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PSB As CBN’s New Strategy To Connect Informal Sector

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The Central Bank of Nigeria (CBN) recently released an exposure draft guideline on the licencing and regulation of Payment Service Bank (PSB) as part of efforts at increasing the level of financial inclusion in the country. BUKOLA IDOWU looks at issues arising from the expected licencing.

Nigeria plans to achieve at least 80 per cent financial inclusion in the next two years, although, statistics show that the level of penetration of financial services is still low despite the various initiatives that has been put in place. In ensuring that the target is achieved, the Central Bank of Nigeria (CBN) and the Bankers Committee had recently commenced the Shared Agent Network Expansion Program (SANEP) which looks at mobilising 500,000 agents that will ensure that not less than 40 million individuals from all around the states are included in the nation’s financial sector in the next two years.

What is Financial Inclusion?
CBN in its National Financial Inclusion Strategy launched six years ago defines financial inclusion as when adult Nigerians have easy access to a broad range of formal financial services that meet their needs at an affordable cost. These services may include payments, savings, loans, insurance, and pension products. The Apex banks stated that in 2010, 46.3 per cent of adults were unbanked, hence CBN outlined a strategy under its National Financial Inclusion Strategy to bring the figure of unbanked adults down to 20 per cent in 2020.
According to the chairman of board of Enhancing Financial Innovation and Access (EFINA) , Mr Segun Akerele, about 41 million Nigerians were financially excluded with the bulk of it coming from the north- west, north- east and north -central.
He noted that this formed the basis of targeting the areas that were yet to feel the impact of financial services. “In Nigeria today, we have 41 million people that are excluded and we have a target of 20 per cent exclusion by 2020” he said.

PSB To The Rescue
Early this month, CBN published an exposure guideline that would allow for the establishment of Payment Service Bank (PSB) designed to serve the simple financial service needs of rural areas with the use of technology.
The CBN said the decision to licence PSBs followed several study tours of other jurisdictions that have made significant progress in driving financial inclusion that it conducted in collaboration with the Nigerian Communications Commission (NCC), banks, mobile money operators (MMOs) and telecommunications operating companies (Telcos), stating that PSBs are expected to leverage on mobile and digital services to enhance financial inclusion and stimulate economic activities at the grassroots through the provision of financial services.
According to CBN’s director, Financial Policy and Regulation department, Kevin Amugo letter to banks, telecommunications companies, mobile money operators, banking agents and the Nigerian Communication Commission (NCC) the introduction of PSBs into the financial system was part of efforts at promoting financial inclusion and enhance access to financial services for low income earners and unbanked segments of the society through leveraging on technology.
Amugo in the letter said in view of the challenges to effective outreach to rural communities as well as the need to complement the services provide by other licenced entities, the CBN issued this draft regulation to provide for the licencing and operations of PSBs in Nigeria.

Leveraging Technology
PSBs are expected to leverage on mobile and digital services to enhance financial inclusion and stimulate economic activities at the grassroots through the provision of financial services. PSBs will also enable high volume low value transactions in remittances services, micro savings and withdrawal services in a secured technology driven environment.
They are envisioned to facilitate high volume low value transactions in remittance services, micro savings and withdrawal services in secured technology driven environment to further deepen financial inclusion and help in attaining the policy of 20 per cent exclusion rate by 2020.
Basically its target market in the rural areas is small businesses and low income households. The structure of the PSBs according to the guideline is such that they can only take deposits and do withdrawals, operate electronic purse, use the deposited funds to trade in federal government securities and issue payment cards.
These would be all that they would be allowed to do as they would not be able to process payments from outside the country, deal in foreign exchange or grant loans.
PSBs asides from their basic functions would also be allowed to establish automated teller machines (ATMs) in the areas they operate, be at liberty to operate through banking agents, use other channels including electronic channels to reach out to its customers, establish coordination centers in clusters of outlets to superintend and control the activities of the various access points and banking agents.

Draft Guidelines
The draft guidelines provide that the founders of a PSB be Banking Agents, Telecommunication Companies (Telcos) through a subsidiary, Retail Chains such as supermarkets, and Mobile Money Operators (MMO). It also stipulates that the paid-up share capital of the PSB shall be N5 billion, but the bank will not be allowed to grant loans, advances, guarantees or underwrite insurances.
Analysts and operators in the payment space have called for non-bank-led mobile money system to tap into the database of the telecommunications industry in achieving financial inclusion, but some have differed on some parts of the guideline.

