IMPACT OF DIGITAL CURRENCY ON FINANCIAL INCLUSION IN NIGERIA (1990-2023)

ABSTRACT

This study explores the impact of digital currency on financial inclusion in Nigeria from 1990 to 2023, focusing on key digital payment systems such as Point of Sale (POS) systems, Mobile Phone Payments (MPP), Web Payment Services (WPS), and Central Bank Digital Currency (CBDC). The primary objective is to assess the role of these digital platforms in enhancing access to financial services, particularly for the unbanked population. The findings indicate that the widespread adoption of POS systems has significantly contributed to improving financial inclusion by facilitating convenient payment options. Additionally, the growth of MPP has substantially increased access to financial services for Nigeria’s unbanked population, allowing them to engage in transactions through mobile phones. However, the study found that WPS has not had a significant impact on enhancing the security and accessibility of digital payments for financial inclusion. Conversely, the introduction of CBDC has positively influenced financial inclusion by enhancing access to formal banking systems, especially among underserved populations. The study concludes that while digital currencies and payment systems have made significant strides in promoting financial inclusion, further investments in infrastructure, security, education, and regulatory frameworks are essential for ensuring sustainable growth and broader access to digital financial services in Nigeria.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

In the 21st century, financial inclusion has become a critical global concern. It is estimated that approximately 1.7 billion people remain underbanked, while 2.3 billion adults are financially excluded. Small- and medium-sized enterprises also face significant challenges in accessing formal financial systems, which limits their potential for growth (Ekong & Ekong, 2022; World Economic Forum, 2021). These challenges are particularly severe in developing economies, where structural and socio-economic disparities exacerbate poverty. Nigeria, a major player in Sub-Saharan Africa, exemplifies this trend, with over 60% of its population of 206.1 million excluded from the formal banking system (Global Finance, 2021). This situation is worsened by a persistent rise in currency circulation outside the banking system, which grew by more than 50% between 2015 and 2020, from 1.46 trillion naira to 2.3 trillion naira (CBN, 2021). Currency depreciation episodes in 2016 and 2020 further amplified inflation and drove more Nigerians away from financial inclusion services.

To address this exclusion, the advent of digital currency presents an opportunity to redesign financial systems to be more inclusive and accessible. Ariyanto et al. (2020) emphasize that digital currency, when implemented through authorized e-cash guarantors, can expand financial access across borders. Evidence from India demonstrates the potential impact of digital financial innovations, with formal financial user rates increasing from 52.8% in 2014 to 79.8% in 2018 due to digital payment systems (mSTAR, 2019). This success highlights the urgent need for developing economies like Nigeria to adopt digital currencies as part of their financial inclusion strategies.

The case for digital currency is strengthened by its potential to support global poverty reduction efforts. The United Nations (UN) has set a target to eradicate poverty by 2030, but the COVID-19 pandemic has significantly hindered progress. By 2019, over 82.9 million people had fallen into extreme poverty due to the pandemic, and projections indicated that by 2022, over 100.9 million Nigerians would be living in poverty (World Economic Forum, 2021; Irvin et al., 2021; World Bank, 2021). Digital currency offers a pathway to economic recovery for vulnerable populations, both in rural and urban areas, in the post-COVID-19 era.

Financial inclusion is also a recognized enabler of sustainable development. The World Bank (2018) highlights its role in achieving seven of the 17 Sustainable Development Goals (SDGs). Goal 9, which emphasizes innovation and infrastructure, underscores the importance of financial innovations like digital currencies in fostering equitable wealth distribution and promoting social inclusion, justice, and security. Recognizing this, the G20 has reaffirmed its commitment to advancing financial inclusion through high-level principles aimed at enhancing global access to finance.

Finally, financial exclusion not only worsens poverty but also hinders economic growth. Economies with low levels of financial inclusion face declining growth rates, as small- and medium-sized businesses struggle to access the capital needed to expand and meet market demands. As Demirguc-Kunt and Klapper (2012) note, without inclusive financial systems, the poor are forced to rely on limited savings, while small enterprises lack the financial resources to pursue growth opportunities. This perpetuates income inequality and slows economic development. In this context, digital currency emerges as a transformative tool for enhancing financial inclusion and fostering economic growth in Nigeria from 1990 to 2023.

