A Comparative Analysis of Financial Inclusion A Study of Nigeria and the UK.pdf

1
Leeds Metropolitan University
Faculty of Business & Law
MA International Business
A Comparative Analysis of Financial Inclusion:
A Study of Nigeria and the UK
A research project submitted in partial fulfillment of the requirements for the:
Masters Degree in International Business
By:
IBEACHU E. HENRY
September, 2010.

2
FACULTY OF BUSINESS AND LAW
Postgraduate Scheme
Programme/course: ………………………………….
Statement of Originality and Authenticity
This dissertation is an original and authentic piece of work by myself. I have fully acknowledged and
referenced all material incorporated form secondary sources. It has not, in whole or part, been
presented elsewhere for assessment.
I have read the Examination Regulations and I am aware of the potential consequences of any breach
of them.
Signature:
Name: IBEACHU E. HENRY
Date: 15th September, 2010

3
ACKNOWLEDGEMENTS
I want to give Glory to God for His daily strength and motivation to be able to complete my Masters
degree and to submit my research.
I want to appreciate the help of my family in their prayers and good wishes towards me, notably to my
parents; Mr. & Mrs. L.N Ibeachu, and to my siblings, Kosi, Dozie, Chika, Rachel, Vivian and Helen.
It was by their motivations and assistance that all of my endeavors came through.
To my tutors and especially my Supervisor; Mr. Peter Chippindale. He guided me through all the
difficulties of carrying out a masters dissertation. To my course administrator; Mr. Gary Carr and all
my tutors. They filled me with the knowledge through their lectures and teachings.
To all my great friends; Akash, Jorge, Vincent, Nomso, Shuji, Ejila, and many more, I am very
grateful.
To Emem; I appreciate all the prayers and support.

4
ABSTRACT
The study and survey of financial inclusion is useful for both policy makers and bank service
providers to make strategic decisions. This dissertation attempts to provide a snap shot of the extent
of financial inclusion i.e. the level and expansion of access and capability of the Nigerian public in
finance utilization. It identifies the main types, causes and factors that motivate or hinder financial
inclusion.
The research states the drive of financial inclusion and bank outreaching as a strategic move of
financial providers (banks) to seek out strategic customers. It shows financial inclusion as a growth
strategy for banking institutions. It also assessed the capability of the Nigerian banking industry with
the use of Porter’s diamond model. This provided a plain look at the general strength of the industry.
With the use of questionnaires administration and several other data collection methods, the research
compared the results from Nigeria and the UK. This was to generally assess the expansion of
financial inclusion of Nigerian from benchmarking a more highly included economy.

5
Table of Contents
CHAPTER ONE........................................................................................................................... 10
1.1 INTRODUCTION............................................................................................................... 10
1.2 Objectives....................................................................................................................... 11
1.3 Financial inclusion ......................................................................................................... 11
1.3.1 Financial Exclusion................................................................................................. 12
1.3.2 Banking the Unbanked............................................................................................ 12
1.3.3 Basic banking Services ........................................................................................... 13
1.3.4 Service quality in Finance Inclusion....................................................................... 13
1.3.5 Financial Outreach.................................................................................................. 13
1.3.6 Non-bank Institutions for Finance Inclusion .......................................................... 13
1.4 Introduction to the Problem............................................................................................ 13
1.5 Background .................................................................................................................... 14
1.5.1 Nigeria..................................................................................................................... 14
1.5.2 Banking................................................................................................................... 14
1.5.3 Developments of the Nigerian Banking Sector ...................................................... 15
1.5.4 Unbanked areas in Nigeria...................................................................................... 15
1.5.5 The Nigerian Micro Finance Policy, Regulatory and Supervisory Framework ..... 16
1.5.6 Overview of the Nigerian Micro Finance/Community Banking Provision............ 16
1.5.7 Operations of Nigeria’s Microfinance/Community Banking Sector ...................... 17
1.5.8 Problems of the Non-bank System in Nigeria ........................................................ 17
1.6 Summary of Hypothesis................................................................................................. 18
1.7 Research Structure.......................................................................................................... 18
CHAPTER TWO .......................................................................................................................... 19
2.1 LITERATURE REVIEW............................................................................................... 19
2.2 Financial Exclusion........................................................................................................ 20
2.2.1 Types of Financial Exclusion.................................................................................. 20
2.2.2 Causes of Financial Exclusion................................................................................ 20
2.3 Critical Success Factors of Financial Inclusion ............................................................. 23
2.4 Financial Inclusion as a Generic Competitive Strategy ................................................. 24
2.5 Financial Inclusion as a means of reaching the Strategic Customers ............................ 24
2.6 Rural Financial Inclusion Policy as a Focus Strategy in bank outreaching ................... 25
2.7 Financial Access............................................................................................................. 25
2.8 Quality Bank Service for Financial Inclusion................................................................ 25

6
2.9 Success Factors of Service Quality................................................................................ 26
2.9.1 Core service or service product............................................................................... 27
2.9.2 Human element of service delivery ........................................................................ 27
2.9.3 Systematization of service delivery: (non-human element).................................... 27
2.9.4 Tangibles of service ................................................................................................ 28
2.9.5 Social responsibility................................................................................................ 28
2.10 Bank Branches................................................................................................................ 28
2.11 Automated Services........................................................................................................ 29
2.12 Quality Service as a Differentiation Strategy in bank Inclusion.................................... 29
2.13 The importance of Microfinance Institutions in Financial Inclusion............................. 30
2.14 Micro Finance as a Low Cost Strategy in bank outreaching.......................................... 30
2.15 Financial Indicators of Financial Inclusion.................................................................... 31
2.15.1 Currency in circulation to Money Supply............................................................... 31
2.15.2 Currency outside Banks to Money Supply ............................................................. 31
2.15.3 Currency Held by Banks......................................................................................... 31
2.15.4 Total Deposits & Loans .......................................................................................... 32
2.16 Covering unbanked areas as a competitive strategy for banks....................................... 32
2.17 Problems in delivering to the unbanked......................................................................... 32
2.18 Assessing the Nigerian Banking System........................................................................ 32
2.18.1 Porter’s Diamond Model......................................................................................... 33
2.19 Competitive Advantage of the banking sector ............................................................... 35
2.20 Solutions to Financial Exclusion.................................................................................... 36
2.20.1 The E-banking Solution.......................................................................................... 36
2.20.2 Financial Education and Community Development............................................... 36
2.20.3 Subsidized Credit Approach ................................................................................... 37
2.20.4 Employment Creations............................................................................................ 38
2.20.5 Consumer Protection............................................................................................... 38
2.21 Conclusion...................................................................................................................... 38
CHAPTER THREE ...................................................................................................................... 40
3.1 METHODOLOGY......................................................................................................... 40
3.2 Research Paradigms ....................................................................................................... 40
3.3 Research Approach ........................................................................................................ 41
3.4 Data Collection............................................................................................................... 42

7
3.5 Data Analysis ................................................................................................................. 42
3.5.1 Analytical Framework ............................................................................................ 42
3.6 Justification of UK in the survey ................................................................................... 43
3.7 Justification of Nigeria in the survey ............................................................................. 44
3.8 Questionnaire ................................................................................................................. 44
3.9 Hypothesis...................................................................................................................... 44
3.10 Ethics.............................................................................................................................. 45
3.11 Limitation....................................................................................................................... 45
3.12 Possible Sources of Bias ................................................................................................ 45
3.13 Conclusion...................................................................................................................... 45
CHAPTER FOUR......................................................................................................................... 47
4.1 DATA ANALYSIS........................................................................................................ 47
4.2 Measuring Financial Access........................................................................................... 47
4.2.1 Bank Account owners............................................................................................. 47
4.2.2 Use/Access to Microfinance/ Community Banks................................................... 48
4.2.3 Bank Distance and Access...................................................................................... 49
4.2.4 Access to Automated and Credit/lending Facilities................................................ 50
4.3 Measuring Financial Inclusion....................................................................................... 53
4.3.1 Extent of Financial Inclusion.................................................................................. 56
4.4 Effect of factors.............................................................................................................. 62
4.5 Measuring Service Quality............................................................................................. 65
4.6 Monetary Measures of Financial Inclusion.................................................................... 66
4.6.1 Ratio of Money supply to gross domestic product (M/GDP Ratio %)................... 67
4.6.2 Ratio of Currency outside Banks to Money Supply (COB/M Ratio %)................. 67
4.6.3 Ratio of Currency in Circulation to Money Supply (CIC/M Ratio %)................... 68
4.6.4 Loans to customers and Deposits............................................................................ 68
4.7 Summary of Findings..................................................................................................... 69
CHAPTER FIVE .......................................................................................................................... 71
5.1 DISCUSSION ................................................................................................................ 71
5.2 RECOMMENDATIONS ............................................................................................... 73
5.3 CONCLUSION.............................................................................................................. 74
BIBLIOGRAPHY…………………………………………………………………………77
Figures
Figure 1: Financial Access of Developed and Developing Countries .......................................... 10

