Efficacy of Digital Finance on Financial Inclusion: Evidence from the Nigerian Banking Industry

Globally, the number of adult population who do not have access to financial services continues to pose a challenge to economic development. The problem of financial exclusion is more acute in developing countries where more than half the adult population is unbanked. In 2021, 55 percent of the population of adults in Nigeria were unbanked, which created gaps in financial access for typically excluded and underserved adults, especially the vulnerable groups – the women, the poor, the less educated, the rural dwellers, the young, and those outside the labour force. The motivation for this study arose from a concern of how to use digital finance to bring those who are unbanked and financially excluded into the formal financial system. The study employed the quantitative research method using an ex-post facto research design. Annual time series data spanning from 2004 to 2020 was analysed using the ARDL estimator. The results reveal that commercial bank branches and internet access are the strongest drivers of financial inclusion in Nigeria in the short run. On the contrary, digital credit to the private sector and a period lag in interest rate hinder financial inclusion. In the long run, commercial bank branches, internet access, and exchange rates significantly affect financial inclusion. Conversely, digital credit to the private sector and lending rate are the critical factors contributing to financial exclusion. Based on the findings, the study suggests the need for a holistic financial framework that aims at incorporating the informal financial market into the mainstream financial system with the capacity to integrate majority of the financially excluded Nigerian adults. Such a robust framework should be digitally sensitive, politically neutral, financially inclusive, economically viable and spatially distributed for sustainability purposes.