The Transition to a cashless economy in Nigeria May 10, 2011
The Central Bank of Nigeria, lead by its Governor Sanusi Lamido Sanusi, has put forward a policy requiring that all cash withdrawals and deposits be set at a daily limit of a maximum of N150,000 while pegging that of corporate entities at N1,000,000, with penalty fees of N100 per extra N1,000 and N200 per N1,000 imposed on individual and corporate defaulters respectively.
The Central Bank of Nigeria's reasoning behind this policy could be because of a lot of issues affecting the financial system; from trying to check money Landry and illicit activity, inflation, cost of maintaining an economy predominately cash base, or just good old change which is one factor that's always constant in life.
A cashless economy its simply at its prime when all means of payments are carried out without the use of physical cash. Payments will range from a list of options such as cheques, wire transfers, debit and credit cards, online transactions, and mobile banking. The advantages of a cashless society are enormous; from regulating, controlling, and securing the financial system of any economy.
If all things are perfect there are still a few down sides to a cashless economy. Money by its nature is abstract. The less cash that flows through our hands, the more intangible it becomes and the more we lose our sense of its real value. Our banked assets are now an electronic apparition, and the fear of not having cash on hand is a downturn.
Nigeria's economy as it relates to forms of payments
Nigeria compared to the rest of the world, as it relates to payments, is still in the era of the wild wild west. To fully understand the situation one has to study the history and analyze factors such as; the Nigerian culture, the role of its government, the state of infrastructure, the level of general education, the availability of real data, the amount of investments made and needed, security as it relates to laws (enforcements and it judiciary) confidence in the system (internal and external) and insurance and privacy issues to mention a few.
The journey of a thousand miles begins with the first step. I commend the CBN for its courageous attempts to effect change, and also worry that the system may not be ready for such a drastic approach. The problem is that in an already weak economy such as Nigeria implementing this policy now will only result in the opposite effect of what the CBN wants to achieve.
The CBN would be in the best position to understand what the economy really needs to prosper, and its policy on withdrawals and deposits give reason for pause.
Whats the real reason driving this policy? You could say the Nigerian factor, which really means anything ranging from scams and corruption to the fix it now approach.
No where in the world, do they have fixed withdrawals and deposits.
For the record, a cashless society should be now and the future for Nigeria and there is no one solution to every economical challenge.
There is one thing that's certain, in the next five to six years, if this policy is aggressively carried out, the growth of the Nigerian economy is going to contract significantly before it eventually picks up.
There are a couple of concerns, the greatest of them being that it is most likely going to lead to the next real recession in Nigeria. For example 70 to 75 percent of the people of Nigeria do not have bank accounts. Therefore saying that the CBN does not have 70 to 75 percent of the nations financial statistics is a safe call. Money circulation works its way down and around from the top 10 percent of bank accounts which accounts for 75 percent of the total value of cash. The Majority of this 10 percent service directly or indirectly affect 70 to 75 percent of the Nigerians who are without bank accounts. Cutting this lifeline quickly, will force a significant number of Nigerian employers to require their employees to start operating bank accounts to save them cost on doing business in Nigeria; so that concrete laborer or that student, driver, security-man, teacher, trader and so on will not get his or her money in cash, but be required to have a bank account. This will put pressure greatly on the infrastructure of the banking industry as they in turn are not ready to handle the amount of new accounts. Even if the mobile phone payment systems picks up steam, the majority of banking would still be done on physical banking locations in the near future, such as opening and signing accounts, and future transactions, the ratio of bank locations to potential clients is estimated to be 1 : 20000 people. The difficulty of opening a bank account and the cost of operating one will slowdown cash flow into mainstream. The hoarding in the black market will explode by simply selling for 10 to 20 percent lesser than what it will cost to get the same amount of money from the banks. This will cause wide speculations, and as a result affect everything from prices, production, availability, supply and demand and even the stock market. Judging from Nigeria’s past history of implementation of policies, this policies may not be effectively administered or will gradually fade and become a thing of the past after a while, you could say an addition by subtraction.
At what price
CBN’s direct cost of cash management In 2009, was N114.5 billion, projection is that by 2020, it will cost N200 billion in cash management. This cost is relatively lower than the average cost globally, a Stanford University Report in 2010 states
* The Federal Trade Commission (US) estimated that there were 48.7 million individual fraud transactions in 2005 and the average loss was $60 per transaction. This would put the total dollar loss to fraud at approximately $2.92 billion per year in the United States (2007)
* The 2006 UK fraud study estimated total dollar losses in the UK in 2005 to be 3.5 billion pounds (UK, 2006).
* The Consumer Authority in the Netherlands estimated fraud losses in 2008 totaling 579 million Euros (Consumer Authority- Netherlands, 2009)
The CBN should be aware of the compulsory risk and impending cost a cashless society present, given that Nigeria is a major international hub for online scams and online fraud. Proper arraignments have to be made to protect the rights of its citizens and the amount of fraud transactions is definitely going to increase significantly. if not handled proper the banking industry could stall to take account of losses, this will cripple the economy
I also suspect that a major factor behind this policy is the problem of money laundering in Nigeria and the need for the proper authorities to “follow the money”. if this prediction is accurate then the benefits will be tremendous by saving and retaining money in the country, this money is then used for additional developments. It also will reduce the pressure on the Naira, but this can be done in a less dramatic way by creating a standard and effective cross-boarder electronic transmittal's reporting system.
This reporting system is a network between all financial institutions in Nigeria and the CBN. when ever there is a withdrawal or deposit exceeding a particular stipulated amount its reported to the CBN, that way they can analyze these data and follow the money taking proper actions with out disrupting the system.
As the CBN prepares Nigeria for a rough transition into a cashless economy, they must put into considerations these factors
Power must be improved dramatically to accommodate for smooth operations of financial activities
The state of Infrastructure;
The financial infrastructure in Nigeria is not adequate to carry the load of a cashless society, ATM's, Point of Sales system, mobile banking and other mediums have to dramatically expand to touch at least 40% of the whole economy before any meaningful effect can be achieved
Availability of real data;
Proper and accurate identification of account holders must be maintain and shared when necessary by all financial institutions; also CBN must collaborate with all other government and private agency responsible for collection of Identification of individuals in Nigeria for reconciliation of any identification.
CBN must be ready to invest heavily to make these transition possible, Technology is not cheap and ever changing at a very fast pace. Investments in billions of dollars made in infrastructure, training, marketing, security, maintaining it networks on so on will be on a yearly basis for the years to come and should be a collaboration of efforts by all invested parties.
As it relates to laws that are need to enforce new methods of transactions and a changing culture, the CBN must partner and work with the National Assembly to ensure proper legislation is been formulated. Enforcements of new legislation would be carried by the CBN and all other executive arms that are empowered such as the EFCC. They must commit to training of personnel and the judiciary must be prudent and up to the task.
Another major concern would be the risk involved, because if the process is rush and the economy losses confidence i the system due to high level of fraudulent activities, it will be devastating to the Nigeria economy
The Nigerian economy is in exciting but challenging times, The proper foundations have to be established as the CBN courageously transform the modes of operation of the Nigeria economy. The road to the stars is rough.