8
Figure 2: Components of Financial Inclusion............................................................................... 12
Figure 3: Financial Inclusion as a Generic Strategy ..................................................................... 24
Figure 4: Rural Financial Inclusion Policy as a Focus Strategy in Bank Outreaching................. 25
Figure 5: Quality Service as a Differentiation Strategy in bank Inclusion................................... 30
Figure 6: Micro Finance as a Low Cost Strategy in bank outreaching......................................... 31
Figure 7: Porter’s Diamond Model............................................................................................... 35
Figure 8: Mobile CellularSubscription per 100 people. ............................................................... 36
Figure 9: Nigerian Deposit and Lending Rate .............................................................................. 38
Figure 10: UK Use/Access to Financial Institutions..................................................................... 49
Figure 11: Nigerian Use/Access to Financial Institutions ............................................................ 49
Figure 12: Bank Branch Distance................................................................................................. 50
Figure 13 & 14: Users and Non-users of other Banking Services................................................ 54
Figure 15: Level of Familiarity of Loan Services......................................................................... 56
Figure 16: Level of Familiarity of Internet Banking Services...................................................... 57
Figure 17: Level of Familiarity of Mobile Banking Services....................................................... 58
Figure 18: Level of Familiarity of Debit Card Services ............................................................... 59
Figure 19: Level of Familiarity of Credit Card Services .............................................................. 60
Figure 20: Level of Familiarity of Bank Mortgage Services........................................................ 61
Figure 21: Effect of Employment Status on Use/Access of Financial Services........................... 62
Figure 22: Effect of Income Level on the Use/Access of Financial Services .............................. 63
Figure 23: Effect of Interest Rate and Charge on Use/Access of Financial Services................... 64
Figure 24: Effect of Level of Identification on Use/Access of Financial Services ...................... 65
Figure 25: Overall Perception of Bank Quality Service .............................................................. 66
Figure 26: Money Supply to GDP Ratio Percentage (%)............................................................. 67
Figure 27: Currency outside Banks to Money Supply Ratio Percentage (%)............................... 68
Figure 28: Ratio of Currency in Circulation to Money Supply (CIC/M Ratio %) ....................... 68
Figure 29: Loans and Deposits to bank customers ....................................................................... 69
Figure 30: Loans and Deposits from Rural bank branches........................................................... 69
Tables
Table 1: Distribution of Microfinance Banks by Geopolitical Zones........................................... 17
Table 2 & 3: Data on Bank Account Owners ............................................................................... 48
Table 4: Data on Use/Access of Financial Institutions................................................................. 48
Table 5: Data on Bank Branch Distance....................................................................................... 50
Table 6: Data on Automated Teller Providers .............................................................................. 51
Table 7: Data on Automated Teller Users .................................................................................... 51
Table 8: Data on Availability of ATMs........................................................................................ 51
Table 9: Data on Providers of Credit Services.............................................................................. 52
Table 10: Data on Non-users of Credit Services .......................................................................... 52
Table 11: Data on Reasons for ATM Non-users .......................................................................... 53
Table 12: Data on Users of other Bank services........................................................................... 53
Table 13: Data on Reasons for other Financial Service Non-users .............................................. 54

9
Table 14: Data on Level of Familiarity of Loan Services ............................................................ 56
Table 15: Data on Level of Familiarity of Internet Banking Services.......................................... 57
Table 16: Data on Level of Familiarity of Mobile Banking Services........................................... 58
Table 17: Data on Level of Familiarity of Debit Card Services................................................... 59
Table 18: Data on Level of Familiarity of Credit Card Services.................................................. 60
Table 19: Data on Level of Familiarity of Bank Mortgage Services............................................ 61
Table 20: Data on Effect of Employment on Use/Access of Financial Services.......................... 62
Table 21: Data on Effect of Income level on Use/Access of Financial Services ......................... 63
Table 22: Data on Effect of Interest Rate and Charges on Use/Access of Financial Services..... 64
Table 23: Data on Effect of Level of Identification on Use/Access of Financial Services .......... 65
Table 24: Data on Overall Perception of Bank Quality Service................................................... 66
Table 25: Monetary Measures of Financial Inclusion .................................................................. 67
List of Appendix
Appendix A: Sample of Research Questionnaire
Appendix B: Research Proposal
Appendix C: Subgroup Percentages

10
CHAPTER ONE
1.1 INTRODUCTION
The story of finance starts where there is a general acceptance of what is being offered as services.
There have been various studies in the different financial access. The World Bank financial access
2009 looked at financial access differences between developed and under-developed countries. Their
findings were very distinctive. They discovered (obviously) that the developed European countries
were better exposed to financial services and accounts ownership. They collected some set of
indicators of financial access in countries around the world. Such indicators included the number of
deposit accounts and loans, the number of deposit clients and borrowers, and the number of financial
access points, such as branches, agents, and automated teller machines.
Figure 1: Financial Access of Developed and Developing Countries
Source: World Bank Financial Access (2009)
The Italians studied, with the use of a survey on their different territories. This was to better
understand the new typology of customer who could be more effectively integrated into society and
the ordinary financial system. It is also seen as a policy objective for national policymakers,
multilateral institutions, and others in the economic development field. According to Mitchell, (2003),
a developed financial system on its own cannot bring about economic growth but it can contribute to
it.

11
1.2 Objectives
The objective of the research is to assess the level of financial inclusion in the Nigerian context in
comparison to that of the UK thereby stating from findings the nature of both countries’ financial
accessibility.
1) Identify the nature of the Nigerian banking Industry.
2) Identify the Microfinance Scheme as an instrument of financial inclusion.
3) Identify various literatures on the success factors, causes of financial exclusion/inclusion.
4) Pinpoint literatures on service quality as a factor of financial inclusion.
5) Assess financial inclusion as a strategy for growth for banking institutions.
6) Using a theoretical underpinning: Porter’s diamond model to assess the competitiveness of
the Nigeria banking industry.
7) Run a test of the critical factors of financial inclusion through a survey.
8) Comparing surveys descriptively from the UK and the Nigerian banking customers.
1.3 Financial inclusion
“Financial inclusion is a state in which all people have access to appropriate, desired financial
products and services in order to manage their money effectively. It is achieved by financial literacy
and financial capability on the part of the consumer and financial access on the part of product,
services and advice suppliers” (Transact, the national forum for financial inclusion, 2007).
The effort of all institutions both financial and developmental is aimed at encouraging inclusion. The
use and access of financial services has been at the stem of study for major regulatory financial
institutions. Some developed countries report annually on the level of access of finance for economic
and social developments. Technology is gaining grounds on banking services through the use of ICT
devices. Some of the various ways of encouraging and ensuring financial inclusion is in the
circulation of deposit accounts, loans, insurance and automated electronic transfers.

12
Figure 2: Components of Financial Inclusion
Source: Karmakar K.G. 2010
1.3.1 Financial Exclusion
The exact opposite of inclusion but could also be termed in the deprivation to social, health and
educational infrastructures. Knowledge of this helps economies and firms alike to understand the
various opportunities for development. It allows policy makers to make better and accurate decisions.
Ways of which this problem can be resolved is through the assessment of affordable banking services
and free financial advice. According to the employees’ forum on disability (2007), access to finance
services like bank accounts, is a fundamental step towards the attainment of broader indicators of
social and economic inclusion.
According to Olsen (2001) financial exclusion of the poor in the UK is generally considered to mean a
lack of access to banking services. It has been interpreted as being caused by the closure of bank
branches and building society offices and thus ignores the possibility of informal-sector lending
offering a substitute for bank services in remote areas.
1.3.2 Banking the Unbanked
Banking today is seen as a means of economic advancement. The level of advance banking is seen as
a competitive edge over competitors. Various banks want to expand and dominate thereby gaining
market grounds.

13
1.3.3 Basic banking Services
The importance of basic banking services aims at reducing the cost of using banking services. Banks,
especially in developing economies have these basic services in place to encourage the access of
financial services to the public. The World Bank (2009) found that financial inclusion policies such as
offering basic accounts, transferring government payments to individual accounts, and encouraging
saving through matched and tax-advantaged savings accounts are concentrated in high-income
countries and far from widespread. When implemented in developing countries, they usually work
only if participating financial institutions see them as a viable business proposition.
1.3.4 Service quality in Finance Inclusion
According to the World Bank (2009), getting financial services to rural clients is the biggest challenge
in the quest for broad-based financial inclusion. The understanding of service quality is paramount to
attracting and retaining customers.
1.3.5 Financial Outreach
One of the main barriers to financial inclusion in rural areas is the great distances that rural residents
must travel to reach a bank branch. There are various ways with which this can be resolved. One of
which is through non-bank institutions that close the gap that commercial banks have by spreading
bank branches across areas. Other ways are through technological means like mobile and internet
banking. Banks have sort to expand their technology in the administration of automated services and
devices to broaden their reach of the unbanked sectors.
1.3.6 Non-bank Institutions for Finance Inclusion
According to the World Bank financial access (2009), lower income clients are served mainly by
nonbank financial institutions, including cooperatives, specialized state financial institutions, and
deposit- taking microfinance institutions, where average deposits are smaller. It also states that
regulated nonbank financial institutions cater to poorer clients than banks and provide smaller loans.
The importance of microfinance banks cannot be under-emphasized. These institutions are the
bankers of the poor. In some areas of the world they are funded by charitable institutions and by
government to encourage and empower the lower and under-privileged society.
1.4 Introduction to the Problem
According to Oluba, (2008), Millions of adult Nigerians do not have any kind of dealing with
financial institutions even at the community banking. The Nigerian banking survey states that more
than 53% of Nigerian adults lack access to finance. Only 3% of the adult population uses a
microfinance bank. Santiago el al., (2005 cited in Oluba, 2008) noted that the access to financial

