THE IMPACT OF CBN CASHLESS POLICY ON THE DEVELOPMENT OF FINANCIAL SECTOR OF NIGERIA

CHAPTER ONE

• Background to the study

One of the prerequisite for the development of national economy according to Ajayi and Ojo (2006) is to encourage a payment system that is secure, convenient, and affordable. In this regard, developed countries of the world, to a large extent, are moving away from paper payment instruments toward electronic ones, especially payment cards (Humphrey, 2004). In these countries, for instance, it is possible to pay for a vending machine snack by simply dialling a number on one‘s phone bill. In recent times, the mobile phone is increasingly used to purchase digital contents (e.g. ringtones, music or games, tickets, parking fees and transport fees) just by flashing the mobile phone in front of the scanner at either manned‘ or unmanned point of sales (POS). In Nigeria, as it is in many developing countries, cash is the main mode of payment and a large percentage of the populations are unbanked (Ajayi and Ojo (2006). This makes the country to be heavily cash-based economy.

Against these backdrops, the CBN introduced the cashless policy in April 2011 with the objective of promoting the use of electronic payment channels instead of cash.  The introduction of electronic banking, online transactions and mobile banking in Nigeria has paved way for a new era of development where the use and demand for physical cash is gradually declining. These recent evolution of technology in the Nigerian financial institutions possess interesting questions for economist, financial institutions, business analyst and the government regarding the current economic status, logistics, and availability of instruments to guarantee economic growth and stability, efficiency and effectiveness of the cashless policy. Since the inception of humanity, various payment methods have been used to purchase goods and services starting with the trade by barter. The trade by barter method of transaction has been the foundation for the introduction of money and coins to solve the problem of double coincidence of wants and divisibility faced by trade by barter. The use of money/coins was introduced after the use of trade by barter method, and it has solved various challenges associated with trade by barter, but the use of money as an exchange medium has its own challenges and dis-advantages and can still be replaced with a better payment system-the cashless policy. Various advantages enjoyed by more developed nations such as the US has prompted the Central Bank of Nigeria (CBN) to adopt the cashless policy. At the end of the 1980s the use of cash for purchasing consumption goods in the US has constantly dropped with inflation (Humphrey, 2004). Nigerian’s aim to be among the biggest economy by 2020 has driven her to gradually move from a pure cash economy to a cashless policy. Since Nigeria gained her independence in1960, there have been different constitutional reforms, change in economic and banking policies mainly aimed at stabilizing the economy, enhancing social welfare and enhancing economic growth and development. In view of being one of the best and biggest economies in 2020, the CBN  started implementing the cashless policy/banking in some major states/cities in Nigeria such as Lagos, Kano, Port-Harcourt and Onitsha early in 2011. The CBN and Pro cashless policy activists have asserted reduction in crime rates, minimized risk associated with carrying huge sums of money, reduction in political corruption, reduction in banking cost, improvement on monetary policy in management of inflation and the overall growth and development of the economy of Nigeria as advantages associated with the  financial system of any economy is responsible for mobilizing savings for productive investments and ensuring efficient resource allocation. Banks have traditionally played an active role in this regard. A large volume of literatures such as those of Ajayi (2006), Adegbaju and Olokoyo (2008), and Babalola (2008) have documented the contribution of banks to socioeconomic development of nations. In recognition of this, various financial policy reforms targeting the banking sector have been pursued in Nigeria. The recent of such policies within the last decade are: the recapitalization of banks initiated by the Central Bank of Nigeria (CBN) in July, 2004 and concluded in December 31, 2005, formalisation of adoption of electronic banking, and transition from cash based to cash-less financial arrangement in Implementation of the cashless policy.  A cash based economy is a setting where retail and commercial payments are primarily made in cash. The statistical evidence provided by Central Bank of Nigeria (2012) revealed that, cash related transactions accounted for 99% of customers’ activities in Nigeria banks as at December, 2011. It estimated the total cash transaction volume through the conventional five payment channels to be 215,015,005 (two hundred and fifteen million, and fifteen thousand and five). Of this figure, ATM withdrawal accounted for 50.9%, over-the-counter (OTC) withdrawal, 33.72%

and cheques 13.56%. Point of sales (POS) and web channels accounted respectively for 0.49% and 1.26%. Obviously, the combination of ATM and OTC withdrawals amounting to 84.96%  justifies the claim of the CBN that the Nigerian economy is heavily cash-based and the imperative for cash-less economy.

Furthermore, a cash based economy also imposes some costs on the banking system, individuals, and the government. The higher the velocity of cash usage, the higher the processing cost borne by those in the value chain. There is, for instance, the cost of printing new notes to replace the ones that are torn or worn out due to frequent handling. Central Bank of Nigeria (2011) states that this cost is high and also on the increase hence the attempted redenomination of the currency. It puts the direct cost of cash to the Nigerian financial system as at 2009 at a colossal amount of N114.5 billion. The figure is based on actual data from the CBN and 17 banks in the FSI. It excludes bank cash infrastructure cost and employee costs attributable to cash logistics. This amount is broken down into: cash in transit cost N27.3 billion (24%), cash processing cost N89.1billion (67%), and vault management cost N18.1 billion (9%). The estimated cost of cash by the end of 2012 was put at N192billion. Clearly, this evidence provides a platform for migration to cash-less economy.

