Bumpy Road to a cashless economy

In a bid to fast track the transition from a cash to cashless economy, the Central Bank of Nigeria (CBN) recently announced a new policy on cash withdrawal limits which may have a profound effect on banking operations. Ikechukwu Eze and Alexander Chiejina x-ray this development and the challenges which may bog it down

Kelechi Anaeke, Director, Kelly Computers owns a shop at the popular ‘Computer Village’ located at Ikeja, Lagos. Anaeke deals in all kinds of computer accessories, and supplies laptops as well as other telecommunication gadgets to clients from within and outside the state. His business is worth over a million naira, and is essentially cash-based.

Like him, Rose Okoh, a baker, owns a shop at Oshodi, Lagos. Her business is worth several thousands of naira. But unlike Okafor who maintains a personal savings account with one of the banks at Ikeja, Okoh did not have any account until last month when a bank marketer convinced her on the need to open an account with his bank.

However, Okafor, who pays between N200, 000 and N450, 000 into his bank account on a good day, has been wondering how his business will cope following recent announcement by the Apex Bank limiting daily cash withdrawals and deposits to N150, 000.

A look at recent improvements in the nation’s banking culture and growth of e-payment platforms, suggests that people move huge volume of cash around giving the instant value and finality it brings to financial transactions they embark on. For the informal sector where most cash transactions occur, it is huge and largely unsophisticated.

In a bid to reduce the increasing use of cash-in transactions which according to analysts, has dire consequences on the overall economy, particularly concerning cost of cash management to the banking industry, security, and money laundering, the Central Bank of Nigeria (CBN) directed all commercial banks, savings and loans institutions, mortgage and microfinance banks in the country to ensure that, effective June 1, 2012, daily cumulative free cash withdrawals and lodgements by individual and corporate customers do not exceed a maximum ceiling of N150, 000 and N1 million respectively.

Sanusi Lamido Sanusi, CBN Governor

In a circular entitled: “Industry Policy on Retail Cash Collection and Lodgement,” which was signed by Director of Currency Operations, CBN, Muhammad Nda, revealed that the CBN has imposed a penalty of N100 per N1000 on all individual cash transactions in excess of the limit, while corporate customers that go contrary to the new policy are to pay a fee of N200 per N1000 withdrawn above the stipulated cumulative limit.

The circular added that, “Contravention of this policy shall attract a fine of five (5) times the amount that the bank waives as a first offender, while the bank shall, subsequently, pay ten (10) times the charges waived.”

Following this developmåent, concerns about the implementation of this new policy, especially as it means transiting from a cash-based economy to a near cashless one in just one month have since sparked off another round of controversy in the banking industry.

For people like Anaeke and Okoh who make significant sales and do not operate corporate accounts, where would they keep their extra cash if they can only make a cumulative lodgment of N150, 000 in a day? Many believe that even if they resolve the problem by keeping the remaining cash for lodgment till the following day, they would still have to contend with the issue of safety of their money. This is not their only worries.

Most business transactions in the country are still cash-based, which means, businessmen would need to withdraw huge sums of money to purchase their produce or goods and pay for transportation to Lagos. The traders in the hinterland, from whom they buy their goods know of no other form of payment except cash. They would thus be confronted with a bigger dilemma if this policy if eventually implemented as it is.

In an interview with newsmen, Ade Martins Odigie, President, National Union of Banks, Insurance and other Financial Institutions Employees (NUBIFIE) warned against implementing such monetary policy in Nigeria.

According to him “The current CBN’s management should be called to order. For instance, if you compel an entrepreneur who is transacting a daily business of buying and sell for about N400, 000 to limited his cash lodgements and withdrawals to just N150, 000, it means his operations would be reduced by 60 percent. This is unimaginable and should not be accepted in any form.”

Austin Airobomian , a medical equipment supplier also believes that the policy would cause some distortions in the economy in the short term. According to him, “some of my customers always insist on cash payment before they would release their goods. How do we make these changes in a short time?” Airobomian however stated that the CBN ought to have carried out sensistisation programme to prepare Nigerians for the transition.

Central Bank of Nigeria Head Office at Abuja

 Not everybody sees it as a wrong policy. Ogho Okiti, Business Day’s chief economist believes that Sanusi is right on matters of first principle which is seeking to limit the amount of cash in circulation. “Nigeria is one of the only few big countries where people move huge amounts of cash around. When cash is not in the banking system it means banks cannot lend that cash. That simply means that the cash is not working for the economy.

“ The second thing is if he is right on first principle what are the things he wants to correct? But there are underlying principles; there is the issue of efficiency, there is issue of corruption and issue of waste.”