14
services in developing countries is limited and it would be useful to provide wider access to those
services as it can be helpful to reduce the volume of currency outside the banks and also enhance the
development and use of financial products.
The Nigerian banking system has gone through various reforms. Nigeria has the fastest growing
banking system in Africa. The success of the financial sector reforms and consolidation in the banking
industry is very critical because like the UK financial system, the sector plays a catalytic role in the
economy.
According to FSA (2000), the increase in financial inclusion in the case of the United Kingdom has
been boosted by significant developments in the financial services sector which included re-regulation
of the UK financial markets; developments of information technology; and the 1990s recession.
Leyshon and Thrift, (1995 cited in Amaeshi et al., 2007) stated that these factors spurned a “flight of
quality” approach to servicing customers.
1.5 Background
1.5.1 Nigeria
According to Smith A. and Aigbe K. (2010), one of the key drivers of the Nigerian banking
performance in 2009 was the “flight of depositors”. They stated that while some banks experienced
declines in their deposit base, there was a boost in the deposit base of banks that were perceived to be
stronger.
Sanusi L. S (2010) also stated in his address of the public that one of the factors that brought about a
downturn in the Nigerian banking sector was the lack of consumer sophistication. He said that banks
failed to impose market discipline and take advantage of the consumers. Augusto O. (2005) stated that
one of the problems of the Nigerian banking sector is the failure of banks to see from the perspective
of the customers. They failed to analyze the customers need for better services and diversified
delivery channels. They also failed to ensure that banking customers can access services at lower
costs.
1.5.2 Banking
According to the National Bureau of statistics (2010), the history of banking in Nigeria dates back to
1892. Until, 1959, the banking system remained unregulated. After the consolidation reform in 2004,
today, Nigeria has a total of 25 banks operating independently but being supervised by the Central
Bank of Nigeria.

15
1.5.3 Developments of the Nigerian Banking Sector
According to CBN statistical bulletin (2007) the Nigerian banking industry has experienced an
excessive amount of growth. In 1990, the number of banks increased from 42 to 107. The number
went upwards in 1992 to 120 banks in total. At the time of 2004, this amount fell to 89 due to bad
fortunes. Today the country has 25 banks. This was shortly after the consolidation reform that
witnessed several banks either liquidating or merging with one another to survive because they
couldn’t meet the 25 billion naira capital base.
Consolidation is a term used by the central bank of Nigeria (CBN) to describe the coming together of
some banks within the country to become one bank and be able to meet CBN’s requirement for
capitalization to a minimum of 25 billion naira. After the consolidation of the banking system, it is
expected that the services rendered by the joined banks will be improved. Phillips (1997 cited in Oke.
A 2006) stated that the more capital a bank has at its disposal, the more losses it can sustain without
going bankrupt capital thus provides the measure for the time a bank has to correct for lapses, internal
weakness or negative developments. Possessing adequate capital also offers other benefits like
protecting the depositors and creditors of banks in cases of failure and also enables banks to attract
funds and to subsidize the charges on their services at lower cost. According to Oke .A (2006),
adequate capitalized banks that are well managed are better able to withstand losses and provide credit
to consumers and businesses alike throughout the business cycle including during downturns.
Adequate capital thereby helps to promote confidence in the banking system.
Consolidation of banks also helps to create opportunity for banks to carry out diversified operations.
Oke .A (2006) said that banks should diversify their services by devising creative means of offering
services. These means of offering services can also be channeled towards the unbanked areas and
thereby generating returns to the banks. In the banking bid of generating large amount of returns,
those financial institutions should not neglect their backyards.
The country is over-dependent on the oil sector which accounts for 20% of GDP, 95% of foreign
exchange earnings and about 65% of government revenue. The Nigerian nature of oil dependency has
spawned other economic distortions. It would be good that other avenues of research in the non-oil
sectors of Nigeria e.g. banking sector should be encouraged to enable future growth of the economy.
1.5.4 Unbanked areas in Nigeria
“The unbanked areas in the whole of Africa remain so due to geographical inaccessibility, lack of
infrastructure, the high cost of banking services and lack of financial understanding” (Standard
Chartered Asia, Africa and the Middle East; Guide to working capital Management 2009/10).
According to the Central Bank of Nigeria (2009), about 83.9% of the money in circulation in the
country is still outside the banking system. Banks will therefore, need to come up with innovative
ways of tapping into those market segments to mobilize the huge pool of funds that are there.

16
1.5.5 The Nigerian Micro Finance Policy, Regulatory and Supervisory
Framework
Microfinance policy in Nigeria is part of the global financial integration in the provision of tailor
made financial services to those outside the catchments of the big banks either as a result of their
income, location, literacy level or discrimination. As at 2008, 127 private investors applied for micro
finance licenses. The Central bank of Nigeria, (2009), recognized 840 micro financed banks, the
number is relatively small if compared to the population of the country where majority of the people
reside in rural areas. With the creation of the micro finance policy, the question that remains is if the
act can cause a transformation in those rural areas.
1.5.6 Overview of the Nigerian Micro Finance/Community Banking
Provision
Oluyombo (2007) made note that microfinance institutions and banks are fast becoming a household
name globally due to its acceptance as a means of reaching those people that were not served by the
conventional big banks. During the year 2008, the Corporation extended deposit insurance cover to
licensed microfinance banks (MFBs) thereby keeping with the provision of the National Deposit
Insurance Corporation (NDIC) Act No 16 of 2006. Microfinance banking was an initiative designed
to help the poor and economically vibrant Nigerians to have access to credit and reduce the level of
poverty in the country.
The specific objectives of microfinance policy are as follows:
 Make financial services accessible to a large segment of the potentially productive Nigerian
population which otherwise would have little or no access to financial services;
 Promote synergy and mainstreaming of the informal sub-sector into the national financial
system;
 Enhance service delivery by microfinance institutions to micro, small and medium
entrepreneurs;
 Contribute to rural transformation;
In terms of the spread across geo-political zones, the North central states had 101 MFBs in 2008 i.e.
13.2% of the total which was 768 at that time. Also, about 39.7% or 305 MFBs were located in the
South West geopolitical zone followed by South East with 21.6% or 166 MFBs. North East Zone had
the least with 3.9% or 30 MFBs. The South-South Zone has 14.3% or 110 MFBs and the North West
with 7.3% or 56 MFBs. This is shown below:

17
Table 1: Distribution of Microfinance Banks by Geopolitical Zones
Geo-political Zone Number of MFBs Percentage (%)
North-East 30 3.9
South-East 166 21.6
South-West 305 39.7
North-West 56 7.3
North Central 101 13.2
South-South 110 14.3
Total 768 100.0
Sources: The Nigerian Microfinance Newsletter. May 31st
, 2008.
1.5.7 Operations of Nigeria’s Microfinance/Community Banking Sector
The Microfinance Policy was launched on the 15th December, 2005 by the Central Bank of Nigeria
(CBN) to complement the banking sector reforms. According to the policy framework, MFBs were
promoted to provide financial services to the economically active poor in the society. The policy was
targeted at creating an environment of financial inclusion to boost capacity of micro, small and
medium enterprises (MSMEs) to contribute to economic growth and development through job
creation that would lead to improved standard of living and poverty reduction.
1.5.8 Problems of the Non-bank System in Nigeria
The microfinance and community institutions are faced with several issues in their attempt to be a
means of outreach to the general poor. According to the National Deposit Insurance Corporation
(2008), some of these issues are:
1.5.8.1 High Operating Cost
Here, the cost operating grew largely because of the also high cost of accommodation in urban areas
and high wage bills. This resulted in the reduction of loan able funds available to the general poor and
also to the micro, small and medium enterprises.
1.5.8.2 Lack of Microfinance Experience
The idea of micro financing was a new concept in Nigeria. Majority of the staff of MFBs did not have
requisite knowledge and skills in microfinance.
1.5.8.3 Contagion of Risk
After the failure of most community banks and finance houses, the general public is growing weary of
the micro finance banks. This caused a great problem for these banks to be able to mobilize loans.

18
1.5.8.4 Collateral Security Challenges
This is due to the problem of poor borrowing nature of Nigerians and that many microfinance banks
had not embraced the culture of the lending practice. This was also due to the slow judicial process of
settling the loan recovery process.
The Nigerian banking system is growing but at a semi fast rate when compared to other international
institutions. This is perhaps due to the limited level of exposure of its services to the public thereby
resulting to a low level of access to these facilities. Access and use of the services that banks have to
offer is one of the primary driving factors of further growth.
The main push towards this study was the curiosity to how far these services are being utilized and
what the factors are that makes them useable and appreciated.
1.6 Summary of Hypothesis
The study is based on the summaries that bank charges; economic status; financial complexity; quality
of service; financial education and income are positively related to the problem of financial exclusion.
1.7 Research Structure
The research is structured in the following format for better comprehensiveness of the study. Chapter
one is to give a general introduction to the topic by defining terms and explaining topics. Chapter two
is a capture of literatures on the topic to further validate the study. Chapter is an outline of the
methods and analytical approach of the research. Chapter four is a description of the findings. Finally,
chapter five is for the discussion, conclusions and recommendations.

