Introduction

Access to affordable and effective financial products remain out of reach to most Nigerians, despite the active role the Central Bank played in promoting rural branches and cooperative banks. Since the Central Bank's nationalization in 1969, conflicting bank policies have tried to promote new types of banking services, while at the same time placing stringent restrictions on others. For traditional checking and savings accounts, minimum account balances remained so high that individuals were unable to access basic transaction accounts. Combined with the nation-wide tendency to prefer cash for day-to-day transactions and the rapid inflation of the 1980's, many Nigerians did not view banks as an effective player in their commercial activities. In addition, Nigerian and foreign owned banks were limited in their ability to provide affordable financial services. As the Central Bank gradually deregulated the banking industry beginning in 1986, the few commercial banks in rural areas began to close as banks no longer supported unprofitable branches, even as the total number of commercial banks in the country doubled. While deregulation made commercial accounts inaccessible to most Nigerians, the Nigerian Central Bank began to pursue other financial services delivery methods, such as mutual savings and loan association.

For many Nigerians, access to even a small amount of credit can make a considerable difference in their ability to earn a self-reliant income. Throughout the process of financial deregulation and modernization, the government and Central Bank of Nigeria have developed a number of financial services provisions to target these small scale industries and local operators to encourage self-sufficiency and promote main-stream financial transactions.

• Until 1998, the Nigerian Central Bank limited the ability of foreign and domestic commercial banks to open checking or savings accounts for individual depositors. Commercial accounts were required to maintain balances of N50,000, or about US$370, limiting their customer base.



• In 1988, the Nigerian banking system consisted of the Nigerian Central Bank, 42 commercial banks and 24 merchant banks, with a total of 1,000 branches. Most of these branches were located in major urban areas, limiting rural and low-income areas' access to the private market financial mainstream.

Initial Government Responses to Lack of Banking Services

• Community development finance issues in Nigeria primarily stem from policy decisions made by the Nigerian Central Bank.



• The Rural Banking Scheme was developed by the Central Bank in 1977 with the goal of achieving one bank branch in each of Nigeria's 774 Local Government Areas. This goal was met in 1991. Each of these branches serves about 127,000 people.



• The People's Bank was established in 1989 to provide access to credit for low-income families, farmers, and craftsmen. This community development finance initiative was relatively unsuccessful and was criticized as being too dependent on government subsidies. The initiative was unable to recover many of its loans and was facing severe decapitalization when it was replaced by the Community Banks Program in 1990.

The Invention of Community Banks

• Community banks were designed around the informal mutual savings and loan associations operating in rural areas. Organized by the government sponsored National Board of Community Banks (NBCB), these financial institutions are meant to be self-sustaining and managed by communities to provide credit and deposit banking facilities. The NBCB is responsible for chartering and examining the Com-munity banks for sound operation.



• Community banks have been successful in providing financial services to those people most likely to be left out of the financial mainstream. These banks use the strong local networks present in many rural areas of Nigeria and community bank boards are generally drawn from respected leaders within the community.



• However, community banks have a number of shortcomings. The instability in the com-mercial banking system, in which many community banks place their funds, has had a chilling effect on community banks capacity to lend. In order to maintain sound opera-tions they have only been able to make short-term investments, limiting the wealth creation potential of their members. In ad-dition, community banks have had limited success in urban areas, where the general sense of community ownership is not as strong.

Small Business Lending-The Small and Medium Industries Equity Investment Scheme

• Urban areas, however, have benefited from the Small and Medium Industries Equity Investment Scheme (SMIEIS). This volun-tary scheme developed by the Banker's Committee at the request of Nigerian President Obasanjo, was designed to replace many of the unsuccessful government small business development programs.



• Beginning in 2001, all Nigerian banks are required to set aside 10 percent of their before-tax profits and invest these funds in small and medium enterprises. Qualified businesses must have less than N200 million in assets and between 10 and 300 employees. Investments have a term limit of three years.



• Between 2001 and 2003, the SMIEIS set aside N13.07 billion (US$98.3 million), of which only N2.87 billion (US$21.6 million) has been invested in qualified projects. Nearly all of these projects were in the service sector, and nearly all of them located in urban areas. Given the overall lack of interest in the SMIEIS, banks have been slow to respond to demands for increased investments and simply set aside the required amount on their balance sheets without pursuing qualified investments in good faith. The Central Bank has taken a leading role in encouraging future SMIEIS participation.



• Going forward, both the Nigerian Central Bank and the Banker's Committee have suggested mechanisms for improving the investment rate of the SMIEIS program. However, limiting the percentage of invest-ments going to the service sector and requiring investments in certain NGO's has not proved effective.

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