Nigeria: X-Raying the Gains of Cashless Policy

The Central Bank of Nigeria Act 2007 stipulates that the Bank shall have powers to print, redesign, destroy, and re-distribute currencies. Specifically, Section 20(3) of the CBN Act stipulates that: "Notwithstanding subsections (1) & (2) of this Section, the bank shall have power, if directed to do so by the President and after giving reasonable notice in that behalf, to call in any of its notes or coins on payment of the face value thereof and any note or coin with respect to which a notice has been given under this subsection, shall, on the expiration of the notice, cease to be legal tender, but, subject to Section 22 of this Act, shall be redeemed by the bank upon demand."

There is no doubt that since 2015, technological advancement in the Nigerian banking industry has grown exponentially to become one of the best in the world. Thus, the cashless policy, which is the global best practice, was re-introduced in 2019 and by October 2022, the CBN Governor, Godwin Emefiele, stated that the apex bank is committed to making Nigeria 100 per cent cashless.

According to him, all infrastructure needed to ensure a smooth working cashless system such as the CBDC, online banking, Payment System Banks, PSBs, Point of Sale terminals, PoS agent banking, mobile banking and ATMs have since been deployed, adding that the destination was to achieve 100 per cent cashless economy in Nigeria.

Consequently, the apex bank announced the full implementation of the cashless policy effective Monday, January 9, 2023 through a twin-track policy of naira redesign and new limits on cash withdrawal from banks. Specifically, the CBN places a stricter cash withdrawal limit compared to the initial limits placed when the policy was introduced in 2012.

According to the directive effective January 9, 2023, individual bank customers cannot withdraw more than N100,000 in cash over the counter, through ATMs or PoS in a day. This amounts to N500,000 every week or N2 million in a month. For corporate customers, the withdrawal limit was placed at N5 million per week, translating to N20 million per month.

The circular, which was signed by CBN Director of Banking Supervision, Haruna Mustafa, also placed a limit of N100,000 on over-the-counter third party cheques.

In line with the plan of the CBN to ensure that the higher denominated notes will be used as only a store of value as only more of the lower notes will be in circulation, the apex bank directed that, as against N1,000 and N500 notes that are dispensed by ATMs across the country, naira denominations of N200 and below only must be loaded into ATMs. This implies that N500 and N1,000 notes can only be collected over-the-counter in the banking halls or at PoS points.

Generally, currency redesign policies (sometimes called demonetisation policies) are designed by countries to strengthen the performance of key macroeconomic parameters and equally combat social improprieties. Chiefly, it is expected to reduce the amount of cash in underground or illicit economy, truncate the activities of racketeers, and obliterate rent-seeking businesses in the black market. By reducing currency outside banks, it will shrink money stock and accordingly lower the long-run path of inflation. The ensuing deflationary pressure could elicit interest rate cuts that will in the short- to medium-term boost economic activities, spur aggregate demand, and enhance output growth.

This is not the first the Nigerian currency would be redesigned. Over the years, the Nigerian legal tender has been redesigned four times - 1965, 1968, 1973, and 2007. In 2022, the currency was redesigned while the new notes - N200, N500 and N1000 -- were launched on November 23 of the year.

Clearly, the cashless policy of the CBN has enormous benefits. Speaking on the benefits of the policy since its reintroduction, the apex bank governor said it has stabilised the exchange rates. "Secondly, we aim to increase financial inclusion in the country by reducing the number of the unbanked population. Thirdly, our aim is to support the efforts of our security agencies in combating banditry and ransom-taking in Nigeria through this programme and we can see that the military are making good progress in this aspect".

Data shows that in 2015, Currency-in-Circulation was only N1.4trillion. As of October 2022, currency in circulation had risen to N3.23 trillion; out of which only N500 billion was within the Banking System and N2.7 trillion held permanently in people's homes. Ordinarily, when CBN releases currency into circulation, it is meant to be used and after effluxion of time, it returns to the CBN thereby keeping the volume of currency in circulation under the firm control of the CBN. It should also be noted that the Notes in private homes and outside the banking system are not available for economic activities and thus may affect the economy attaining its potential growth.

According to Emefiele, "So far, and since the commencement of this programme, about N2.1 trillion has been collected; leaving us with about N900 billion. By spurring more people to use bank accounts, this policy will further increase bank account ownership and increase the use of accounts by enhancing people's saving behaviour. It could encourage some hitherto informal business operators to formalise the pattern of transactions and adopt more formal settlement channels.

"In addition, the short-term decline in cash holding and the increased formalisation of business activities as the cashless policy forces more economic agents to open bank accounts, will also boost fiscal policy. With more transactions going through e-channels and bank accounts, more agents come within view of the government's tax net. This enlarges the base of taxable activities and increases the possibility of more tax receipts by various tiers of government.

In the long-term, the policy improves the sophistication of tax collection and would no doubt reduce tax evasion and tax avoidance. As experiences from other jurisdictions have shown, effective currency redesign can support regulatory reform, increased legislative reach and coordinated fiscal and structural policies.

- Danjuma writes from Kaduna

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