19
CHAPTER TWO
2.1 LITERATURE REVIEW
Introduction
For banks to stay competitive, they must look to differentiate itself from its competitors. One of those
diverse ways is through their inclusion strategies. The importance of banks cannot be
underemphasized. The same can be said about the communities that they serve. Banks face a
challenge with the winning over, satisfaction and the retention of their customers. They are also faced
with the challenge of bringing unbanked households into the banking system and also not forgetting
their duties to their owners and shareholders. According to Nigeriatelecoms, an online magazine,
banking the unbanked will not be achieved if African Banks continue with same strategies that shut
out potential new customers base that constitute 70% of the continent’s population. Santiago et al
(2005 cited in Oluba, 2008) noted that in developing countries, access to financial services is typically
limited and therefore providing wider access to such services can aid financial and economic
development. According to the House of Commons Treasury Committee 2005/06, banking services
are central to the challenge of financial inclusion. These stress the importance of quality of services in
financial inclusion banking. Al-Hawari et al., (2005), also made it known that service quality has
received much attention because of its relationship with cost, financial performance, customer
satisfaction and retention and also with competitive advantage.
In banking worldwide, the service environment is becoming very competitive and is featured by many
demanding customers and banks are seeking various ways of getting more unreached areas. Even so,
many parts of the underdeveloped world do not share a similar view in terms of the availability of
banking services at their disposal. Africa has been at the center of attraction in terms of this. In some
areas of concern, there is the issue of long distances between communities and bank branches and also
the unavailability of cheaper banking facilities. Some of them incur some amount of cost on wanting
to have access to ATMs or other banking services. Sometimes, the issue could be that some people do
not see the need for these services and so banks have to device several means of easing off the
pressures of accessing these services. Therefore, the quality of service becomes an integral part of the
financial institutions attempt to reach the unbanked. The attitudes of banks and non-banking
institutions should be channeled towards seeing these unreached areas as a competitive edge as they
constitute a majority of the population in underdeveloped areas. There is a need to further look into
the matter of financial exclusion/inclusion, service quality and strategies that will help in customer
outreaching.

20
2.2 Financial Exclusion
According to Kendall et al., (2010), in developing countries there is an estimate of 0.9 accounts per
adult and 28% banked adults. He stated that the rise of financial inclusion as an important policy goal
is due in part to mounting evidence that access to financial products can make a positive difference in
the lives of the public. The European Commission Manuscript 2008 defines financial exclusion as a
process whereby people encounter difficulties accessing and/or using financial services and products
in the mainstream market that are appropriate to their needs and enable them to lead a normal social
life in the society in which they belong. They also stated that there is some widespread recognition
that financial exclusion can be referred to as part of a much wider social exclusion, faced by some
groups who lack access to quality essential services such as jobs, housing, education or health care.
2.2.1 Types of Financial Exclusion
Kempson and Whyley (2000), in their study, established six types of financial exclusion:
 Physical access exclusion: This, they stated, is brought about by the closure of local banks or
building societies and lack of reliable transport to reach alternatives.
 Access exclusion: This type of access is restricted through risk assessment, with people being
denied a product or service as they are perceived to be high risks.
 Condition exclusion: This is when conditions are attached to products or services thereby making
them inaccessible to some.
 Price exclusion: This occurs when products are available but at a price that is unaffordable.
 Marketing exclusion, where sales and marketing activity is targeted on some groups, or areas, at
the expense of others.
 Self exclusion, when individuals do not seek financial products and services for reasons
including fear of failure, fear of temptation or lack of awareness.
2.2.2 Causes of Financial Exclusion
According to the World Bank (2008, cited in Honohan and King, (2009), the causes of financial
exclusion were broken down into: insufficient income; discrimination; contractual/information
framework; and price and product features. In their research, Honohan and King (2009) looked to see
the reasons that none financial user give for not using financial products. He asked if it could be fixed
by the financial providers in terms of quality of service, location or relevance of product.
Kempson (2006) gave some explanations to the reasons why people are financially excluded. He said
that these reasons could vary from country to country. He stated the importance of bank required
identification and documents, the terms and conditions of bank accounts, levels of bank charges,
physical access and cultural barriers in financial inclusion.

21
2.2.2.1 Required Identification
Kempson (2006) stated that various types of people with the right means of identifying themselves
fail to meet the banks requirements to open an account. People like the homeless and unemployed.
Everywhere around the world, banks require a certain proof of identity before some kinds of services
can be offered. This was also attributed to stricter money laundering rules by Brussels (2006) stating
that it is in response to avoid terrorist attacks, with some people being unable to satisfy required
identification. Leyshon and Thrift (1995, cited in the European Commission, 2008) stated that
people with limited income and with some disabilities represent a high risk to the financial
institutions, who then avoid such geographical locations where these people reside.
2.2.2.2 Financial Liberalization and Over-complexity
Kempson et al., (2000, cited in, The European Commission 2008) gave financial liberalization as one
of the societal factors that limits financial inclusion. Shehzad and De Haan (2008) argued that
financial liberalization reduces the likelihood of financial crises. Contrary to this, it was stated in the
European Commission (2008) that financial liberalization has led to an increase in the complexity of
financial products and providers.
The liberalization of the financial system is comprised of high levels of administrations of financial
institutions, which according to Shehzad and De Haan (2008), is measured with the presence of
interest rate controls, credit controls, entry barriers, capital account restrictions and supervision of the
banking sector.
2.2.2.3 Terms and Conditions of Bank Accounts
Different banks across the world have different terms and conditions to opening accounts with them.
Such terms as amount of money to open with, the amount of minimum/maximum balance e.t.c. This
goes a long way to having an effect on the extent of financial inclusion. Kempson (2006) explained
that these different types of terms and conditions can deter or prevent people with low incomes to
open an account. Some accounts come with certain contracts that establish the rules on which the
accounts are controlled.

22
2.2.2.4 Income Inequality and Unemployment
Kempson (2006) stated that countries with low levels of income inequality tend to have lower levels
of financial exclusion, whereas high financial exclusion is found in least equal countries. In most
areas of the world, a person who is unemployed and with no source of income is most likely to be
excluded from the use of financial facilities. It is also likely that this will be due to self-exclusion.
2.2.2.5 Levels of Bank Charges
OFT (1999, cited in Wallace and Quilgars, 2005) stated that the fear of getting overdrawn and
incurring high bank charges was a major discouraging factor for many people on low or modest
incomes to obtaining an account. Kempson et al, (2000, cited in Wallace and Quilgars, 2005)
supported by saying that low income earners prefer bank services that complies with the needs of low
income households.
2.2.2.6 Lack of Physical Access
The inability to have access to certain financial services could be due to various reasons like; travel
distance, disabilities, or level of knowhow. According to Kempson (2006), it can also be caused by
bank closures which are due to the intense level of competition and economics in international
banking. The World Bank financial access (2009) stated that the main barrier to financial inclusion in
rural areas is the great distances that rural residents must travel to reach a bank branch.
2.2.2.7 Cultural Barriers
“In countries with high levels of financial exclusion, self exclusion by individuals with low or no
income is more of the reason for lack of access to banking services than direct exclusion by the banks
refusing to open accounts” (Kempson, 2006).
Help the aged (2005) noted that cultural and language barriers is one of the issues that minority
community dwellers face in accessing financial services.
2.2.2.8 Lack of effective demand for services
Sinclair et al., (2009) explained that low income means a lack of adequate demand for services. He
stated that such a lack of demand can be attributed to the failures and limitations of services from
current providers of such services. According to the House of Commons Treasury Committee
2005/06, banking services are central to the challenge of financial inclusion.

23
2.2.2.9 Lack of financial education
“A credit union also has an obligation to educate their members in effective and responsible
management of money, and credit unions offer debt and money advice to their members alongside
financial goods and services and insurance products” (Credit Unions Act 1979, cited in Commission
of Rural Communities, 2007). The absence of this will inevitably lead to an exclusion from financial
facilities and services.
2.3 Critical Success Factors of Financial Inclusion
For financial inclusion to be successful in a targeted area, there factors that need to be considered,
such factors like the customer considerations, availability of low cost services, wide spread customer
information and transparency on the part of the service providers, e.t.c. Certain sacrifices to meet
these needs also have to be made. The need for sacrifices is all due to the “flight in quality” of the
mainstream service providers. Kempson et al., (2000, cited in Sinclair et al., 2009) explained that the
financial needs of low income customers are regarded by many suppliers as uneconomic because their
needs are modest and the profit margins small.
Tagoe et al., (2006) gave several success factors as essential for a good and well conclusive inclusion
of individuals in the utilization of financial facilities and services. Having access to financial services
requires one to be well knowledgeable about the services at stake. There is a high requirement for the
availability of basic banking services.
Non-bank institutions like building societies have to be readily available as they are the bankers of
rural inhabitants. According to Tagoe et al., (2006), by increasing the availability of basic bank
accounts and increasing the capacity of credit unions to provide similar products will serve as critical
for the success of financial inclusion.
Bank branches and service points also have to be at strategic points for individuals to be able to locate
them. According to the World Bank financial access (2009), one of the main issues of financial
inclusion policies is the distance the individuals have to travel to be able to access these facilities.
Lewis (1955 cited in Nwachukwu & Odigie, 2009) noted that people would save more if saving
institutions were nearer to them than if they were farther.
Technological means like ATMs, Internet banking, debit cards and mobile banking facilities that
allow bank customers to easily reach and utilize banking can also be in place to help and encourage
people of the benefits of banking.

