News Column

Promoting Access to Finance

May 14, 2014

Obinna Chima

The introduction of the tiered Know-Your-Customer regime for potential bank customers will drive the country's quest for improved access to finance.

In most developing countries, large population of low income earners has little access to financial services.

As a result of this, many of them have to always depend either on their own or informal sources of finance and generally at an unreasonably high cost. More so, some have argued that financial inclusion seems to be geographically limited, saying that there is huge concentration of banks in some parts of the country.

Available statistics indicate that about 64.1 per cent of adult Nigerians (56.3 million) do not have access to financial services. Various factors account for the high level of financial exclusion.

These include irregular income, distance and low level of bank branches and cumbersome account opening requirements/procedures.

Indeed, the enforcement of full account opening procedures often excludes some segments of the population from financial services. This keeps them out of the formal economy and indirectly promotes the informal sector. This is particularly so among the lower income earners, poor and socially disadvantaged segments of the population, majority of who live in the rural areas.

It is trite to state that in Nigeria, many people lack formal means of identification. Even when they want to obtain such, the procedures to acquire them are too cumbersome and expensive, effectively out of their financial means. This inadvertently makes financial services go beyond the poor.

Therefore, the Central Bank of Nigeria (CBN) reckoned that in order to continue to maintain same level of Know-Your-Customer (KYC) requirements for all segments of the population, as hitherto required, encourages prevalence of informal financial systems which in turn undermines its anti-money laundering/combating of financing terrorism (AML/CFT) objective.

Consequently, in furtherance of its objective of enhancing financial inclusion and access to finance, the CBN developed the tiered KYC requirements for compliance by banks and other financial institutions under its regulatory purview.

The 'tiered' KYC requirements regime ensures application of flexible account opening requirement for low-value and medium value accounts and these are subjects to caps and restrictions as the amount of transactions increases. This means that account opening requirements will increase progressively with less restrictions on operations.

However, the main objective of the proposed approach is to promote and deepen financial inclusion.

Structure The structure of the tiered KYC approach ensures that the accounts remain attractive to customers of different socio-economic levels while close watch is kept on the risk-involved.

For instance, for low-value accounts, they are subject to close monitoring by the financial institutions and with less scrutiny by bank examiners. This form of accounts can be opened at branches of financial institutions by prospective customers or through banking agents and requires no amount for account opening.

Such accounts also cover mobile banking products, the central bank further stipulated.

On the other hand, medium value accounts can be opened face to face at any branch of a bank by agents for enterprises or by the account holder. Evidence of basic customer information is required at this level. Identity verification and monitoring by financial institutions are also required. These forms of accounts are strictly savings and no amount is required for opening the account.

For the third tier which is for high-value accounts, banks are required to obtain, verify and maintain copies of all the required documents for opening the accounts. The account is to be opened at the bank branches by physical presence of the prospective customer. This type of accounts could be savings and current and no amount is required for its opening.

From the very beginning of the banking profession, "knowing your customer" (KYC) has been the essence of good banking. Understanding as much as possible about borrowers has been essential to higher revenues, lower losses and better returns on capital.

From the very beginning of the banking profession, "knowing your customer" (KYC) has been the essence of good banking. Understanding as much as possible about borrowers has been essential to higher revenues, lower losses and better.

It is important to note that maximum deposits nd branches are specified only for the low-value and medium-value categories of accounts. Incompliance with and in the spirit of the CBN monetary policy and financial inclusion, there shall be no minimum opening amount for accounts in all the levels.

In addition to the proposed limits and caps, the additional safeguards to further reduce the risk of money laundering and financing of terrorism include account monitoring by financial institutions for suspicious transactions. To this end, financial institutions are among other things, required to report to the Nigerian Financial Intelligence Unit (NFIU) and suspicious transactions.

Access to Finance To a former Deputy Governor of the CBN, Mr. Tunde Lemo, the tiered KYC is all about financial inclusion. He explained that the KYC requirements were made in such a way to reduce the incidence of identity fraud.

According to him, "the requirements are such that if you don't cascade it down and simplify it as the financial requirements becomes less, you will automatically rule out a large segment of Nigerians from the system.

"I want to give you an example. If as a customer of bank X, transacts business in hundreds of thousands and millions of naira, of course you will want to make sure that you have my international passport, you want to make sure that the identification that I have are robust enough to ensure that somebody doesn't show up tomorrow and grab a cheque issued in the name of Tunde Lemo, goes and open an account and present himself as Tunde Lemo.

"But the requirements need not be as rigorous for transactions that are just N500, N1, 000 and N2, 000. So as you go down the prosperity ladder, you simplify it such that at every point in time, you will have sufficient information required by every segment of customers, depending on where they are on the transaction ladder."

So, he explained further that the tiered KYC requirements were fashioned out to ensure that those who otherwise would not be qualified for an account relationship on account of the rigor associated with the detailed KYC requirements of the past are also given opportunity to open account and transact business to the extent of the amount of business that they do.

He had pointed out that the central bank made it as low as N20, 000, so as to ensure that virtually everybody, whether in the city or wherever have the opportunity to be integrated into the financial system.

On his part, the Deputy Managing Director, Diamond Bank Plc, Mr. Uzoma Dozie stressed the need to continue drive policies to enhance access to finance in order to support economic growth.

"There is need to focus more on financial inclusion and also to provide the enabling environment for small businesses to thrive. What we found out is that a lot of business starts, but they falter after some years.

"There is need for greater collaboration between the central bank and the federal government and agencies such as the Federal Inland Revenue and the legal system, to reduce the burden of financial inclusion in the society because the more people we have included in the financial system, the better the effect of monetary policy transmission," he said.

While noting that there is a lot of cash moving around in the system, he argued that such a situation affects smooth implementation of monetary policy.

Continuing, the central bank noted that the tiered KYC requirements regime envisages the use of banks' agents and mobile banking portals to reach a wider segment of the society that otherwise have no access to financial services.

Therefore, while the central bank continues to drive the enforcement of the policy, it is believed that it would have positive impact in the financial markets by making account opening and operation more attractive to the masses in view of its simplified requirements.

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Source: AllAfrica