S&P Global Ratings thinks financial technology (fintech) will close the gap of financial exclusion and literacy in the next five years in Nigeria, where roughly 50% of the population is formally banked and the financial exclusion rate (measuring those without a bank account) is nearly 40%. The country's citizens are among early adopters of cryptocurrency as their preferred payment and savings vehicles. According to Chainalysis, Nigerian wallets received nearly $60 billion of cryptocurrencies in 2022 (12% of GDP), a staggering amount compared to annual remittances of about $22 billion. To clamp down on capital outflows given a U.S dollar scarcity, the CBN banned banking sector cryptocurrency transactions and in 2021 introduced the e-naira, the first CBDC by an African central bank, but with limited uptake. More recently, the government introduced a 10% tax on cryptocurrency gains and issued regulation for digital assets and recognized the potential of blockchain to transform Nigeria's economy.

Nevertheless, the strategic shift to digital banking accelerated Nigerian banks' scale and supported profitability through volatile economic cycles. Commercial banks, while being kept out of cryptocurrency transactions, have made steadfast progress in deepening their reach and offering new products and services to foster financial inclusion.

With 70% of the population younger than 30, Nigeria's demographics, entrepreneurial spirit, and nascent digital ecosystem are great catalysts for growth if the population can benefit from access to improved technology infrastructure. While mobile penetration is high, at close to 100% in 2023, only half the population has broadband access and about a third a smartphone. Furthermore, the number of mobile money accounts is still lower than in countries such as Ghana and Kenya. Mobile data is comparatively affordable, although it has become more expensive because of high inflation but less competitive than in countries that have deployed advanced technology. However, the main telecom companies are rolling out their 5G networks, which in turn should bring down the data costs and reduce latency for data-intensive services and applications.

Our TRIP Analysis Shows That Nigerian Banks Face High Disruption Risks

We base our views of disruption risk for Nigerian banks on our four-factor analysis of the banking system's technology, regulation, industry, and preferences (TRIP).

Chart 1

Technology: Disruption Risk | High

Widespread mobile access and the banking sector's legacy IT infrastructure support the growing fintech sector

Nigerian banks face high technology risks in part from the rapidly growing fintech sector, thanks to widespread mobile access, data affordability, and banks' comparatively weaker agility.

Nigerians have access to mobile technology, with nearly 100% mobile penetration in 2022, according to the Nigerian Communications Commission. Although broadband infrastructure is being deployed across the country, it lags that of other emerging markets. About 55% of the population had access to the internet in 2022 because of the significant use of nonconnected feature phones. According to a study published in March 2023 by Orange Group Nigeria, and conducted across 12 cities in the country, only 36% of the population are smartphone users, but this is set to rise to 65% by 2025. We think digital and broadband infrastructure will continue to improve with increased sector investment. The 5G network's rollout in Nigeria continues after the government approved its implementation in September 2021. This will accelerate telecommunications companies' (telcos') reach in a country where infrastructure development needs are high. Mobile data is relatively affordable, although it has become more expensive because of high inflation (24% in 2023) and declining GDP per capita ($1,600). It costs an average of 39 U.S. cents per gigabyte for Nigerian consumers, below the 2023 average global cost of $2.61 and cheaper than in most African countries, including South Africa and Kenya.

Fintechs are also taking advantage of blockchain technology to facilitate payments and transfers. Nigerians rely on peer-to-peer cryptocurrency exchanges such as Paxful to transact (such as for remittances) or invest. A majority of apps used by Nigerians have an African focus, which underpins a broad and dynamic fintech ecosystem.

Unstructured supplementary service data (USSD) technology was introduced in 2015 for Nigerian banks to expand services to the underserved and financially excluded. The technology only requires a feature phone and no internet connection. Banks rely on telcos that provide access to the service for a fee. The ongoing dispute between banks and telcos regarding USSD fees underscore banks' vulnerability to a technology they do not own. While the volume of electronic transactions rose sharply after 2020, the share of USSD transactions peaked in 2019. Fees associated to USSD transactions increased 55% in 2021 as telcos asked for their cut. This is likely to slow financial inclusion, particularly for those with very low income.

Chart 2

In addition, Nigerian banks' digital infrastructure and capabilities were put to the test in early 2023 during the naira redesign, which led to cash shortages. The redesign policy aimed to replace some naira notes to facilitate monetary policy implementation and reduce counterfeits. Banks' customers turned to mobile wallets as they grew dissatisfied with their inability to cope with the increased volume of transactions. Pure fintech startups largely operate with a cloud-based infrastructure, which enables low latency time. While IT expenditure have increased for some banks since 2020 to about 10% of total operating costs, this remains below the 15% in developed markets. Staff and regulatory costs dominate banks' costs amid high inflation and a weak currency, which constrains capacity to accelerate change.