24
Banks can also reduce their levels of identification as some people mostly the unemployed and
homeless might not have adequate sources of proving their identity. It is also important to note that
such a bank policy should not be totally removed to ensure safety for all.
Unemployment is also a factor in financial inclusion. When one does not have an adequate and steady
source of income, there is no need to patronize banking services that encourage savings. The level of
charges that a bank offers can also be considered.
Figure 3: Financial Inclusion as a Generic Strategy
Source: Porter (1980) Generic Strategy
2.4 Financial Inclusion as a Generic Competitive Strategy
The above diagram illustrates financial inclusion policy as a generic strategy. Porter (1980) created
three generic strategies; cost leadership, differentiation and focused strategy. In financial inclusion,
the first of the strategies can be expressed through non-bank or low-cost financial institutions e.g.
Microfinance banks, community banks e.t.c. The second is the differentiation strategy i.e. by
producing services which are perceived by the customers as unique or different through quality
services or through technology enhancements. The last of them is the focus strategy which states that
an organization should target a segment or a small market; by which in financial inclusion is done
through targeting the under-developed areas or unbanked markets.
According to Hansemark & Albinsson (2004), customer satisfaction and retention is an important
aspect in banking industry as customers tend to provide a large share of the profits.
2.5 Financial Inclusion as a means of reaching the Strategic Customers
According to Johnson et al (2009), a strategic customer is one at whom the strategy is primarily
addressed to. It is good to note that the term “financial inclusion” is one usually used to address
development schemes. The opposite; “financial exclusion” is used to identify that under-developed
areas don’t have access to financial services. In market segmentation by geographic location of rural,
rural/urban and urban areas, financial inclusion stands as more effective in both the rural and rural
urban areas. Therefore, seeing these areas as opportunities is crucial for developing the appropriate
strategic capability.
Differentiation Low Cost
Focus
(Rural/Urban Poor)
Quality Service Non-bank
Institutions

25
2.6 Rural Financial Inclusion Policy as a Focus Strategy in bank
outreaching
Financial inclusion is aimed at a set of customers who, voluntarily or not, do not have access to
banking services. Porter, (1990) argues that focusing on a narrow segment or a niche of the market
will allow a firm to be better placed to meet the needs of the customers. In this case especially when
the financial exclusion could mainly be found in rural or underdeveloped areas of the world.
Figure 4: Rural Financial Inclusion Policy as a Focus Strategy in Bank
Outreaching
2.7 Financial Access
This is the ability to make use of financial services without experiencing any barriers to opening an
account or lending from financial institutions. Understanding levels of access may therefore require
insight of barriers to opening and using a bank accounts, such as cost and physical proximity of bank
service points (branches, ATMs, etc) and also accessing quality lending facilities. According to the
World Bank Financial access 2009, a very basic measurement of financial access can be derived
through the number of opened accounts across financial institutions and estimating the proportion of
the population with an account and also through the number of loans. Access to financial services is a
stepping stone towards both social and economic inclusion.
2.8 Quality Bank Service for Financial Inclusion
The European Commission Manuscript 2008 stated that financial products/services will be considered
appropriate when their provision, structure and costs do not lead the customer to encounter access
and/or use difficulties. These difficulties are caused by the characteristics of the products and the way
they are provided. The confidence that customers derive from the use and access of financial services
is one of the factors of financial inclusion. The nature of financial services and products is more of a
motivating factor of usage of such products and services than many other factors.
By differentiating, one is trying to make the quality of service provided to stand out of the ordinary.
Zineldin (1996, cited in Jama M.H 2010) said that banks need to focus on acquiring and maintaining
their market value by making sure that threats are not encountered by their competitors. All banks
Differentiation Low-Cost
Strategy
Focus Strategy
(Rural/Urban Poor)
Competitive Scope

26
have to realize that they have to maximize all possible benefits of their customers. One way of doing
this is by improving the quality of the services and products rendered. He also stated that the banks
that are likely to fail are those that don’t consider or prepare themselves to generate a competitive
spirit and to develop those differentiated strategies to make their position in the market stronger.
According to Jama M.H (2010), the main issue while looking at quality of service comes from the
economy itself and its operations. He added that the solution to the problem is to interlink more
significant factor like competitive ranking, customer relations with the quality of services.
According to Jobber (2004), making customer value the main focus of a firm enables them to attract
and to retain customer loyalty. The main objective is to provide the targeted customers with more
value added services. Once this is achieved, the firm adopts a marketing concept that takes customer
value in context. Therefore, an exemption of this method will very well lead to the path of exclusion
of financial credibility.
Yavas et al., (1997), investigated the effect of service quality on commitment. He stated that service
quality in the banking sector is an effective predictor of customer commitment. This sort of
commitment can also be interpreted as inclusiveness.
Mouawad and Kleiner (1996 cited in Al-Hawari et al., 2005), noted that it has been proposed that
customer perception and preference of service quality has a significant impact on banks success.
According to Sureshchandar G.S. et al., (2003), one way of critically evaluating the effectiveness of
banking in developing countries is through the research of the issue of quality of banking.
In the research of car servicing, Bouman and Van der Wiele’s (1992), identified three factors of
service quality in customer kindness, tangibles and faith, and stressing the importance of customer
kindness as the most important factor that creates a significant relationship.
Lewis and Soureli (2006 cited in Poolthong, Y et al., 2009), stated that certain unique characteristics
in the financial industry can affect how a customer evaluates a firms quality of service.
2.9 Success Factors of Service Quality
According to Phillip, Chang and Buzzell (1983, cited in Bolton and Drew 1991), companies have
become convinced of the strategic benefits of quality. As a result of this many literature has been
based on the measure of quality in their services. Parasuraman et al., (1988) used five factors to
measure service quality, namely: reliability, responsiveness, assurance, empathy and tangibles. This
has been the basis on which other works has been built. Sureshchandar et al. (2001) by criticizing the
above work identified five factors of service quality. These factors are:

27
2.9.1 Core service or service product
Product and service development are vital for growth of a firm or organization. “Perceived value of a
service is the customer’s overall evaluation of the utility of a product based on the perception of what
is given and what is received” (Zeithaml, 1988).
According to Gronroos (1987), most services are bundles of core, facilitating and supporting services.
In banking, the core service is the business that the bank carries out with its retail and small business
customers which is depositing and lending transactions. The level of a bank’s core performance is
measured by this.
2.9.2 Human element of service delivery
Sureshchandar et al. (2001) explains this to be all aspects that fall under the domain of the human
element i.e. reliability, responsiveness, assurance, empathy, moments of truth e.t.c. According to
Shostack, (1977), with services, each member of an organization represents the firm and defines the
product. “It is important to consider the role the employee behavior plays in the process of overall
service personality” Parasuraman et al., (1985). The human element is specifically explaining all
aspects of service that has to do with human beings. For example, according to the House of
Commons Treasury Committee 2005/06, people who do not have access to banking services are
limited to undertaking a wide range of financial transactions and those limitations are increasing as
such transactions are becoming sophisticated. Also, a customer’s assessment of the level of service
given to him is as a result of the warmly attitude that he is addressed with.
2.9.3 Systematization of service delivery: (non-human element)
According to Sureshchandar et al. (2001), this has to do with the process, procedures and the
technology that would make a service very attractive to the customers. He added by stating that
customers are always expecting their service to be at a high standard also that they be streamlined and
simplified without any hassles. Frei & Harcker (1996) made note of the importance of design and
implementation in the service delivery process. They noted that traditional studies measure the
performance of a firm by its ability to transform inputs into outputs and that they neglect the actual
way in which these inputs are transformed.
Roth and Jackson (1995) provide evidence that process, capability and execution are major drivers of
performance due to their impact on customer satisfaction and service quality. Therefore, a study of the
efficiency and quality of service organizations must focus on the role of process design and
performance. In the service delivery in the banking area, the process and technology is very important
because it can allow the firm to assess its operations and be able to make better adjustments for the
future.