Okiti however admitted that the policy is not sufficient for the implementation of the new measure. For instance, he wants CBN as a matter of urgency to commence policies that would encourage people to open bank accounts as well as embrace other means of payment outside cash.

“The point is that people are inclined to argue from the angle that favours them. There is too much cash circulating in the system and we don’t have to wait until everything is right before we embark on corrective measures. Experience has shown that economic behaviour will change once the right policy is in place,” Okiti said.

In his own view, Boniface Chizea, Managing Consultant and Chief Executive Officer, BIC Consultancy Services argued banks in developed economies do not accept cash lodgements beyond a specified amount. He however added that if one must do so, some satisfactory explanations would be demanded (about) the source of such proceeds.

Chizea, who is also an economist, recommended the policy from the perspectives of attaining greater operational efficiency, as it would enable the apex bank reduce the cost of currency management, and fight the battle against money laundering.

The financial consultant advocated for a raise in the set limit initially in a bid to mitigate opposition to the policy, promote its acceptability, adding that commencement of the policy from such high cash density locations will allow time for the message of the policy to permeate the nooks and crannies of the economy and make for better implementation. The concern of the CBN is said to be that Nigeria may not realise its vision of transforming into one of the 20 most advanced economies in the world by the year 2020, which is just nine years from now, if a large segment of the population is unbanked and payment system remains undeveloped.

In a 2010 report presented last November, Enhancing Financial Innovation and Access, EFIA, a professional and non-governmental organisation sponsored by the United Kingdom’s Department for International Development, put the population of banked Nigerians at 25.4 million, representing only 30 per cent of the adult population, leaving 39 million adults outside the banking system.

Due to the vast number of Nigerians outside the banking system, this situation may result in having billions of naira circulate through the informal sector, which has a negative impact on the country’s economic growth and development. This no doubt poses a great challenge to the banking sector, particularly the regulatory agencies, saddled with the responsibility of driving the country’s transformation into a cashless society.

However, despite the fears expressed over the new policy and its possible repercussions, particularly because of the unpreparedness of the apex bank, some Nigerians see it as a good omen for the economy.

To these Nigerians, the policy is seen as an extension of various electronic products of banks, which have made life more comfortable for elite Nigerians. For instance, the use of credit card is gaining ground and is believed to be beneficial to the user, the issuer and the economy. This explains why experts believe that electronic payment (otherwise known as e-payment platforms) must form the bedrock of all financial transactions for Nigeria to achieve Vision 20:20-20.

Austin Oche, a banker, a belongs to a very small percentage of Nigerians who have embraced the e-business culture, noted that the challenge for the banks and other financial service providers is to vigorously promote e-payment or e-business with innovative products.

For Remi Babalola, former Minister of State for Finance, belongs to the class that wants Africa quicken its appreciation of the e-platforms in business transactions. In a recent lecture on the imperative of a cashless economy in Nigeria, he said:“The immense benefits associated with the use of electronic payments both to the individuals and the country are not in doubt. But while tremendous progress is being made on card system in developed countries, the African continent appears to have been left significantly behind.”

According to Babalola, the inclination, in developed countries is to move more towards electronic payment than any other form of payment for convenient, fast and easy business transactions.

”For Nigeria to join this league of developed economies by 2020, e-payment must form the bedrock of all financial transactions,” he said.

While many Nigerians may not readily use cards in paying for goods over the counter, doing so for the purposes of recharging their telephones and paying for television subscriptions may be more likely.

Currently, of all electronic payment channels, the use of the Automated Teller Machine (ATM) is more widespread as it allows the card holders to obtain cash 24 hours. To encourage its use, some banks had to issue ATM cards to their account holders and debited them. They have also imposed a cash limit that should be withdrawn with the ATM machines and customers who wish to be paid over the counter would have to pay some charges, all in an effort to encourage its use.

Going further, the Electronic Payment Providers Association of Nigeria has estimated the e-card industry to be worth about N24 trillion monthly, with ATM transactions constituting N80 billion and Point of sale (PoS) terminals only N1.4 billion.

With over 30 million e-cards, 10,000 ATMs, 15,000 PoS terminals deployed across the country, the prospect of developing a cashless economy can be said to be on course. However, some of the channels do not accept some other cards, which is why CBN’s order to the service providers to harmonise all e-payment cards in the country by next month is seen as a step in the right direction.

The new CBN directive setting limits on cash withdrawal for individual and corporate customers of banks may not be a bad policy after all. However many analysts have expressed concern on the preparedness of the apex bank, giving that many policies in the past like the banning of spraying of naira currencies at parties has only been implemented on paper.