Cash-less banking is that banking system which aims at reducing, but not eliminating, the volume of physical cash circulating in the economy whilst encouraging more electronic based transactions. In other words, it is a combination of e-banking and cash-based system. It is essentially a mobile payment system which allows users to make payment through GSM phones with or without internet facilities (Odior and Banuso, 2012; Akhalumeh and Ohiokha, 2012). In 2011, it was estimated that 99% of over 215 million customer transactions in Nigeria banks were through ATM and over-the-counter, and this was valued at about N2.1 trillion. It is estimated that an average Nigerian transacts about N65 in cash out of N100 income earned (Princewell and Anuforo, 2013)

The operation of the cash based system has been at a significant cost to the Nigerian economy. The estimate shows that cash distribution cost accounts for 60% overheads in the banking industry while cash management operations require up to 80% of the industry’s infrastructure base and staff strength (CBN, 2012). Furthermore, the direct cost of transporting, processing and storing (vault) huge volume of cash borne by the financial system was valued at N114.5 billion in 2009 and it was estimated to rise to N192 billion by the end of 2012. Again, heavy cash users (i.e. those with transaction value above N150, 000) account for only 10% of transaction volume but 71% of the transaction value. It appears therefore, that implicit cash holding costs for the minority class of cash users are being subsidized by the majority (Nweke,2012).

In response to this trend, the Central Bank of Nigeria by its legal mandate initiated the policy shift from cash-based system to cash-less one. In 2005, the CBN initiated the National Payment Systems (NPS) specifically to achieve the objectives of promoting efficiency and effectiveness of payment system, promoting safe and sound banking practices and protection against systemic risks. It also set the objective of migrating to cash-less mode of payment, such as electronic debit/credit instruments, credit/debit cards, ATM – sharing Electronic Fund Transfer at Point of Sales and Real Time Gross Settlement System (RTGS). Other objectives of NPS include; to ensure payment system audit transparency and full transaction reporting and to achieve acceptance and confidence through information dissemination, customer convenience and total quality delivery (Princewell and Anuforo, 2013). Eventually, the NPS initiative metamorphosed into the cash-less policy in April 20, 2011.

According to CBN, the cash-less policy aims at reducing the amount of physical cash in circulation and to encourage more electronic based transactions. The policy came into effect in January 1, 2012 with partial implementation in Lagos State and later moved into full execution in that State in April 1, 2012. Thereafter, the policy was extended to five states (Kano, Ogun, Rivers, Anambra, and Abia) and Abuja on October 1, 2013 and to the entire country in July 1, 2014. The cardinal objectives of the policy are: (i) to drive development and modernization of Nigeria payment system in line with vision 2020 goal of Nigeria becoming one of the top twenty economies of the world by year 2020, (ii) to reduce the cost of banking services (including the cost of credit) and drive financial inclusion by providing more efficient transaction options and greater reach, (iii) to limit high cash usage outside the formal sector and thereby improve the effectiveness of monetary policy in managing inflation and encouraging economic growth, and (iv) to curb some of the negative consequences associated with high physical cash usage,

including high cost of cash: robberies, corruption and leakages through money laundering, fraud and cash-related crimes (Central Bank of Nigeria, 2011; Odior and Banuso, 2012; Shonubi, 2012).

However, the following are vital issues of the cash-less policy. First, there is a threshold of daily cumulative cash of N500, 000 and N3 million on cash withdrawals and lodgements by individual and corporate bodies respectively free of processing fees. At the conception of the policy in 2011, these were pegged at N150, 000 and N1 million but were later reviewed. This limit applies to all account so far as it involves cash, irrespective of the channel used. Second there are processing fees for withdrawals above the limit, and it is 3% for individual and 5% for corporate bodies. Lodgement above the limit attracts 2% and 3% processing fee for individual and corporate bodies respectively. These processing fees are subject to review every six months.

Thirdly, these fees do not apply to accounts operated by Ministries, Departments and Agencies of the Federal and State Governments, solely meant for the purpose of revenue collections. Exemptions are also extended to Embassies, Diplomatic Missions and Multi-lateral and Aiddonor Agencies, as well as Micro Finance Banks and Primary Mortgage Institutions (CBN, 2012)

Reducing the huge population of Nigerians who do not have access to financial services is one of the major targets of the CBN. A survey on enhancing financial innovation and access in 2010, revealed a marginal increase of those served by formal financial market from 35% in 2005 to 36.3% in 2010; five years after the launch of Micro finance policy which was thought could massively mobilize rural Nigerians into formal financial services (Onyinye, 2012). The survey attributed the reasons why most Nigerians do not have or maintain a bank account to unsteady income, unemployment and distance to bank branches. Accordingly, the CBN targeted to increase the number of Nigerians in the formal sector from its figure of 36.3% in 2010 to above 70% by 2020 (The Nigerian Voice, 2013; The Nation, 2013).

