported that 6.9 percent — about 3.9 million adult Nigerians — preferred to live without a bank account due to the lack of trust in the banking sector. An additional 2.8 percent (1.4 million people) didn’t feel their funds were safe in a formal financial institution.

While the percentage is relatively lower than reported in 2010, the absolute numbers of adults lacking trust in the banking system are equivalent. In addition, perceptions of the safety of funds domiciled in banks almost tripled.

2016 — Board of Skye Bank sacked, CBN takes over

By 2016, financial exclusion levels worsened to 41.6 percent from 39.5 percent in 2014. Attributes of this spike include, but not limited to, the economic recession, the BVN enrolment exercise, and others.

However, it appears that consumers were also still reeling from the effects of the banking industry’s tumultuous journey through the years. With 40.1 million adults excluded, 2.6 percent of them (about 1.04 million people) still did not trust banks enough to open or maintain an active bank account. In spite of these improvements, trust remains a concern.

2018 — Skye Bank bows out, along with 154 microfinance banks

The news of the revocation of Skye Bank’s operating license in September sent shockwaves through the entire ecosystem. This was soon followed by the revocation of operating licenses from another 182 financial institutions, 154 being microfinance banks. While the Skye Bank intervention has been in operation since 2016, the revocation reasons of microfinance banking licenses range from insolvency to distress.

Through these crises , depositors continually question the safety of their funds, especially access to these monies amidst regulatory incursions! The CBN, on it’s part, through these interventions has averted the complete closures we witnessed with the likes of Savannah Bank and ABC Bank. The process of deposit insurance, especially for depositors with vast amounts, still leaves a sour taste in the mouths of the affected and their families.

While the impacts of trust in Nigeria may seem somewhat negligible and may never be completely eliminated, trust being one of the tenets of banking needs to be continually strengthened in the banking industry.

The responsibility is nonetheless shared between the operators and their regulators — CBN and NDIC. The depth of supervision, amongst others, needs to ensure the adherence to prudential guidelines as well as managing the possibility of systemic risk that occurred in the 2008 global financial crises. This has led to a call for new legal and regulatory frameworks to prevent future financial crises as well as build confidence in financial markets. This becomes even more imperative as Nigeria continues to witness the influx of fintechs into the financial services space.

Likewise, through effective governance and management systems, the operators need to focus on building sustainable organisations. While various factors led to the failure of these financial institutions, the philosophy of rent-seeking without recourse to society is not only harmful but also erodes confidence.

Finally, consumer education is also an essential third leg to the trust conversation.

Improvements in financial literacy and financial education amongst all spheres of the population are welcome. The National Financial Literacy Framework published by the CBN in 2015 recognises the diverse needs of banking populace, affirms the absence of a one-size-fits-all approach and identifies consumer segments for the effective development and delivery of financial education.