CASHLESS POLICY: Charting a way forward for Nigeria’s ailing economy

On January 1, 2012, the Cashless Economy Policy of the Central Bank of Nigeria (CBN) kicked off. A large volume of literature has been circulating, analysing and criticising the Cashless Economy Policy. This gives us a poser as to what a cashless economy means and why we actually need a cashless economy.

Firstly, we need to understand the nitty-gritty of cashless economy before we can relate it to the Nigerian economy hence proffering solutions as to what makes Cashless Economy Policy effective locally.

A cashless economy is one where purchases and transactions are done mainly by electronic means and seldom by cash. This does not mean the total abolition of cash from the economy -as this is impracticable- it means cash will still be spent and acceptable widely but there will be a reduction in the heavy usage of cash and an increase in the use of alternatives to cash due to the negative consequences of cash usage.

THE NEED TO CHANGE FROM OUR CONVENTIONAL CASH-BASED ECONOMY TO A CASHLESS ONE

Nigeria can be regarded as a cash-based economy because majority of retail and commercial payments are made in cash. According to ODIOR, E. and BANUSO, F. (2012), a CBN survey showed cash-related transactions account for 99% of customer activity in Nigerian banks. In addition, it discovered that cash transactions above N150,000 was largest in terms of value (N1469 billion) and second smallest in terms of number or volume (10%).

This means that the Nigerian economy is highly dependent on cash usage and highly volatile hence the need for a policy that will save cost in the financial sector. It reduces the cost of cash management as reduced pressure on the physical money in circulation means the notes have a longer life span. It also checks money laundering because electronic platforms of payment are registered and traceable by service providers. It as well provides a solution for the insecurity of cash-in-transit both at corporate and individual levels.

UNDERSTANDING THE CENTRAL BANK OF NIGERIA’S CASHLESS POLICY

The policy, introduced by the CBN in April 2011, states that individual and corporate customers are restricted to a daily cash withdrawal and lodgement of N500,000 and N3m respectively. By implication, individuals, who make cash withdrawals above the limit will be charged N3,000 on every N 100,000 (3%), while a corporate organisation will be charged N5,000 on every N100,000 (5%). The service charge will only be on the amount above the free limit and not the entire withdrawal.

Apparently relying on its commercial stamina as Nigeria’s business hub, the CBN commenced the pilot scheme in Lagos State. This is to encourage the use of electronic platforms for day-to-day transactions.

The alternative forms of transaction include:

Card payments: this is done via use of cards such as credit and debit cards

Point-Of-Sale (POS) terminals: this is an online system that involves the use of plastic cards in terminal on merchant’s premises and enables customers to transfer funds instantaneously from their bank accounts to merchant accounts when making purchases.

Mobile banking system: this is the use of mobile devices such as phones to transact business with banks and other service providers such as cable TV services, internet services etc.

Internet banking: This is the means by which customers transact business with a bank through the use of the Internet network. Customers can access their bank accounts and make transfers through a website provided by the bank and complying with some rigorous security checks.

Automated Teller Machine (ATM): ATM is a combined computer terminal, with cash vault and record-keeping system in one unit, permitting customers to enter the bank’s book keeping system with a plastic card containing a Personal Identification Number (PIN). It can also be accessed by punching a special code number into the computer terminal linked to the bank’s computerized records. It is cash dispensing machines capable of making deposits, funds transfer between two or more accounts and bill payments.

Electronic Funds Transfer systems: these are e-wallets/purses which are virtual accounts offered by payment service providers from which transactions can be made.

Telephone Banking: Telephone banking or telebanking is a form of virtual banking that deliver financial services through mobile telephone devices.

NEGATIVE CONSEQUENCES OF RUNNING A CASH-BASED ECONOMY

According to the CBN, the Cashless Policy aims to curb some of the negative consequences associated with the high usage of physical cash in the economy, including:

High cost of cash: There is a high cost of cash along the value chain – from the CBN and the banks, to corporations and traders; everyone bears the high costs associated with volume cash handling.

High risk of using cash: handling cash physically encourages robberies and other cash-related crimes. It can also lead to financial loss when fire and flooding incidents occur.

