Financial Innovation: The Impact on small and Medium Scale Enterprises in Nigeria
The Concept of Financial innovation is the process of creating new financial products, services, or processes. Financial innovation according to Investopedia has come through advances in financial instruments, technology, and payment systems. Digital technology has helped to transform the financial services industry, changing how we save, borrow, invest, and pay for goods and services.
While all tiers of banks continue to invest in mobile banking, FinTech companies, like Stripe, Flutter wave, Paystack, PayPal, AmazonPay, WePay, Googlepay to mention but a few, help small businesses conduct online payments, and investment. These innovations have increased the number of financial providers available to consumers, borrowers, and businesses most especially SMEs across the globe.
Prior to the introduction of the Structural Adjustment Programme (SAP) in 1986 by General Ibrahim Babagida led military regime of decrees, the Nigerian economy, particularly, the financial system, was highly regulated, with interventionist policies manifesting in exchange and interest rates controls. There was the compulsory allocation of bank credit to selected sectors of the economy as well as measurable benchmark of credits directed to the private sector. The inefficiencies of that regime were all too obvious. First, the monetary authorities had to grapple with an overvalued domestic currency (the naira) which crippled direct investment by the private sector in critical areas. There was outright unavailability of funds; exchange rate controls created a corrupt bureaucracy that fuelled a huge financial and currency crisis, leading to high mortality rate of small and medium scale enterprises (SMEs) in the economy according to Thompson and MacMillan. This was a consequence of the inability of most businesses who relied significantly on imported capital equipment and other raw materials to meet up with the demands of multiple exchange rate regimes and other structural rigidities. Not only that, but there was also an underdeveloped payments system that overly relied on physical cash, payment slips and cheques and other accepted negotiable intrument for transaction purposes.
Institutionally, the Nigerian financial system was stuck in a huge technological gap, with most operations still carried on manually. All these culminated in deep financial repression, with negative consequences on the productive sector of the economy especially SMEs.
In the same vein, the deregulation of the sector in the aftermath of SAP changed the architecture of the Nigerian financial system especially as it relates to payment systems. Now to be operated along the principles of neo-liberal market fundamentalism, deregulation also birthed a massive wave of financial innovation into the sector. The sector witnessed a flood of novel financial instruments and technologies. Financial processes as well as relationships amongst market operators, especially as between banks and their depositors changed dramatically. Conventional or perhaps the traditional modes of operations which characterised the notorious pre-SAP era were dethroned. Specific instruments which embodied the process of financial innovation ranged from the emergence of automated Teller Machine (ATM), Web Banking (WEB), Point of Sale (POS), Mobile Banking, and many others emerged as a new business transaction norm.
Similarly, the deregulation of the financial sector and the subsequent introduction of new financial instruments and processes into the sector triggered several facets of research on the effect of these developments on both the financial sector itself and the general performance and growth of the economy (see for instance studies by Olofin and Afangideh, 2010; Azege, 2004; Shittu, 2012; Sulaiman et al., 2012; as well as Ohwofasa & Aiyedogbon, 2013). These studies generally find a positive and significant effect of reforms in financial sector on economic performance and impact.
From the above key findings, it suggests that financial innovation plays a crucial role in improving business services, facilitating access to financial services and improving customer experience as well as Innovative banking products that enable customers to access advanced and more efficient banking services. This has played a huge performance impact on both Micro and Macro Medium Enterprises in Nigeria.
Therefore, for SMEs to be positively impacted and gain a competitive advantage leveraging on financial innovation must do so, by focusing on niche markets, providing exceptional customer service, fostering innovation and creativity, prioritising quality, developing a strong brand identity, and forming strategic partnerships, small businesses can differentiate themselves in the market and build a sustainable competitive advantage through the gains of technology lest crude methodology of business operation especially demanding on physical cash payment or cheques may adversly affect business growth of such SMEs.