Chart 3

Unlike fintechs, Nigerian banks operate with hybrid IT infrastructure because their transition to the cloud must abide by their risk and compliance frameworks. The cloud infrastructure is expected to accelerate banks' performance in service delivery and security settings. In addition, the use of big data, artificial intelligence, and open banking is still at an early stage. Nigeria ranks 97th of 181 countries according to the U.N.'s Government AI readiness index.

Regulation: Disruption Risk | High

Unified policy formulation will be key in fostering technology investments

Regulatory risks are high because the CBN introduced regulation to foster competition between banks and fintechs, including large telcos. Consistent policy formulation could accelerate institutional adoption of new technology.

With about 50% of the population in the formal banking system, improving financial inclusion has been one of the CBN's key priorities. To this end, it introduced in 2012 the digital payments directive to accelerate inclusion and reduce cash circulation in the economy. In October 2021, the CBN became the first central bank in Africa to launch a CBDC to scale up financial intermediation and reduce cash in the economy. To bring in users, the CBDC model relied on banks' onboarding compliance and regulatory capabilities. However, adoption has been low, with e-naira wallets accounting for less than 1% of Nigeria's active bank accounts in 2022.  The CBDC is not interoperable and does not enable users to transact globally on various public blockchains, which may have contributed to the low adoption as Nigerian favored global cryptocurrencies, including stable coins.    

In 2018, the CBN issued licenses to telcos to operate as payment services banks (PSBs). Like banks, they leverage technology and agency banking to gather deposits and provide payments services but are not allowed to extend credit or underwrite insurance. This leaves banks as the main credit provider institutions, limiting the disruption. In October 2022, the CBN allowed PSBs to sell U.S. dollars received as cross-border remittances to authorized dealers to ease pressure in the foreign exchange market. PSBs' operating models point to some competition with banks because they use agency banking and provide payment and saving products. Although PSBs rely on banks to manage their excess liquidity, some have deeper reach, with more cost-effective service delivery than commercial banks.

More changes are coming with open banking. Nigeria became the first African country to establish an open banking regime when the CBN published its regulatory framework in 2021 and operational guidelines in March 2023. We think open banking will foster products that promote tailored financial services products through innovation by sharing customer data between banks and fintechs via application programming interfaces (API). The Data Protection Act took effect in June 2023 and replaces a framework that inadequately protected individuals' data. While this new law is in line with similar international data protection frameworks, its implementation requires coordination with other agencies to be aligned with aspects such as the national identification and cybersecurity systems in the context of a developing internet network and elevated cyber risks. 

The CBN adopted a regulatory sandbox approach for the Nigerian payments system to encourage innovation and provide an avenue for regulatory engagement with fintechs. This in turn should promote effective competition through new technology, improve customer experience, and encourage financial inclusion.

The Fintech Association of Nigeria partnered with the CBN to offer members free access to the CBN sandbox. This provides a formal process for companies to conduct live tests of new products and services, delivery channels, or business models in a controlled environment, with regulatory oversight.

Timely policy formulation and coordinated regulatory implementation facilitate institutional adoption towards this fast-growing asset class that continues to attract Nigerians. In May 2023, Nigerian authorities adopted the national blockchain policy that requires the government to develop standards in listing and trading cryptocurrencies on regulated exchanges in the country. This initiative reflects the potential of blockchain to transform the economy across multiple sectors. Both the CBN and the Nigerian Securities and Exchange Commission (NSEC) issued a regulation on crypto assets. The nascent blockchain bond market could optimize Nigerian banks' access to the international capital markets. More positively for the sector, in 2022, the NSEC approved rules for tech companies to list on the Technology Board and raise funding on the Nigerian Exchange (NGX). This paves the way for the NGX to compete and combine liquidity pools of tech companies, including blockchain. For now, half of the top 10 market capitalization are either telcos or banks.

As well, regulatory action regarding cryptocurrency supports Nigeria's efforts to better manage anti-money-laundering and combatting the financing of terrorism risks. In December 2023, the CBN lifted its ban on cryptocurrency in the banking sector, removing the last barrier for the sector to fully take advantage of blockchain. Cryptocurrency trading had not been illegal outside of the banking sector. The CBN's initial ban on cryptocurrency in the banking sector was introduced with the Jan. 12, 2017, directive, and subsequently reinforced by a directive in February 2021. After the ban's lifting, a consortium of banks announced in January 2024, the launch of a Nigerian stable coin backed by deposits and held by banks.

