Imagine it was your birthday, and your friends and family got together to gift you N200,000 in cash. Let’s say the gift money came in mostly N100 and N200 notes. Obviously you’d be going home with several bundles of cash and for safety/security reasons, you’d probably buy or borrow a bagpack. If anything happened to that bag, all that money would be at risk.
So there you are, ready to leave the party with your bag of cash and then a long time, trustworthy friend walks up to you and says, “You can leave this money with me, I’ll keep it safe. And whenever you need it, just let me know. Either you come to my office or you give me a call and I’ll make sure the money is available whenever and wherever you need it.”
That would be more convenient for you, right?
Well, what your friend just offered you is a financial service.
Financial services refer to activities carried out by third parties to help with the investment, transfer and management of money for both people and organisations. They include banking, savings and payments, investments, insurance, pensions, lending, and many more.
Basically, if we didn’t have financial services, we’d all be lugging around bags of cash everywhere and everyday which would be quite a hassle (not to mention dangerous!).
The different people and organisations helping others send/transfer money, invest and manage their money in safe and secure ways is known as the financial service sector. These organisations include banks, pension fund administrators, lenders, finance companies, real estate brokers, insurance companies etc.
Consumer Financial Services
Arguably, the most popular financial service is banking. But there are several financial services beyond the bank. In this article, we will do an overview of the financial service landscape in Nigeria highlighting the diverse financial services available and describe the nature of services they provide.
Financial service: Banking and payment services
In our opening example, your friend is basically offering you banking services.
Provider: Banks, mobile money operators (MMOs), fintechs.
In Nigeria, banking and payments services are regulated by the Central Bank of Nigeria.
Deposits: the money kept or held in any bank or mobile money account. Licensed providers are safer than non-licensed ones because being licensed means the institution has passed all the requirements demanded by the CBN.
Save and earn interest: Saving with a licensed provider often means you can earn interest on your savings. Different institutions offer their customers different types of savings accounts and interests. Interest on a savings account is the amount of money the bank or MMO pays you for storing your money with their institution over a period of time.
Loans: banks can offer you loans. A loan is an amount of money given to you under agreement that the money will be repaid (usually with interest) at a particular day/time.
Make payments: A payment is when you give a person or organisation money in exchange for a good or service. Because Nigeria is still a cash economy, typical, everyday payments are done via cash. Banks used to exclusively facilitate big sum and long distance payments until the advent of digital technologies. Today, we have innovative financial technology companies like mobile money operators, payment service banks, telcos and other payment providers, with the capability to facilitate large sum and long distance transfers, almost instantly, making it easy for everyday Nigerians to send money to anyone, anywhere at affordable rates.
One day you’re going to get old and unable to work. But right now, you’re in the prime of life and your earning power is yet to peak. A pension is basically you thinking about your future, when you are unable to work and your earning power has dumped.
A pension is a fund into which a sum of money is added over the course of an employee’s employment years and from which periodic payments can be drawn to support the person during their retirement years. These periodic payments are drawn from what is called a ‘pension fund’.
A pension fund requires consistent contributions over a worker’s active years, either by the employer, the employee, or sometimes both. The contributions are a percentage of the person’s salary (at least 7.5%) and should occur monthly.
For example, if your salary is N100,000 a month, your employer will make a monthly contribution of at least N7,500 every month into your pension account (can be more, if your employer so desires). You are also expected to make a similar payment of at least 7.5% into the pension fund every month.
Over several years, those contributions add up!
In previous years, pensions were mostly for employees in the formal sector. However, with the Pension Reform Act (PRA) 2014, it has been expanded to cover the informal sector, particularly self-employed citizens and persons working in organisations with less than 3 employees.
To understand insurance, we will return to our original example of your birthday gift of N200,000. So your birthday is over and you decided to buy a brand new bicycle worth N90,000. That’s quite an expense! A N90,000 bike would make you the envy of your friends. However, life happens and the bike could get run over and damaged by a careless driver. Or it could get stolen (like your neighbour’s son’s bike which was stolen last week!).
There are many possibilities.
So, let’s say you call up another friend to narrate your new bicycle worries. Then, he tells you the weirdest thing – he says he’s ready to give you the money to fix the bike if it ever gets damaged by a careless driver. But he has a condition… you will have to pay him N2,000 every month henceforth, regardless of if the bike gets damaged or not.
Hmmm! You think about it. N2,000 doesnt sound too bad. But you’re still worried about thieves. It’s like your friend read your mind because he then says, “If you make it N3,500 monthly, I’ll help you get another bike if this one gets stolen. Either way, you’re covered.”
Boom! You’re sold on the offer.
Insurance is a contract that allows you to receive financial protection or reimbursement from an insurance company against losses. Because your friend (the insurance company) will be receiving monthly payments from other people who are also scared of losing their bicycles (for example) your friend is able to make individual monthly payments more affordable for you.
You can insure almost anything – your house, your vehicles, your business, even your health and ability to do work. In 2007, American actress America Ferra had her smile, teeth and gums insured for $10 million (yes, seriously).
The insurance industry in Nigeria is regulated by National Insurance Commission (NAICOM).
Financial services are essential to the efficient operation of modern society. This is because the financial services industry helps us keep our money safe, and gives us unprecedented and convenient access to funds whenever we need it via tools and innovative technologies, all at reasonable costs. As the world gets more complex and technology becomes more integrated into our daily activities, saving, spending and moving money around will be transformed in incredible ways and financial services will become as essential as ever.