28
2.9.4 Tangibles of service
According to Bitner (1990 cited in Jamal and Anastasiadou 2009) stated that customers make
inferences about the quality of service based on tangibles such as equipments, buildings and physical
layout that surrounds the environment. Wakefield and Blodgett (1999 cited in Jamal and Anastasiadou
2009) also found that the tangible aspect of a service environment was critically effective in the
response of the customers. In banking literature, Arasli et al., (2005) found that tangibles are
important indicators of customer satisfaction. Wong and Sohal (2003) said that it is the most
significant indicator of customer loyalty. Research from Wakefield and Blodgett (1999) has shown
that tangibles influence the customer’s responses such as pleasure, relaxation and feelings of
excitement. It was also found by Bang et al., (2005) that the use tangibles in advertising can help
improve the effectiveness of service advertising by reducing the amount of uncertainty involved.
2.9.5 Social responsibility
According to Zhonglei and Qigang (2008), corporate social responsibility means that the same time
that enterprises are creating profits and are being responsible to their shareholders; they should also
bear the social responsibility of their staffs, customers, community and environment. They stated the
importance of social responsibility in the quality of service when they stated that social responsibility
is subdivided into ten and products and service of sustainable development being one of them. A
banks quality of service and products owes it customers that social responsibility through quality
control and environmental protection. Amaeshi et al., (2007) noted that there are market benefits and
competitive advantage for firms whose business policy integrates corporate social responsibility.
Stafford (1996) reported seven distinct elements in bank service quality. The first one is “bank
atmosphere”: which is made up of cleanliness, as well as an overall positive and courteous attitude by
employees (kindness, friendliness, and pleasantness). The second is “relationship”: he indicated the
importance of a personal relationship with the bank employees, where customers are recognized easily
by long-term employee. The third is “rates and charges”: it indicates that low costs and high interest
rates can affect an individual's perception of bank service quality. The fourth is “available and
convenient services”: it indicates a full array of services that available, easily accessible and
convenient. The fifth element is “ATMs”: indicates available, convenient, and working automatic
teller machines. The sixth element is “reliability and honesty”: indicates the importance of a solid
bank rating and honest, reliable employee. And the seven one is “Teller”: indicates adequate and
accessible teller.
2.10 Bank Branches
Cohen et al., (2006), in their findings of customer satisfaction, wrote that the presence of bank
branches is essential for the convenience of customers. Becks et al., (2007) discovered a negative

29
relationship between barriers to banking access and bank branches. Financial inclusion entails the
access of basic services and as such bank deposits, loans, e.t.c. The deliberate expansion of these
branches, though quite costly will be one of the important measures to ensure an almost full banking
inclusion.
2.11 Automated Services
“Service organizations are increasingly utilizing advanced information and communication
technologies, such as the Internet, in hopes of improving the efficiency, cost-effectiveness, and/or
quality of their customer-facing operations. More of the contact a customer has with the firm is likely
to be with the back-office and, therefore, mediated by technology” (Froehle and Roth, 2004). They
constructed a usefulness belief model to explain that a customer will be more motivated to use a
service again when they benefit or derive value from it.
For financial inclusion to be possible to an extent there is the place of technology to aid the process. A
will find it easier using computerized and technology aided means of controlling his finances.
2.12 Quality Service as a Differentiation Strategy in bank Inclusion
According to Henry, (2008), the differentiation strategy involves the organization competing on the
basis of a service or product that is recognized by customers and they must be valued by the
customers. Differentiation strategy creates brand loyalty and it protects the organization from the use
of substitutes. Aaker et al., (1991 cited in Jamal. A 2009), said that greater customer loyalty can lead
to lower marketing cost and it is also important to brand equity, which in turn is significantly
important for creating differentiation and competitive advantage. Some financial institutions are
ranked on several criteria such as total assets, total earnings, credit and deposits. These rankings are
based on financial aspects and not on the quality of services rendered. An analysis on the service
quality aspect might give banks the details that will allow them to achieve competitive edge in
seeking new customer horizons. This supports that quality of service which is one of the ways with
which a firm can be differentiated. Banks should ensure that in administering the quality of their
services, that it be differentiated from that of its competitors to sustain competitive advantage in the
service department.

30
Figure 5: Quality Service as a Differentiation Strategy in bank Inclusion
2.13 The importance of Microfinance Institutions in Financial Inclusion
According to Conroy (2008), a lack of access to certain credit services is a constraint to many
especially the poor, a simple and direct remedy is to provide micro-loans to them. Aportela (1999)
defined increasing access of financial services to the poor as microfinance and stated that the
development of this type of institutions has been an active strategy/policy for most governments.
Microfinance is about providing financial services to the poor who are traditionally not served by the
conventional financial institutions. According to the World Bank Financial Access Survey 2009,
lower income clients are served mainly by nonbank financial institutions, including specialized state
financial institutions, and deposit- taking microfinance institutions.
2.14 Micro Finance as a Low Cost Strategy in bank outreaching
Microfinance institutions usually have a very high cost of operations due to the high level of human
intervention that is required to serve their clients. Leveraging on information and communication
technology, however, can, in the long term, significantly reduce costs of operations, which will go a
long way to ensuring sustainability. The micro finance system is characterized by three things and
they are; small amount of loans and savings provided; the absence of asset based collaterals; and the
simplicity of operations. In order for this to be possible, government has to implement some means of
generating funds that are not cost intensive. In the case of the Nigerian micro finance policy,
regulatory and supervisory framework, the government has put in place a public funded micro/rural
credit policies that is targeted at the poor.
Differentiation
(Quality Service)
Low Cost
Strategy
Focus Strategy
Competitive Advantage

31
Figure 6: Micro Finance as a Low Cost Strategy in bank outreaching
2.15 Financial Indicators of Financial Inclusion
Some monetary values can also be applied as a determinant of inclusion of the general public in the
use of bank facilities. Such values are in this position because of their meanings and what they
measure.
2.15.1 Currency in circulation to Money Supply
According to Simwaka (2006), currency in circulation can be used as an indicator of cash utilization
in two ways; i.e. share of currency in circulation in Money supply and in ratio of currency in
circulation gross domestic product (GDP) of a country. He said it is an indicator of transaction. He
stated that an increase in the currency in circulation denotes a decrease in the deposits and
subsequently available loans. The later sets have been stated by World Bank financial access (2009)
as a major indicator of financial inclusion.
2.15.2 Currency outside Banks to Money Supply
This is the amount of money that isn’t in the banking system but still going through some set of
transactions. This could be due to level financial accessibility of the public. The CBN annual report
(2008), defines this as an intermediation efficiency indicator. It stated this as an indicator reflecting
the level use of electronic forms of payment, particularly the use of ATMs and other card products as
well as improved banking habits among the public.
2.15.3 Currency Held by Banks
This is the amount of money held in the vaults of banks. A high value of this shows the amount of
deposits made by the public and the amount of loan able funds that are available.
Differentiation Low Cost Strategy
(Micro Finance
Policies)
Focus Strategy
Competitive Advantage

32
2.15.4 Total Deposits & Loans
The World Bank Financial Access (2009) stated that the best indicator for measuring access to
financial services is the number of depositors and borrowers.
2.16 Covering unbanked areas as a competitive strategy for banks
According to Amaeshi et al,. (2007), it has been widely recognized that the increasing competition
among banks is causing them to seek new, more and effective unbanked customers to compete. By so,
supporting the neoclassical economic theory that states that the low-wage/cost areas offer a higher
return on investments. The banking arena is crowded by sophisticated customers who have clear
understandings on the financial products and services. These institutions should learn to understand
the potential of the unbanked areas. These areas have not been fully integrated. One of the measures
of financial performance is the amount of deposits that a bank can muster. According to the World
Bank (2009), in underdeveloped nations, the number of deposits per adult is lower than that of
developed nations. If these underdeveloped nations can reach those without bank accounts, this will
give them some reasonable competitive edge.
2.17 Problems in delivering to the unbanked
According to Eseigbes (2010), one of the supposed issues of consolidation is efficiency challenge.
The argument has been that bigger banks might not necessarily be more efficient, since they have no
incentive to improve efficiency within the limited competitive field. Observers of Nigerian banking
have noted that the big banks (perhaps because of the increase in the number of customers) have
slipped back to their erstwhile habits before the advent of the new generation banks. According to
Morawczynski, (2009), some of the problems of delivering to the unbanked areas of Africa could be
attributed to the fact that many preferred to keep their money in circulation rather than saving their
cash.
2.18 Assessing the Nigerian Banking System
According to Kendall et al., (2010) a necessary step towards achieving an inclusive financial system is
to evaluate its status in each country.
In other to help understand the position of the Nigerian banking industry in a case global competition,
the research uses Porters Diamond model in explanation. Assessing the position of the banking
industry is useful as it will help to gain insight on the ability and power of banks in total to carry out
their functions and ensure financial inclusion is increased in the country.