Industry: Disruption Risk | Moderate

Despite uncertainty, banks are key facilitators of technology

More than a decade-long regulatory reform in Nigeria resulted in stronger banks contributing to the emergence of a digital ecosystem where they play a central role for financial services while mobile money is emerging.

In 2012, Nigerian banks pivoted their strategic focus by creating digital platforms to deepen their reach in rural areas and offer payment products to their captive urban and affluent clients. The strategic shift accelerated banks' scale and supported their profitability through economic downturns. Competitive dynamics in Nigeria support commercial banks' business positions and stability. The five top-tier banks account for about 70% of system assets and have good operating efficiency, despite elevated regulatory costs.

Chart 4

Nevertheless, strong earnings despite volatile economic cycles enabled strategic IT investments, positioning banks among the largest enablers of digital ecosystems. The top five banks' market capitalization is about $5 billion, and banking sector assets stood at about 40% of 2022 GDP. Despite high regulatory costs, the sector's operating efficiency and profitability have improved through economic cycles, with an average return on equity of 16% in the past five years. We think implementation of new technologies will accelerate and improve efficiency as banks partner with global providers and native fintechs; and scale up their own capabilities, including retaining their tech talents amid fierce competition. In our view, adopting big data, artificial intelligence, and open banking will improve banks' operating efficiency and risk management, potentially leading to credit ratings differentiation.

Chart 5

We do not see fintech startups or telcos significantly challenging the banking sector's top tier because banks are not idle during technology shifts and there is a great interdependence between banks and fintechs. Banks have embraced and emulated fintech innovation, particularly in the payment solutions space in a large country where financial exclusion persists. Fintechs offer market avenues with easy, fast, and low-cost financial services while banks provide regulatory and compliance expertise through their backend infrastructure.

In addition, Nigerian banks launched their own fintech business in the payment products space, and some are already turning a profit. Most banks have established payment services subsidiaries to compete and collaborate with fintechs and telcos. Although these are still startups, their ambition is to capture a greater share of payments flows in Nigeria and Africa overall, particularly for banks with a presence outside Nigeria. Their geographic diversification gives them a competitive edge relative to some native fintechs by offering seamless cross-border payments services to their corporate and retail customers across Africa and enables banks to capture remittance flows from abroad. Blockchain technology presents banks with opportunities to harness these flows.

Nigerian banks have developed a vast channel of agency banking, which improves access to bank services in rural areas that lack physical branches. With more than 1.3 million agents, banks surpassed the CBN's initial goal in 2019 in the Shared Agent Network Expansion Facilities to reach 500,000. Agency banking provides a wide array of services, including cash-in and cash-out services, account opening, deposits and withdrawals, account balance inquiries, and bill payments. Although fintechs also use the agency banking model, this market segment is largely concentrated and driven by banks. Nevertheless, fintechs are challenging banks with weak digital capabilities, which should create a multi-tier financial sector and consolidation.

The usage of mobile money has been growing in Nigeria as mobile users look to save costs in a context of high inflation. However, Nigeria is trailing African peers such as Kenya and Ghana. It is considered a medium prevalence mobile money market according to the Global System for Mobile Communications Association. Among adults aware of mobile money and who have used a mobile phone, mobile money account ownership in Nigeria has grown to 22% in 2022 from 16% in 2021, supported by telcos. This is low given the strong mobile penetration, with almost one mobile phone per person, the growing adoption of smartphones and digital apps for 16-64 year-olds, and usage of mobiles in urban and rural locations. After the liberalization of the mobile money space in 2018, two PSBs (9 and Hope) launched in 2020 with three more--Smartcash (Airtel), MoMo (MTN) and MoneyMaster (Glo)--launching in 2022.

Chart 6

Nigeria is one of three main tech hubs in Africa, along with Kenya and South Africa. It has produced five of the seven unicorns (startups valued at over $1 billion) in Africa. It is home to large fintech companies such as Interswitch and Flutterwave but also to tech companies that harness and develop programming capabilities. The country has over 200 fintech companies, which represent only 36% of tech startups, according to a 2023 PWC report. The tech startups are affecting all sectors of the economy but most fintechs remain small and are mainly operating in the payments and lending space.

Chart 7

The country's young demographics, large informal sector, and lack of national identification, which exacerbate financial exclusion, makes it an opportunistic long-term destination for fintech investments because of the strong growth prospects. However, we think neobanks such as Kuda, Opay, and VBank do not pose a threat to commercial banks because of the latter's dominant market positions and the strong growth prospects in their quest to financial inclusion. Fintechs backed by banks have a competitive advantage because some small and midsize enterprises (SMEs) attracted by seamless payments services could be looking for bank funding later. In addition, banks have deeper pockets than stand-alone startups.