Stakeholders Reaction
One of such is the minimum capital base which was set at N5 billion. Omuli Iwere, legal practitioner believes the minimum capital is one that will restrict the participation of some who would have seeked the licence. According to him, the minimum paid-up share capital requirement has to be reduced significantly for a wider range of promoters to get involved. He explained that many of the financial technology companies that would have applied for the licence would find it difficult to source N5 billion as many of them are startups.
“Also, the use of the word bank makes the framework undesirable when compared to other existing bank structures. I believe that if it must remain a bank, then the PSB should be permitted to give out loan facilities in order to justify the proposed minimum paid-up share capital of N5 billion. Otherwise, what would be the yard stick for such minimum paid-up share capital when the funds saved in the e-wallets and bank accounts can only be transferred on the request of the account holder? One may highlight the issue of liquidation of the PSB as a concern, but is that not what the Nigerian Deposit Insurance Corporation (NDIC) caters for?”

Currently, there are three categories of banks in Nigeria, namely; Commercial, Merchant, and Specialised Banks. The hierarchy of these banks are determined by their paid-up share capital requirements. The requirement for Commercial Banks are N10 billion, N25 billion, and N50 billion depending on the class; Merchant Banks require N15 billion and Specialised Banks which includes Microfinance Banks, Mortgage Banks, Non-Interest Banks and Investment and Development Banks, have varying paid- up share capital requirements which begins from N20 million to N100 million. The capital base of MFBs were recently raised to N200 million and N5 billion respectively. Iwere noted that “it is rather strange that the PSB is the only bank wherein the exact field of the promoters have been stipulated in the guidelines. All other banks can be founded by individuals or companies from any sector. Why then did the CBN feel the need to restrict the founders of a PSB to Bank Agents, MMO, Retail Supermarket and Telcos? Is this because their expertise is necessary for the operation of a PSB? Since the PSB is technology driven and all four proposed founders are involved in promoting the sales of products via technology, I am inclined to agree that they have the requisite experience, however, it will be a struggle for an MMO or a Bank Agent to raise the N5 billion paid-up share capital as proposed by the CBN as these are largely start-up companies.
“So, in anticipation of additional revenue from bank card charges, card maintenance fees, and transaction charges (which the MMO and Bank Agents already share with Commercial Banks), the MMO and Bank Agents are required to maintain a minimum paid-up capital of N5 billion.

“Big Retail Supermarkets such as Shoprite, and the Telcos will likely be able to raise and maintain the required paid-up capital, however, what are the odds of the retail supermarkets moving to rural areas in Nigeria away from their strategic market? It is obvious that this is only a no-brainer for the Telcos, as their business already takes them to rural areas to provide telecommunication services to people in the rural areas” he stated. Bunmi Lawson, director at Enhancing Financial Innovation and Access (EfiNA) who applauded the move noted that a similar structure currently runs in India with over 25 PSBs operating in the country. Stating that as the guideline is an exposure draft, she said some issues have so far been raise and the comments sent to the CBN for review. One of the issues she said is the fact the PSB have a vastly limited permissible investment sources. According to the guideline, PSBs are only allowed to invest in government bonds and Treasury Bills. This, she said only makes the PSBs collection points of funds from the rural areas to be put into government securities. Lawson noted that the PSBs should be allowed to invest in other areas other than government securities. “They should be allowed to invest in areas such as microfinance banks which will put the funds back into the rural areas through loabs and advances.” While not perturbed with the no granting of loans structure as contained in the guideline, she said the job of lending to the rural and low income economy should be left to the MFBs. “With the increased capital base of the MFBs, they will have more capacity to perform their role of lending to the rural areas.”

Serving Bottom of the Pyramid
Speaking on the PSB, CBN Director, Banking and Payment System department ‘Dipo Fatokun noted that the whole essence of coming up with the guideline for licensing PSBs “is to create banks that can serve the need of the people at the bottom of the pyramid especially people at the rural areas. “When you add our guideline on super agents to the guideline on PSB you will see that sooner than later all nooks and crannies, all corners of this country will be covered by providers of financial services agents which is already happening. If you drive on the streets even in rural areas you can see ‘do your banking transactions here’, “you can pay into any bank here’, which was not there many years ago. The management of the CBN decided that the super agents are the way to go and working with the bankers committee, there is a programme now called Shared Agent Network Expansion Program (SANEP) and the number of agents are growing and instead of people going to queue at ATMs or going to queue at other locations, you can just walk to an agent and you get your transactions done.”



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