33
2.18.1 Porter’s Diamond Model
Porter (1990), states that the rule of competitive advantage of nations is the outcome of four
interlinked and advanced factors. He also said that these factors can be influenced by government of a
nation in a proactive way.
2.18.1.1 The strategy, structure and rivalry of firms
Porter (1990) stated here that it is direct competition that makes firms to work for increases in
productivity and innovation. The Nigerian banking industry has gone through reforms of
consolidation. This has caused the number of banks to shrink tremendously to 25 banks in total. This
amount of banks was derived from various mergers and acquisitions of both small and big banks.
With each banks meeting the capital base minimum requirement of 25 billion naira, the strength of
each bank is now thought to be almost equaled thus depicting direct competition and making rivalry a
lot stronger. Accord to Henry, (2008), the existence of strong domestic competitors is the most
important factor for the creation of competitive advantage. Competition of banks is more or less based
on the kind of value that customers perceive. This shows where the focus of each bank is directed
towards. The strategy that each bank uses is that which will create easy banking for the customers.
Strategic alliances have also been a method of growth for the Nigeria banking industry through
various mergers of banks. According to Adelakun .A (2009), it is a form of strategy used by firms to
be formidable in the global market and for increasing market shares. For the structure of banks, the
amount of branches has also grown considerably taking for instance First Bank of Nigeria PLC; one
of West Africa’s oldest and most influential banks. It has over 400 branches and still growing.
2.18.1.2 Demand Conditions
From understanding, the high demand of customers for a particular product/service has a very direct
effect on the quality of that service. According to Porter (1990), if the customers of an economy are
very demanding, the pressures facing firms to continue to improve their competiveness will be high.
This is also in line with Porters Five forces. Porter (1990) states that where there is a high
concentration of buyers this means that the bargaining power of the buyer is high. The Nigerian
banking industry is comprised of large amount of banks all supplying an almost similar level of
services and products. The cost of switching from one bank to another is relatively low. Therefore
banks are faced with the issue of working to continuously improve their quality of services so that
they can compete with for their customers. There is an adequate amount of growth in the middle class
of the set of people that reside in the country due to the increase in the demand for loans for
establishing business and also for transactions, speculative and precautionary motives.

34
2.18.1.3 Related Supporting Industries
Unfortunately, there is a small amount of match between the Nigerian banking industry and other real
sectors like the agricultural, manufacturing, communications, mining and others in terms of
investment opportunities and volumes of business. Porter defined this to be upstream and downstream
industries that facilitates the exchange of information, innovation and ideas. According to Uzor .M
(2006) one of the issues facing the Nigerian banking industry is that reforms and micro economic
policy measures are only limited to the banking sector and do not address the real sector-linked
challenges facing banks. He also noted that without a clear vision of where the other key economic
industries are headed and how far they can go the banking industry will have a limited impact. Even
with the amount of unrelated industries in the nation, the Nigerian banking sector has seen a lot of
positive changes in the past decade, this has been both profitable to the banks and the economy in
general, there have been rapid product development in the other industries and sectors making it
viable and able to compete with other international competitors. This is because the banking industry
is constituted by a large number of other related financial institutions. Such institutions like
Microfinance Banks (MFB), Development Finance Institutions (DFI), Primary Mortgage Institutions
(PMI), .e.t.c. with the Central Bank of Nigeria (CBN) as the apex bank.
2.18.1.4 Factor Conditions
According to Okuda and Saito (2001), the bank industry just like other industries can be thought as an
organization that uses factors of production as inputs and produces final services as outputs. Major
factors of production include raised funds, physical capital, and labor. Porter (1990) made note of
more specialized factors. This he stressed cannot be by any other and are difficult to duplicate. The
Nigerian economy is one that is dominated by oil and petroleum industry. The Governor of the
Central Bank of Nigeria; Sanusi (2010), stated that due to the fiscal policies in place, the excess
liquidity from the oil sector inevitably reached the domestic banking system causing an abundant
amount of capital. Along with the banking consolidations, the banking sector can boast of the speed in
credit creation. Bank deposits and credits have grown four-fold from the year 2004 to 2009 and
banking assets increased on average of 76% per annum. The economies abundance of oil is surely a
specialized factor.
Porter further noted the role of the government in his model. He stated that they serve as a catalyst
and a pusher of firms (in this case, banks) to raise their aspirations and grow to high levels of
competitive performance. The Nigerian banking industry has the Central Bank (CBN) as its Apex
bank; one that oversees all the affairs of the country’s financial position. As a bankers bank, the CBN
has a mandate to promote monetary stability and also as an advisor to the federal government.

35
According to the Fitch Ratings (2010), the Nigerian banking industry is historically weak and it will
be beneficial to the banks compliance functions to the set regulations of the CBN be strengthened.
According to Nigeria best forum magazine, the banking system is still highly risky and very low
compared to other banks of the world. In view of the above assessment, the Nigeria banking industry
is still an infant in the banking system. There quite a lot that needs to be done to ensure the general
effectiveness of banks to reach a high standard.
Figure 7: Porter’s Diamond Model
2.19 Competitive Advantage of the banking sector
In the writings of Landeiro de Vaz, J.J. (2000), size of a banking firm represents a source of
competitive advantage. He also said that if banking firms exist through imperfections in the
functioning of financial markets, the most appropriate strategy should consist in delving more deeply
into them in order to find dominant competitive positions which would enable them to obtain
extraordinary results. The absolute size of the institutions would be the most important competitive
advantage in this sector and the economies of scale and scope would assure the results of the financial
institutions and defense of their positions in this sector. He also stated that scrutiny of resources and
an analysis of organizational capacity would prove to be a conceptual frame and the reference
argument to enhance strategic behavior and the development of depository institutions like banks.
Therefore the success of the industry should not just be focused on absolute size but also on
efficiency. All these stipulate just how attractive the banking industry should be.

36
2.20 Solutions to Financial Exclusion
2.20.1 The E-banking Solution
“The mobile phone is having a dramatic effect on the lives of Africans and is proving to be a life-
transforming device. Limited by weak physical infrastructure but supported by their ingenuity, the
people of Africa are turning to mobile phones to improve their living standards. Banks are
recognizing the potential of the unbanked and are introducing resourceful methods of bringing them
into the formal economy on the back of mobile telephone.” (Standard Chartered Asia, Africa and the
Middle East; Guide to working capital Management 2009/10). The country has been encouraging the
use of telecommunication over the years since the year 2000. The country today has more than 30
million cellular subscribers. (See Figure 8)
Figure 8: Mobile Cellular Subscription per 100 people.
Source: World Bank Database.
2.20.2 Financial Education and Community Development
According to Oluba (2006), the Nigerian government’s pursuit of poverty reduction is in line with the
Millennium Development Goals (MDGs) and the National Economic Empowerment and
Development Strategy (NEEDS) driven reform programme as a sure medium-long term strategic
approach to financial inclusion for many Nigerians. One of the ways through which the government
has been involved in the inclusion of underprivileged in the financial sector activities is through
universal basic education. According to Oluba (2006), it is clear from sufficient evidence that
education is a major determinant of earning capacity of an individual. It is also a necessary condition
for understanding and use of financial institutions and processes to ones advantage.
0
5
10
15
20
25
30
35
40
45
2001 2002 2003 2004 2005 2006 2007 2008

37
According to the House of Commons (2006), financial advice would represent a key building block in
an effective financial inclusion strategy.
“Increasing enrollment in education should therefore increasingly produce more literate Nigerians to
work in the financial institutions; to earn more through improved skills and competencies; and
increase the awareness of the use of financial institutions and its products” (Oluba 2006). The literacy
rate in Nigeria is 68% making majority of the country’s citizens relatively uneducated.
2.20.3 Subsidized Credit Approach
According to McAteer, (2008), the main cause of exclusion is income/ asset related i.e. Large groups
of consumers cannot afford financial services. The general public can therefore be reluctant to engage
in any financial transaction which could be collecting of loans, depositing and savings because of the
cost of these services. According to the Zenith Economic Quarterly (2006), the amount of NGOs
involved in microfinance activities in Nigeria have increased significantly due to the ability of the
formal sector to provide services needed by the low income groups. These NGOs are charity based
and they obtain their funds from grants, fees, interest on loans and contributions from their members.
The Neoclassical economic theory states that all economic systems will eventually reach a natural
equilibrium where forms of capital will flow from the high-wage/cost to the low-wage/cost areas.
This could also be determined by the rate of interest provided both for loans and for deposits. The
deposit rate in Nigeria has been performing rather slowly and should be taken into account as it is
very important to the level of financial inclusion. This is because the higher the rates of depositing,
the more willing people are willing to save and the lower the lending rates, the more people are
willing to loan.