1.2 Statement of the Problem

Despite the growing recognition of financial inclusion as a driver of economic growth and poverty reduction, a significant proportion of the Nigerian population remains excluded from the formal financial system. Financial exclusion in Nigeria is characterized by limited access to affordable and high-quality financial services, which disproportionately affects marginalized groups, particularly in rural areas (Dabor, 2024). This exclusion undermines efforts to foster equitable economic participation and leaves millions reliant on informal savings and lending mechanisms, which are often inefficient and risky.

One of the key drivers of financial exclusion in Nigeria is the inaccessibility of traditional banking services due to inadequate infrastructure, high transaction costs, and complex bureaucratic requirements (Siano et al., 2020). These barriers prevent low-income earners and small businesses from integrating into the formal financial sector, thereby limiting their opportunities for growth and economic empowerment. Additionally, cultural and educational factors contribute to the distrust of conventional banking systems, further deepening the financial exclusion gap (de la Cuesta-González et al., 2021).

The rapid rise of digital technologies, however, presents a unique opportunity to address this issue. Digital currencies, in particular, have the potential to revolutionize financial access by offering a low-cost, secure, and inclusive alternative to traditional banking (Sapovadia, 2018). Nevertheless, the adoption of digital currencies in Nigeria has been slow, hindered by regulatory uncertainties, technological literacy gaps, and concerns over cybersecurity (Ogwu, 2022). The absence of clear guidelines for the use of digital currencies has left many Nigerians skeptical about their potential benefits, further delaying their integration into the mainstream financial system.

The consequences of this continued exclusion are profound. Financially excluded individuals are often unable to save, invest, or access credit, leaving them vulnerable to economic shocks and perpetuating cycles of poverty (Buckland, 2018). For small- and medium-sized enterprises, financial exclusion limits their ability to scale operations, meet market demands, and contribute to economic growth (Etuk et al., 2014). Without a concerted effort to bridge the gap between digital innovation and financial inclusion, Nigeria risks falling further behind in achieving key developmental goals.

The persistent financial exclusion in Nigeria, despite the potential of digital currencies to drive inclusive growth, underscores the urgent need for a comprehensive analysis of their impact on financial inclusion. Understanding the barriers and enablers of digital currency adoption is crucial to designing policies that can harness its full potential to improve the lives of millions of Nigerians and foster sustainable economic development.

1.3 Objectives of the Study

The main aim of this study is to assess the impact of digital currency on financial inclusion in Nigeria from 1990 to 2023. Specific objectives of the study include;

1. To explore the impact of Point of Sale (POS) systems in enhancing financial inclusion through digital currency adoption in Nigeria between 1990 and 2023.
2. To assess the role of Mobile Phone Payments (MPP) in expanding access to digital financial services, particularly for the unbanked population in Nigeria.
3. To evaluate the effectiveness of Web Payment Services (WPS) in fostering financial inclusion by providing secure and accessible digital payment options to Nigerian citizens.
4. To examine the role of Central Bank Digital Currency (CBDC) in enhancing the financial ecosystem and promoting wider financial inclusion across Nigeria’s diverse population.

1.4 Research Questions

          The following questions guided this study;

1. How have Point of Sale (POS) systems contributed to the growth of financial inclusion in Nigeria between 1990 and 2023?
2. In what ways have Mobile Phone Payments (MPP) improved access to digital financial services for the unbanked population in Nigeria?
3. How have Web Payment Services (WPS) influenced the accessibility and security of digital transactions for Nigerian citizens, thereby promoting financial inclusion?
4. What is the role of Central Bank Digital Currency (CBDC) in transforming the Nigerian financial landscape and expanding financial inclusion?