In pursuant of the foregoing, the CBN has undertaken a number of strategic initiatives, including a commitment at the 2011 Alliance for Financial Inclusion Global Forum held in Mexico to reduce Nigeria’s financial exclusion from 46.3% to 20% by 2020. One of the ways of realizing this is to facilitate access to the otherwise disadvantaged groups like the farmers, aged citizens, self-employed, jobless school leavers and SMEs considered by banks a costly, risky and unviable bankable population (Onyinye, 2012). Also, the introduction of mobile money services by the CBN is seen as a veritable tool to create payment access to those unbanked Nigerians in the rural areas, and also help drive financial inclusion in the country. Financial analysts are of the view that the high level of mobile telecommunications usage in the country is expected to translate into increase in bankable Nigerians if perfectly harnessed (Amaka, 2012). It on this that this study investigates the impact  CBN cashless policy on the development of financial sector of Nigeria

1.2 SIGNIFICANT  OF THE STUDY

The study will be of benefit to financial institutions, the government, Nigerian citizens and to fellow researchers. For financial institutions like bank, the study will enable them see the value of cashless policy and the easy to practice the policy. For the government, the study will enable see where to adjust the policy in order enable efficient growth in the financial institutions like banks. The study will enable Nigerian citizens see the benefit of cashless policy in ensuring safety transaction and less arm robbery attack. It will also help Nigerian to welcome this new development as it creates adequate convenience for the citizens.  For fellow researchers, the findings of the study will serve as a source of information and reference for more study.

• STATEMENT OF THE PROBLEM

Monetary policy as a technique of economic management to bring about sustainable economic growth and development through cashless policy and banking introduced by the Central bank of Nigeria (CBN) is not fully operational due to high rate of illiteracy, in-adequate sensitization/education of the benefits of the cashless policy, and in-adequate logistics (such as the provision of internet connections in commercial areas, computers and Point on Sale (POS) machines at all point of business trasaction. Apart from the physical challenges, economic data and indicators are not fully available and reliable. There is a great challenge in attempting to analyse the true impact of the cashless policy on the economy of Nigeria as only few monetary and macroeconomic indicators can be traced with relation to the subject matter. Several scholars have attempted to analyse the cashless system or e-banking. However, it becomes clear that few studies present a comprehensive evaluation of cash-less banking implications in developing countries economy. Most ignore its economic benefits of the equation while some do incomplete examination of its negative implications. This is often due to unreliable panel data for monetary and macroeconomic indicators. Although, this study focuses on Nigeria, it is difficult to translate cashless studies from one country to another. Even payments instruments that look similar across countries on the surface may be different due to historical and legal variations (Daniel et al, 2004). Due to this observations in the study tries to examine the impact  CBN cashless policy on the development of financial sector of Nigeria.

• RESEARCH QUESTION

The following research questions were posed to guide the study.

1. To what extent has the CBN cashless policy impacted on the economy  of Nigeria?
2. To what extent has cashless policy of the CBN contributes to the efficiency in financial system in Nigeria?
3. What are the various challenges associated with the implementation of the cashless policy?
4. How can cashless policy and other monetary policies  be managed for better contribution to the economic growth and development of Nigeria.
   • OBJECTIVES OF THE STUDY

The main objective of the study is to examine the impact of the cashless policy on the economy of Nigeria and how it affects economic growth. Specific objectives of the study include:

1. To examine the impact of the cashless policy on economic growth of Nigeria.
2. To what extent has cashless policy of the CBN contributes to the efficiency in financial system in Nigeria?
3. What are the various challenges associated with the implementation of the cashless policy?
4. To proffer suggestions on how cashless policy and other monetary policies can be managed for better contribution to the economic growth and development of Nigeria.
   • RESEARCH HYPOTHESES

The following hypotheses will be used to test the questions posed.

H_01:  There is no significant impact of cashless policy on economic growth of Nigeria.

H_02:  There is no significant contribution of cashless policy of the in financial system in Nigeria.

H_03:  There is no significant challenge associated with the implementation of the cashless policy.

H_04: There is no significant proffered suggestions on how cashless policy and other monetary policies can be managed for better contribution to the economic growth and development of Nigeria.

1.7 scope of the study

The scope of the study covers the impact of CBN cashless policy on the Development  of financial sector of Nigeria.

1.8 Limitation of the study

The study will be limited to only Awka South and North local government area of Anambra state and will only be limited to cashless policy in Nigeria.

1.9 Definition of Terms

For the purpose of clarity in terms used, the following terms are defined in the contest in which there are used in the study.

Cashless policy:  it a monitory regulation which enable individual to transect without having to carry cash on hand.

POS: This simple means point  of share( it is an electronic machine used for cash transfer from one account to other account)

Prerequisite:    Requirement