38
Figure 9: Nigerian Deposit and Lending Rate
Source: World Bank Database
2.20.4 Employment Creations
In Oluba (2006), he noted that the Nigerian government’s plans and macroeconomic reforms to
initiate more employment are targeted at improving the value-adding capacity and economic
profitability of the private sector; the growth of new firms particularly the small and medium scale
enterprises; as well as outright divestiture of the public sector from ownership of businesses is
expected to create more employment and financial empowerment.
2.20.5 Consumer Protection
As more people enter the financial system and credit products become more complex, regulations to
protect consumers need to be put in place. Bank customers need to be protected from over
indebtedness due to the high rates on lending or loss of collaterals. Bank customers also need to be
informed of the financial systems and transactions. This will help to increase financial literacy and
ease the entry of new customers. One way of ensuring the good flow of customer protection is by
adhering to a disciplined and transparent financial system and this can only be done through
supervision and regulation of the system.
2.21 Conclusion
Literatures have gone as far as recognizing the various success factors of a good financially inclusive
system in an economy in bank charges, complexity, economic status, service quality e.t.c. It is now
the time to test how significant they are. Plenty of literature have tested these factors on a large scale
and with cross country comparisons. The research will intend to answer all relevant questions related
to the topic.
2001 2002 2003 2004 2005 2006 2007 2008
Deposit Rate 15.256 16.67 14.218 13.698 10.533 9.743 10.288 11.9708
Lending Rate 23.438 24.771 20.714 19.181 17.948 16.9 16.939 15.4798
0
5
10
15
20
25
30
35
40
45
Nigerian Deposit and Lending Rates:
(2001-2008)
Deposit Rate
Lending Rate

39
As the concept of financial inclusion continues to gain ground, it has become much more critical to
estimate the level of which the public are being serviced financially.
The literature review explains the factors in general and tried as much as possible to structure them
accordingly. The literature review gave a brief account of the research problem stating that the issue
of financial inclusion as a symbol of financial deepening and a sign financial development. It looked
at the nature and developments of the Nigerian banking system. It gave evidence that the
Microfinance system is a tool to banking the unbanked. It explained the system of Microfinance in
Nigeria; stating its trends and geopolitical segmentation. This is in order to give a background on the
expected system of banking in Nigeria. It defines the terms that are involved in the research like
financial inclusion/exclusion. The research stated Kempson et al (2006) causes and types of financial
exclusion. It explained service quality as one of the major factors that drives financial inclusion.
The literature review explained the concept of financial inclusion in the context of Porter (1990)’s
generic strategy of low cost, differentiation and focus. It also assessed the nature of the Nigerian
banking system using Porter (1990)’s Diamond Model.
It finally gave a brief set of solutions that can be implemented to ease the level of financial exclusion,
while giving account to Nigeria.

40
CHAPTER THREE
3.1 METHODOLOGY
Introduction
The task of actually selecting a method of research is the core of any dissertation. The chosen
methodology, when implemented needs to be able to answer the question at hand and also are in
accordance with the statement of the research.
This is an exploratory/deductive research. The objective is to measure the level of financial inclusion
in a small partial area. This chapter of the research seeks to use a mixed methodology to display the
main objectives of the research. According to Creswell et al., (2007), a mixed method research is a
research design with philosophical assumptions as well as methods of enquiry. Moon (2004) argued
for the application of mixed methodology and provides a paradigm for its defense. He stated that the
application of separate methods seeks to answer raised questions concerning the validity and
accuracy.
Bryman (2001, cited in Moon 2007) stated that the application of the two are equally informing.
Deetz (1996, cited in Krauss 2005), stated that different modes of research allows one to understand
different phenomena and for different reasons.
3.2 Research Paradigms
According to Saunders et al. (2003), a research philosophy has three main classifications; realism,
positivism and interpretivism.
According to Lythcott & Duschl, (1990, cited in Krauss 2005), qualitative research is based on a
relativistic, constructivist ontology that posits that there is no objective reality. Rather, there are
multiple realities constructed by human beings who experience a phenomenon of interest.
Positivism predominates in science and assumes that science quantitatively measures independent
facts about a single apprehensible reality. In other words, the data and its analysis are value-free and
data do not change because they are being observed. That is, researchers view the world through a
“one-way mirror” (Healy & Perry, 2000).
It is a position that holds that the goal of knowledge is simply to describe the phenomena that we
experience. The purpose of science is simply to stick to what we can observe and measure.
Knowledge of anything beyond that, a positivist would hold, as impossible (Trochim, 2000).

41
According to Healy & Perry (2000, cited in Krauss 2005) the factor that differentiates the positivists
from other researchers is that they separate themselves from the world they study.
“Interpretivism promotes the value of qualitative data in pursuit of knowledge” (Kaplan and Maxwell,
1994). Husserl (1965) stated that interpretivists believe that reality is not objectively determined but is
socially constructed.
Williams (2008) noted that it is often those who define themselves as interpretivists (as opposed to
more generic qualitative researchers) who deny the possibility of generalization. He followed by
stating that papers reporting on results of research using interpretive methods will make generalizing
statements about findings whilst not commenting upon the basis upon which such generalizations
might be justified.
He continued to say that interpretive research is similar to generalization since the later is taken in a
broad scientific sense to mean a general proposition.
The research is in place to employ a more interpretive approach of describing the state of financial
inclusion and its effects using a set of factors from an administered survey.
3.3 Research Approach
According to Saunders et al. (2003), the two approaches available for research are Inductive and
deductive approaches. The former being the invention of theory while the later is the application of
theory. This research aims at deducting theories and hypothesis in application to different scope.
The research is also administered in a qualitative form. According to Meyer et al (2003), the
qualitative approach focuses on words and feelings, the quality of an event or experience.
As a descriptive study and insight on a phenomenon, the research aims at shedding light on the
various factors of consumer behavior in access and use of financial services. The research will also
make use of quantitative values in describing the phenomena of the study, thereby making it a mixed
methodological approach.

42
3.4 Data Collection
In collection of data, the research makes use of a set of survey questionnaires to create primary data
and some secondary data from regulatory institutions. This is to validate in information and findings
that will be foundation of the research.
3.5 Data Analysis
The research is analyzed mainly with the use of questionnaire surveys. The sample size covers a large
number of people residing both in the UK and in Nigeria. The aim of the survey is an attempt to
determine the extent of financial inclusion/exclusion in both these countries for the sake of
comparison and recommendation. The results of the survey will be analyzed using statistical graphs,
charts and histograms which help in painting a vivid picture. These statistical instruments will then be
further explained with qualitative means. According to Jankowicz (2000), it will be helpful to have a
description of the sample responses followed by an indication of the existence of analytical statistical
measures.
3.5.1 Analytical Framework
From the literature review, it was seen that various critical factors have effects on the level of
financial inclusion/exclusion. Factors like income, employment, bank charges, quality services, level
of complexity, required identification, financial education, and level of physical access. This will be
administered through questionnaire survey to describe and weigh the importance and effects of these
factors to financial inclusion. The survey is also used to determine the type and extent of exclusion (if
any) that exists among these areas.
Using a survey from two distinct areas; Nigeria in comparison to the United Kingdom will be the two
sample sets. With the use of both primary and secondary data, the research aims to measure the level
of financial inclusion in these regions. The ability of the questionnaire to use comparison is in its
quality to identify easy comparators that match the two sets of population samples.
This technique of comparison might show a limited level of impact due to the differences in systems
and level of advancements in the two sets of populations. Therefore some of the indicators and factors
like household comparisons, and cultural differences might be inaccessible.

43
3.5.1.1 Measuring Financial Inclusion
The research employs various standard means of measuring financial inclusion with key indicators, in
accordance with Kaplan and Norton (1996, cited in Thompson, 2001), stating that organizations
should focus their efforts on a limited number of specific, critical performance measures which reflect
stakeholders’ key success factors. According to Kendall et al., (2010), a necessary step towards
achieving an inclusive financial system is to evaluate its status in each country. The research does this
through the analysis of set questionnaires to determine the levels of inclusion for each country.
3.5.1.2 Measuring Accessibility
According to the European Commission 2008, lack of access to a bank account can lead to additional
costs of operating a cash budget, such as bill payment or check cashing which can make a bad
financial situation became worse thereby making an individual over-indebted. In measuring the level
of accessibility the survey will try to cover factors as level of bank outreach by distance of bank
branches and accessibility to ATMs.
According to the World Bank financial access 2009, measuring the level of access in a country will
enable policy makers to be able to reach effective policies and track the progress of the their financial
institutions. It states that the first step is to start regularly collecting a set of standardized indicators for
all regulated financial institutions in a country. These indicators include the number of deposit
accounts and loans, the number of deposit clients and borrowers e.t.c. Among these the research also
employs the use of other indicators that measure various levels of financial deepening in a country.
3.5.1.3 Measuring Quality Bank Service
In measuring the level of service of banking, the research looks at factors used by Parasuraman et al.,
(1988) namely: reliability, responsiveness, empathy and assurance. This will be determined with the
use of the survey questionnaires. The purpose of this is to validate the place of quality service in
including individuals in the banking system.
3.6 Justification of UK in the survey
The UK economy is the sixth largest in the world. The service sector is 76.2% of the GDP. The UK
companies operating in the financial services market are noted for deploying generic marketing
strategies, particularly the Big 4 retail banks. There has been a large amount of enquiry into the level
of financial exclusion in the UK.
According to the Financial Times (2010), UK banking has experienced some improvements owing to
the reduction in loan impairment charges and to retail and commercial business. A country of
dynamism should be symbolic for comparison to a lesser state of economic level and also for the
purpose of research.

A Comparative Analysis of Financial Inclusion A Study of Nigeria and the UK.pdf

A Comparative Analysis of Financial Inclusion A Study of Nigeria and the UK.pdf

Recommended

Recommended

More Related Content

Similar to A Comparative Analysis of Financial Inclusion A Study of Nigeria and the UK.pdf

Similar to A Comparative Analysis of Financial Inclusion A Study of Nigeria and the UK.pdf (20)

More from Sophia Diaz

More from Sophia Diaz (20)

Recently uploaded

Recently uploaded (20)

A Comparative Analysis of Financial Inclusion A Study of Nigeria and the UK.pdf