1.5 Research Hypotheses

          The following questions guided this study;

Hypothesis 1

H0: The widespread adoption of Point of Sale (POS) systems has significantly contributed to the increase in financial inclusion in Nigeria between 1990 and 2023.

H₁: The widespread adoption of Point of Sale (POS) systems has no significantly contributed to the increase in financial inclusion in Nigeria between 1990 and 2023.

Hypothesis 2

H0: The growth of Mobile Phone Payments (MPP) does not led to a significant increase in access to financial services among Nigeria’s unbanked population.

H1: The growth of Mobile Phone Payments (MPP) has led to a significant increase in access to financial services among Nigeria’s unbanked population.

Hypothesis 3

H0: Web Payment Services (WPS) has not played a significant role in improving the security and accessibility of digital payments, contributing to greater financial inclusion in Nigeria.

H1: Web Payment Services (WPS) has played a significant role in improving the security and accessibility of digital payments, contributing to greater financial inclusion in Nigeria

Hypothesis 4

H0: The implementation of Central Bank Digital Currency (CBDC) has on positively impacted financial inclusion by enhancing access to formal banking and financial systems in Nigeria.

H0: The implementation of Central Bank Digital Currency (CBDC) has positively impacted financial inclusion by enhancing access to formal banking and financial systems in Nigeria.

1.6 Significance of the Study

The significance of this study lies in its potential to highlight the transformative role that digital currencies can play in promoting financial inclusion in Nigeria. As a developing economy with a significant portion of its population excluded from formal financial systems, the research will provide valuable insights into how innovative digital payment systems, such as Point of Sale (POS), Mobile Phone Payments (MPP), Web Payment Services (WPS), and Central Bank Digital Currency (CBDC), can be leveraged to enhance financial access for underserved populations.

By analyzing the effectiveness of these digital payment platforms, the study aims to provide empirical evidence that could influence policy decisions aimed at addressing Nigeria’s financial exclusion challenges.

The findings of this study will be particularly beneficial to several stakeholders. For policymakers, the research will offer data-driven insights into the benefits and challenges of adopting digital currencies, which could inform the development of policies and regulations that foster financial inclusion and support the broader digital economy.

Financial institutions and fintech companies also benefited from the findings of this study, as it will help them understand the key drivers of digital currency adoption and provide guidance on how to design services that meet the needs of Nigeria’s unbanked and underbanked populations.

Additionally, businesses, especially small- and medium-sized enterprises, can gain insights into how digital currencies can improve their access to financial services, thereby fostering growth and innovation within the private sector.

Furthermore, the findings of this study is of significance to the Central Bank of Nigeria (CBN) and other regulatory bodies, as it will shed light on the impact of CBDC implementation on financial systems and its potential to foster a more inclusive, secure, and efficient financial environment.

Finally, the finding of this research contributed to academic literature by providing a comprehensive analysis of the evolution of digital currency adoption in Nigeria and its implications for financial inclusion, offering a foundation for future research in this area.

1.7 Scope of the Study

The scope of this study focused on examining the impact of digital currency on financial inclusion in Nigeria, specifically from 1990 to 2023. The research investigated the role of various digital payment systems in promoting financial access and inclusion, with particular emphasis on the use of Point of Sale (POS), Mobile Phone Payments (MPP), Web Payment Services (WPS), and Central Bank Digital Currency (CBDC). The study explored how these digital currencies facilitated access to financial services for unbanked and underbanked populations, particularly in rural and remote areas of Nigeria.

The study was limited to Nigeria, considering the country's unique financial landscape and the recent push for digital currency adoption as a means to drive financial inclusion. It examined the growth, adoption, and challenges faced by digital payment platforms in Nigeria from a policy, technological, and socio-economic perspective. The role of the Central Bank of Nigeria (CBN) and other relevant regulatory bodies in the development and implementation of digital currencies, particularly CBDC, was also analyzed in terms of how these initiatives aligned with the broader financial inclusion goals set by the government and international organizations.