High subsidy rate: CBN analysis showed that only 10 per cent of daily banking transactions are above N150, 000, but the 10 per cent account for majority of the high value transactions. This suggests that the entire banking population subsidises the costs that the tiny minority 10 per cent incur in terms of high cash usage.

Informal economy: High cash usage results in a lot of money outside the formal economy, thus limiting the effectiveness of monetary policy in managing inflation and encouraging economic growth.

Inefficiency and corruption: high cash usage enables corruption, leakages and money laundering, amongst other cash-related fraudulent activities.

These negative consequences are as a result of the following constraints:

High access cost: users have to invest in devices that give access to electronic platforms before they can engage in retail activities.

Security: there is lack of or inadequate security with the use of electronic devices in Nigeria. Also, internet fraud is on the rise and there is not enough security apparatus to tackle such problems.

Infrastructure: the required infrastructure to make Cashless Policy effective in Nigeria is vastly absent especially in the power and telecommunication sector. These are the two major drivers of any electronic platform of payment. The power sector is nothing to write home about while the internet and telecommunication sectors still need a lot of improvement.

Illiteracy and lack of computer skills: a vast majority of the populace do not have the required computer skills to operate on e-platforms due to illiteracy.

Operational disruptions: disruptions such as server upgrades, network failures etc. affect the stability of electronic payment systems. Situations where bank servers are offline for a whole day is not helpful.

Inadequate funding: the kick-off of a cashless platform requires installation of electronic terminals far and wide which is not present in the system as installations are mainly done in the urban areas only.

Inadequate geographical coverage: the availability of electronic channels of payment is not evenly balanced as they are not available for the rural population.

Inefficient law enforcement: the inefficiency on the part of law enforcement agencies that exist in the country give room for people to get away withoffences.

Public apathy: the banked and the unbanked are not all well at ease with the providers of cashless services due to glitches in services offered as Nigerians expect you to get it right first time especially when money is involved.

High charges on e-channels: some providers charge exorbitant prices to offer cashless services thereby putting people off.

Lack of trust and “bounced cheque syndrome”: Nigerians generally believe in physical cash as they are not confident they will be able to get their money via other instruments especially with the issue of bounced cheques.

‘Unbanked’ majority: there is still a large population of the country that does not transact even via banking systems let alone move to cashless platforms. Getting this percentage of the population straight to Cashless Banking is a big task.

Lack of consumer protection: in case of disputes arising between consumers and service providers, Nigerians are not well protected by the Consumer Protection Council. When people are not well protected, they tend to be careful and deal only via means where their safety is guaranteed.

SOLUTIONS

• The government should formulate policies that will make devices deployed for cashless transactions cheap and affordable to a large percentage of the populace.
• There seems to be a reduction in the cashless awareness in recent times. Re-invigorated continuous publicity can bridge the communication gap between the government and the citizen.
• The legislature should evolve with legislations that keep up with the dynamic nature of Cashless Banking, as this will enable a legal backing for e-transactions and consumers will be more secured.
• Also, the identification initiative by the National Identity Management Commission is a welcome idea. This will provide a database of every citizen of Nigeria and transactions should only be permitted to those who possess the National Identity card hence better tracking by security agencies. The Bank Verification Number (BVN) policy of the Central Bank is also a step in the right direction.
• The functions of the national ID card can be expanded to include services like ‘e-naira’. This will be an e-money service for all government employees, contractors etc. This will hinder inflation of contracts and procurements plus many other benefits too numerous to be highlighted here.
• The apex bank should partner with banks and other stakeholders involved in the campaign to bring the awareness of the policy to a larger section of the populace.
• The infrastructure needed to drive a cashless economy is non-negotiable. Power as well as internet and communication services need to be at optimal performance before we can have optimum results. There is not a single vibrant economy of the world without these two. Also, terminals to facilitate Cashless transactions such as ATMs, POS etc. should be available and fully functional as opposed to what we have now where even ATMs in bank premises are not efficient. Innovations such as the use of Cash and Cheque deposit machines (CCDMs) should be encouraged; this enables cash and cheque lodgement via electronic terminals.
• Terminals such as ATMs, public utility machines etc. should be programmed in at least the three major languages in Nigeria namely Hausa, Igbo and Yoruba to facilitate access for the uneducated. It will also make cashless terminals user-friendly.
• Service providers should be mandated to diversify their database management across different platforms so as to reduce operational disruptions.
• Some services should be mandated to be available only via electronic platforms. This will enable the populace to buy into the idea. An example is the BRT transportation system operational in Lagos. If the only way of boarding the bus is via bus cards, a large population will be compelled to use it which will consequently send a message about the Cashless Policy.
• Government should partner with the private sector in funding the necessary infrastructure to drive the policy especially in the rural areas. No private investor will want to establish where it is not immediately profitable, as only the government can bear to run at a relative loss pending the time the awareness level will rise in such places. This also enables a relatively fair geographical distribution.
• Banks and other service providers should educate the public about all the Cashless Policy options at their disposal, and more importantly the pros and cons. This will reduce public apathy and will douse the get-it-right-first-time tensions.
• An appropriate solution should be proffered to the high fees some providers charge. Probably by making sure the market is competitive and not monopolistic.
• Consumer protection and security should be taken as top priority.
• A deterrent, such as a heavy fine should be imposed on account holders who have bounced cheques on their accounts. If possible banking restrictions should be imposed after a number of bounced cheques. This will enable consumers to respect fair dealings.
• For an effective Cashless banking, a good percentage of the population (over 90%) should own a bank and/or e-account. This will provide an all-inclusive policy implementation.

