A few years ago when the Central Bank of Nigeria suspended its policy of pegging cash deposit and withdrawal limits otherwise referred to as cashless policy many thought that would be the end of it. But, the Apex bank has made a surprise volte-face by re-introducing the much criticized policy. And the hubbub that attended the announcement is a pointer to the fact that the policy is undesirable to the Nigerian business community.
Clearly, the criticism that greeted the re-introduction of the policy is also an indication that cashless economy cannot be attained by decrees and executive fiat. As I observed in an earlier assay on this topic a few years ago, “achieving cashless transactions involve developing internal structures and the use of cash substitutes that will make cash transactions unattractive. Putting a ceiling on deposit and withdrawal with the intention of encouraging cashless transactions is equivalent to attacking the effect rather the cause. It is always the case that when you attempt to solve a problem by attacking the effect, rather than the cause, the problem will resurface in another sometimes more menacing dimension.”
The question that should agitate the authorities in CBN is: why would people prefer to make transactions in cash rather than other means in spite of the inherent risk associate with cash transactions? The answer to this question is not far-fetched. As I also observed in the afore-referenced assay: over the years there has been positive development in electronic banking in Nigeria but despite these revolutions in e-business, Nigerian economy remain largely a cash-and-carry affair due mainly to low level of literacy especially financial literacy, technical inadequacy, low level of trust on financial instruments, on-line payment fraud, system unreliability, absence of credit facility and poor credit administration due to the absence of credit bureau. We also hear of the digital divide which is a stark reality in this part of the globe. There is also the problem of adverse socio-political environment, dualistic nature of Nigerian economy and the legal and institutional weakness in monitoring and credit administration. Added to these, is the fact that Nigeria is grossly under banked. Over 60% have neither access to banking facilities nor financial and economic institutions. A sizeable portion of the total money in circulation is outside the banking system.
A cursory look at the trajectory of events in our banking sector over the years that has improved our payment system culminating in Agency Banking phenomenon that has taking pressure off banking halls and bringing banking services closer to the people shows that they were driven by the ingenuity of bank executives and good policy initiatives from the Apex Bank and not necessarily through executive fiat. Time was when our traders and business men used to ferry cash along far distances in luxurious buses from Kano to Lagos, from Onitsha to Lagos, from Aba to Maiduguri… and were robbed on daily basis by armed robbers. The luxurious buses then moved with armed escorts. The haulage of cash by traders was not stopped by government decree or executive fiat. Not even the menace of armed robbery could stop it. What stopped it was the initiative of banks’ executives who invested in technology and introduced online real- time banking and brought banking services closer to the people by spreading branches across every nook and cranny of the country. Thus, a trader in Onitsha or anywhere in the country could lodge his cash in his bank and travel by bus and make transactions at Idumota or Ojo-Alaba, Jos and sundry other places without having to carry cash on transit. The Jim Ovias, Tony Elumelus, Paschal Dozies, Erastus Akingbolas and others in the banking sector then identified this lacuna and invested accordingly. The current CBN governor, Mr. Godwin Emefiele is a product of that golden era of our banking history.
The pertinent questions nibbling the minds of concerned observers are: would the proposed cash deposit and withdrawal limits have the desired effect? Which party in the financial intermediation scheme would be the ultimate beneficiary of the policy—the regulator, the banks or the customers? If the policy was successful when it was first introduced, would it have been suspended? Consider this scenario, perhaps it can shed some light into the vexed issue. If a certain Depositor D, has a certain amount of money M plus X where M is the permissible amount and X the excess and has two accounts in the same bank or in two different banks A and B. Mr. D has options to circumvent the cash lodgment policy. He could pay in the permissible amount M into one account and pay the excess Y into the other account or lodge in the allowable funds into Bank A and walk over to Bank B and pay in the excess or carry the excess home. Again, what if someone is making payment above the permissible limit into a client’s account? Who pays the fee—the depositor or the account owner? So, pegging deposit and withdrawal limits would create duplicity and wastages and make payment processes somewhat cumbersome.
Broadly, we can classify the depositors or bank customers into two in terms of rate sensitivity. Those whose degree of responsiveness to rate change is inelastic could make their lodgments irrespective of the charges and for producers who produce Fast Moving Consumer Goods (FMCG) transfer the cost to the consumers by increasing the price of their product. Those whose reaction to charges is elastic would find ways to circumvent the charges. Some may be compelled to open multiple accounts in different banks to facilitate multiple withdrawals and deposits without paying the stipulated penalties. Also, some depositors may in an attempt to avoid the payment of the cash processing fee, hold more cash after paying in the stipulated amount permissible. Again and more dangerously, the policy may lead to dollarization as some may be forced to change their money into hard currency and hold them in their private vaults. Moreover, the banks may grant waivers to their valued customers, especially key distributors who make daily huge cash lodgments and withdrawals in other to avoid splitting their lodgments or losing them to their competitors.
Clearly, the implication of these is that the policy would not have the desired effect. Indeed, an attempt to achieve cashless economy by putting a withdrawal and deposit ceiling without necessarily strengthening the entrenched distortions in the system will amount to an exercise in futility. It will further alienate the unbanked and the under-banked sector of the financial system.
Indeed, observers are agitated as it is difficult to fathom out exactly what the policy is intended to achieve. It could not have been to control money laundry for the banking system has many platforms of reporting huge funds movement, suspicious and unusual transactions. It could not have been to improve the payment system for it would make it more cumbersome by creating hiccups and duplicities. Again, if it is to reduce the cost of minting currency as stated officially, then the Apex Bank, can reconsider the currency redenomination idea muted by Prof. Soludo shortly before he left office as CBN governor in 2008. Also, in order to ensure durability and reduce the cost of currency minting, Soludo had introduced the plastic notes in the lower denominations that have higher velocity of circulation. Sanusi said burning the plastic notes pollutes the environment. How many times do the CBN burn currency in a year? Is burning the only way to dispose of dirty mutilated notes? Couldn’t the plastic notes be recycled and put into other uses?
CBN should be more creative in its policy design and avoid policy mismatch and measures that are physical, drastic, controversial and uninspiring that could put strain on our fragile financial system. What should be achieved through moral suasion and public enlightenment campaign should not be pursued through draconian policy. I honestly advise the current CBN regime under the able leadership of Mr. Godwin Emefiele to avoid the mumbo jumbo policies of the past era that put our banking system in a state of topsy-turvy that it is yet to recover from. One of the unfortunate fallout of the immediate past era is the issue of casualization that has exacerbated the issue of fraud in the system. It is a strategic error to use temps in sensitive areas like banking. Those who have no career niche in your system would under minor inducement compromise your system and find their way.
However, I recognise the current regime’s effort at strengthening our financial system. But, I also expect the Apex Bank to be more developmental in its policy initiatives. Nigerian economy is categorized as developing. One of the features of underdevelopment is the presence of dualism. One sector where this phenomenon is glaringly pronounced is in the financial system. There is financial inclusion and exclusion. We have the banked and a huge unbanked and under-banked section. Bridging the gap between these extremes would make the CBN monetary policies more effective. CBN should therefore target the unbanked and the under-banked section of the financial system and integrate them. That is the only way to make its policies effective. Furthermore, Development Banking, financial literacy, financial inclusion and other matters should be given the right attention.