Additionally, the study focused on the period between 1990 and 2023, covering significant developments in the financial sector, including the introduction of electronic banking systems, the rise of mobile money services, and the recent experimentation with Central Bank Digital Currency. The scope did not extend to a global comparison but provided an in-depth understanding of the Nigerian context, considering both urban and rural perspectives on digital payment adoption. The findings offered a snapshot of the state of financial inclusion in Nigeria and insights into the potential of digital currencies to reshape financial accessibility in the years to come.

1.8 Operational Definition of Terms

Digital Currency: In this study, digital currency refers to any form of currency that is electronically created and stored, and is used for transactions via digital platforms. This includes cryptocurrencies, as well as government-backed digital currencies such as the Central Bank Digital Currency (CBDC), which is issued and regulated by a nation's central bank.

Financial Inclusion: Financial inclusion refers to the process of ensuring that individuals and businesses, regardless of their socio-economic status, have access to useful and affordable financial products and services. This includes access to payments, savings, credit, and insurance through formal financial channels such as banks or digital payment platforms.

Point of Sale (POS): In the context of this study, Point of Sale (POS) refers to physical devices that allow customers to make payments using their debit or credit cards for goods or services. POS terminals facilitate card-based transactions in various retail environments, playing a key role in the adoption of digital payments and financial inclusion.

Mobile Phone Payments (MPP): Mobile Phone Payments (MPP) are digital payment systems that allow users to conduct financial transactions using mobile phones. This includes mobile money platforms like USSD-based payment systems or mobile apps that enable users to make payments, transfer funds, and access other financial services using their smartphones.

Web Payment Services (WPS): Web Payment Services (WPS) refer to online platforms or services that enable users to make payments over the internet. These services include digital wallets, bank transfers, or third-party payment processors that allow individuals to pay for goods and services electronically through websites or online applications.

Central Bank Digital Currency (CBDC): Central Bank Digital Currency (CBDC) is a form of digital currency issued and regulated by a nation's central bank. It is a digital version of the national currency and can be used for various transactions, including payments and savings, offering the benefits of digital payment systems while being backed by the country's central bank.

1.9 Structure of the Study

Chapter One introduces the study and provides the background to the research. It discusses the significance of financial inclusion in the global and Nigerian context, with a focus on the role of digital currencies in enhancing financial accessibility. This chapter outlines the research problem, the study's objectives, the research questions, and the hypotheses. Additionally, it provides the scope of the study, including its geographical, temporal, and conceptual focus, and defines key terms used in the study.

Chapter Two presents a review of existing literature related to digital currencies and financial inclusion. It examines theoretical perspectives on financial inclusion and the role of digital currency components like Point of Sale (POS), Mobile Phone Payments (MPP), Web Payment Services (WPS), and Central Bank Digital Currency (CBDC). The chapter reviews global and Nigerian case studies and previous studies, highlighting their findings and discussing gaps in the literature. It also considers how these components of digital currency contribute to improving financial inclusion, especially in developing economies like Nigeria.

Chapter Three focuses on the research methodology used to investigate the study's objectives. It outlines the research design, which is a descriptive survey approach. The chapter details the population and sample of the study, along with the sampling technique used. It also describes the data collection methods, including questionnaires and interviews, and the tools for data analysis. Ethical considerations, such as informed consent and participant confidentiality, are also discussed.

Chapter Four presents the data analysis and results of the study. This chapter provides a detailed discussion of the data collected, including both qualitative and quantitative findings. It presents the results of the statistical tests conducted to examine the relationship between the use of digital currency and financial inclusion in Nigeria. The chapter also interprets these findings in relation to the research questions and hypotheses, providing insights into how digital currencies impact financial inclusion in the Nigerian context.

Chapter Five concludes the study by summarizing the key findings and discussing their implications for policy and practice. It revisits the research objectives and questions, providing answers based on the study's findings. The chapter also outlines recommendations for stakeholders, including government agencies, financial institutions, and the private sector, on how to leverage digital currencies to enhance financial inclusion in Nigeria. Finally, the chapter suggests areas for future research to further explore the evolving relationship between digital currency and financial inclusion.