Nevertheless, funding to fintechs in Nigeria has significantly increased since 2020, at over $1 billion raised in 2021-2022 from only $89 million in 2020 according to Statista. Nigerian fintech startups raised more than $1 billion over the past two years out of the $2.7 billion overall raised by startups in Africa, owing largely to strong growth prospects in payments and remittances. Among the top 10 largest market capitalization on the NGX, only two companies are technology-based (telcos), but the relaxed rules to list tech companies should facilitate access to capital markets funding. 

Chart 8

Preference: Disruption Risk | Moderate

An acceleration of fintech products fits with Nigeria's demographics

The strong crypto adoption in Nigeria by the young tech savvies is mitigated by the high share of underserved and excluded population living in remote areas. According to the CBN, financial inclusion accelerated in 2023 with 64% rate compared to 56% in 2020, supported by fintech adoption. At the same time, Nigerians have been early adopters of crypto currencies in the context of back-to-back economic downturns that started in 2016. They are using cryptocurrencies mainly for savings and international payments, and remittances given the banks' high transfer costs. Banks revenue from remittances are low and we estimate they average less than 5% of operating revenue. Following a two-year ban on cryptocurrency transactions in the banking sector, the widespread usage of blockchain technology led authorities to clarify their stance and regulate the industry.

According to CoinGecko's analysis, Nigeria is one of the most crypto-curious nations, and Triple A estimated that 22 million Nigerians (10.3% of the population) own cryptocurrencies. The country ranks among the top six with cryptocurrency transactions increasing 9% annually as of June 2023, according to Chainalysis. Despite the CBN's ban on banking sector cryptocurrency transactions in 2021, Nigeria has the highest crypto usage in Africa and ranked 11th in the 2022 Global Crypto Adoption Index. We think the new regulation on cryptocurrency and digital assets will accelerate institutional adoption of cryptocurrency and blockchain technology and ultimately force banks to adapt to stay relevant.

The population's demographics will continue to drive innovation and demand for more digital solutions. Of the Nigerian population, 76% are below the age of 35 but 40% live in rural areas. Banks' affluent customers are sophisticated and keen on innovation while the well-educated, urban, and tech savvy youth prefer fintechs. More than 50% of crypto owners are younger than 30 while more than a third of Nigerian adults are crypto investors because of the weak naira and high inflation. While the agency banking model and their electronic channels are a direct bank response to the underserved population in rural areas and low financial literacy, people could favor fintechs and mobile money because they are easy and cheaper to use.

Chart 9

Still, widespread access to broadband is curtailed by low incomes, high inflation, and infrastructure gaps, namely a chronic under supply of electricity, all of which result in higher costs for the population to use technologies. The unbanked and underserved remain high in a country where about 40% of the adult population live in rural areas and the shadow economy accounts for more than 50% of GDP, according to World Economics. Furthermore, cyber risks are high because of security and data confidentiality breaches from phishing attempts that targets payments systems and bank portals, which could lead people to shy away from using digital solutions. According to the Financial Institutions Training Centre Nigeria, reported bank fraud cases led to $21.2 million losses, which compare better than the $43.3 million losses in South Africa. 

Chart 10

Nigerian Banks Will Have To Keep Pace

Nigerian banks' business models have proven to be resilient to the two successive recessions in Nigeria since 2016. They accelerated their transformation by deploying digital channels to harness transactional flows, including deposit gathering. Banks are key enablers of digital solutions by developing and deploying apps on their platforms through APIs to cater to their captive clients' preferences and acquire new customers, including SMEs. Banks will remain frontrunners with digital solutions because they have larger investment capacities and benefit from a longer financial performance track record that fosters client trust. Their access to capital markets allows them also to accelerate their investments in digital payment solutions. Nigeria is home to five of the seven unicorns in Africa. Flutterwave and Interswitch, as well as neobanks, are competing with banks for market share and technology experts. While regulation is shifting with the Nigerian Finance Act 2023 that paves the way to regulate blockchain and cryptocurrencies more comprehensively, the CBN is unlikely to undermine banks' competitive positions as licensed credit institutions. Nigeria's demographic characteristics and the rollout of infrastructure technologies with optic fiber and 5G networks will enable widespread and stable access to more advanced data-driven services and applications, which could underpin the Nigerian economy's shift towards a digital economy, away from the oil sector's ebbs and flows.