Enhanced Financial Intermediation: A Vital Tool for Realizing Tinubu’s N1 Trillion Economic Ambitions

The pursuit of revitalizing the Nigerian economy and propelling it towards the ambitious $1 trillion GDP target, spearheaded by the Tinubu administration, undoubtedly hinges on attracting substantial local and foreign investments. Achieving this aspiration necessitates a profound transformation of the financial intermediation landscape within the country.

At present, Nigeria’s banking industry appears ill-equipped to furnish the necessary capital to fulfill the nation’s investment demands. According to information provided by the Center for the Promotion of Private Enterprise (CPPE), the banking sector’s credit extended to the private sector in Nigeria stood at a mere 20.6% of the nation’s GDP as of 2022. Comparatively, sub-Saharan Africa averaged 28%, while the global average was a staggering 145%.

This data highlights a significant gap between the financing capabilities of the Nigerian banking system and the burgeoning investment community, particularly the small businesses that constitute approximately 50% of the nation’s GDP. Remarkably, these small businesses have access to only about 1% of the total credit available in the banking system, indicating a substantial disconnect between the banking sector and the small-scale entrepreneurs who form the economic bedrock.

Dr. Jumoke Oduwole, the Special Advisor to President Bola Tinubu on PEBEC and Investment, underscores the importance of addressing this issue. She points out that Nigeria is home to approximately 39.7 million Micro, Small, and Medium Enterprises (MSMEs), representing around 96% of all businesses and accounting for 88% of jobs. The financing gap for these small businesses is estimated to be over N600 billion.

Responding to the potential impact of providing sufficient capital to Nigeria’s investors, Moses Igbrude, President of the Independent Shareholders Association of Nigeria, envisions a substantial enhancement of wealth creation, job opportunities, and business expansion. He notes that this scenario mirrors the growth trajectory witnessed in countries like India, China, and other Asian nations. However, he cautions that the high cost of finance should not be solely attributed to financial institutions. Instead, the systemic issues in credit provision and returns should be addressed.

Deepening financial intermediation forms a pivotal facet of economic development, capable of enhancing the nation’s resilience against economic shocks, fostering inclusive growth, and ushering in a more stable and prosperous future for its citizens. Financial intermediation revolves around the process of channeling funds from savers and investors to those seeking capital for various economic activities, a role predominantly shouldered by financial institutions such as banks, insurance companies, and microfinance institutions.

Expanding financial intermediation translates into a more efficient, accessible, and inclusive financial services ecosystem, ultimately improving resource allocation and reducing economic vulnerability. Several compelling reasons advocate for Nigeria to embrace this transformation, with enhanced access to capital being a primary driver.

Dr. Felix Echekoba, a financial economist at Nnamdi Azikiwe University, underscores the potential of deepening financial intermediation to broaden access to capital, especially for SMEs and individuals. SMEs constitute the backbone of the economy and stand to thrive with improved access to affordable credit and financial services. He also notes that this transformation can bolster Nigeria’s resilience to economic shocks and fluctuations, thereby promoting stability.

Dr. David Olaleye, a retired economics lecturer, highlights the potential of deepening financial intermediation in promoting inclusive growth. A more inclusive financial system can reduce income inequality and foster equitable growth by granting marginalized groups and regions access to financial services. This inclusive participation can drive balanced development and lead to job creation, particularly in the fintech and banking sectors, as emphasized by Moses Igbrude.

Moreover, deeper financial intermediation encourages higher levels of investment and savings, both critical for sustained economic growth. When individuals and businesses have confidence in the financial system, they are more likely to save and invest, contributing to long-term economic development.

A robust and diversified financial system can also play a pivotal role in infrastructure development by providing the necessary capital for building and maintaining vital infrastructure such as roads, ports, and energy facilities. Dr. Muda Yusuf, the CEO of CPPE, emphasizes the importance of deepening the financial intermediation role of deposit money banks, which constitutes their primary function in an economy. He stresses that the financial conditions for the private sector remain challenging due to limited access and high credit costs. Rectifying this anomaly necessitates strengthening the collaboration between the banking system and economic players, particularly MSMEs.

Key metrics for assessing the depth of the financial system include the ratio of financial assets to GDP, the ratio of deposit liabilities to GDP, and the ratio of the money supply to GDP. Nigeria’s rating on these ratios remains relatively low compared to other emerging economies, underscoring the critical need to deepen the financial system to enhance stability.

Efforts to reduce the ratio of non-interest income as a percentage of banks’ income are crucial to rectify the failure of financial intermediation in the economy. The banking industry’s core function is financial intermediation, and allowing non-banking activities to crowd out this function hinders economic growth. Additionally, the substantial spread between deposit and lending rates in the Nigerian banking system, exceeding 20%, indicates significant efficiency issues. High spreads deter investment growth and disincentivize savings, emphasizing the need for systemic improvements.

In summary, the quest to revitalize the Nigerian economy and elevate it to a $1 trillion GDP requires a robust and deeply interconnected financial intermediation ecosystem. This transformation can enhance access to capital, promote inclusive growth, reduce income inequality, create job opportunities, encourage higher savings and investment, and support infrastructure development. Recognizing the significance of deepening financial intermediation is a crucial step towards achieving Nigeria’s economic ambitions.