According to Alan Greenspan (2007) ―The Age of Turbulence, ‘if you wanted to cripple the U.S. economy and you take out the payment systems, banks would be forced to fall back on inefficient physical transfers of money. Business would resort to barter and IOUs; the level of economic activity across the country could drop like a rock.’

This shows that efficient payment system is a prerequisite for the development of the national economy. The payment system is a significant national infrastructure and is critical to the growth of the national economy just like telecommunication, electrical power, and transportation infrastructures are. [ODIOR, E.  And BANUSO, F. (2012)]

Other benefits are:

• It prevents too much of cash in circulation thereby addressing the ills associated with a cash based economy such as armed robbery, money laundering, destruction of money via disaster such as fire incidents, spread of bacteria through money handling etc.
• It provides optimized solutions to the government such as easier tax collection, reduction in the costs of sustaining large volume of money in the economy (printing, mining, transportation etc.), efficient treasury management etc.
• It leads to convenience, offers multiple payment options, faster and easier payments and efficient data collection, hence economic growth.
• It creates jobs and new business opportunities through the establishment of agencies involved in Cashless transactions.
• It promotes use of electronic products such as phones, electronic cards etc. which provides a market for IT companies.
• It reduces the cost of banking services

CONCLUSION

To further corroborate the importance of running a cashless economy, the Daily Independent newspaper on August 3, 2014 reported thus:

“Within two years of implementing the Cashless Policy of the CBN, it gladdens the heart to note that the value of interbank transfers, captured through the Nigerian Inter-Bank Settlement System (NIBSS), jumped from N51 billion monthly in January 2012 to over N1.5 trillion as at June 2014.

In volume, NIBSS transfers rose from 87,000 transactions a month in January 2012 to 3.1 million transactions a month as at June 2014.

According to figures from the CBN, volume of Point of Sale (PoS) transactions increased astronomically from less than 2000 monthly as at January 2012 to 1.6 million per month in June 2014, while transactions in value moved up from N38 million per month in 2012 to N24 billion monthly in 2014.

Licensed payment terminal service providers authorised to increase PoS terminal penetration increased from 5 to 10 with over 150,000 PoS terminals across the country as at June 2014.

The CBN said its target is to increase the PoS terminals to at least 350,000 by 2015.

In an update report on the Cashless policy, the CBN indicated that at the moment, mobile money transactions value went up to N819 million monthly while 22 licensed mobile money operators have already secured licences.”

This shows that the need for Cashless banking cannot be overemphasized as opposed to the inefficient and risky way of cash-based transactions.

Though Cashless transactions comes with its risks such as hacking, phishing, identity theft etc., its merits far outweighs its demerits and such risks could be contained via effective cyber-safety measures.

The conventional cash-based system has proven to be a no-match as it even comes with higher risks.

An effective Cashless policy system can be developed with the recommendations highlighted above thereby moving Nigeria from its present ‘Cash-less’ system (a system where there is just a fair lesser cash in circulation) to a Cashless one where transactions are electronic based.