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CBN’s quest for a cashless economy

May 17, 2011

independentngonline

The Central Bank of Nigeria (CBN) recently pegged a limit of daily cash withdrawal and lodgment with commercial banks by any individual and corporate customer to N150,000 and N1 million respectively, effective from June 1. This latest development, according to the apex financial regulatory authority is coming on the heels of increasing dominance of cash in the economy with its implication for cost of cash management to the banking industry, security, money laundering, among others. While some stakeholders said that the directive was in the right direction, others argued that the country has not developed enough for such policy. In this report, Group Business Editor, ROTIMI DUROJAIYE, samples the opinions of a cross-section of Nigerian and concludes that the CBN should be more creative in its drive towards cashless economy to avoid strangling the economy itself.

The banking regulatory authority, which disclosed the latest directive on April 28 in a circular entitled “Industry Policy on Retail Cash Collection and Lodgement,” signed by its Director of Currency Operations Department, Muhammad Nda, warned that individuals and corporate organisations that flout the limits would be charged penalty fees of N100 per thousand and N200 per thousand respectively.

CBN, which pointed out that the policy was adopted to reduce high usage of cash and  moderate the cost of cash management  as well as  encourage the use of electronic payment channels,  stated  that it took the decision in collaboration with the bankers’ committee.

It threatened to suspend any bank, payments scheme, processor, switching company or service provider that contravenes the policy for a minimum of one month, warning that the licence of such institution might be withdrawn if such contravention was repeated.

The CBN added: “Contravention of this policy shall attract a fine of five times the amount that the bank waives as a first offender. Subsequently, the bank shall pay 10 times the charges waived. Furthermore, third-party cheques above N150, 000 shall not be eligible for encashment over the counter. Value for such cheques shall be received through the clearing house.

“If a bank allows third-party cheque encashment, it shall be liable to a sanction of 10 per cent of the face value of the cheque or N100, 000 whichever is higher.  Banks will cease cash in transit lodgement services rendered to merchant-customers from June 1, 2012. In this regard, customers could engage the services of the CBN-licensed cash-in-transit (CIT) companies to aid cash movement to and from their banks at mutually agreed terms and conditions. Contravention of this policy shall attract a fine of N1 million per specie movement.”

According to the regulator, the arrangement would, in the first instance, be implemented in Lagos State, the Federal Capital Territory (FCT), Port Harcourt, Kano and Aba.

It added that it would thereafter be extended to other parts of the country at a date to be determined by the Bankers Committee.

“To achieve interoperability of local currency Point of Sale (PoS) transactions, no card scheme, foreign or local, shall operate exclusive acquirer agreement or contract in Nigeria with effect from June 1. This policy shall apply to both private and public sector transactions. All financial institutions including Deposit Money Banks, Savings and Loans, Mortgage and Microfinance Banks shall comply accordingly,” the CBN explained.

However shortly after the new policy was announced, it sharply generated mixed reactions from a cross-section of Nigerians.

A respondent, Tolulope Olalekan, said while the new rule may have been done with good intentions, its implementation needs to take cognisance of market realities.

“The cash limits are clearly too small for both individuals and corporate organisations respectively. It should be reviewed upwards,” and recommended that such policies should only be implemented when the country’s infrastructure facilities can support it.

This point was corroborated by Chidi Davies, who believes the one-year cut off date does not tally with Nigeria’s roadmap on power, which is required for commerce to thrive efficiently.

“So how does the CBN expect transactions for agric products, and building materials? We desire to shrink the centuries of Western development into months for Nigeria’s development, but short-term/quick-fix solutions to otherwise gradual/long- term situations usually create new hydra-headed problems,” he stated.

According to him, the CBN should first support and develop the enabling infrastructure for a cashless operation when other things can fall into place. “The CBN should be more creative in its drive towards cashless economy to avoid strangling the economy itself.”

For Abubakar Suleiman, CBN’s move is commendable as it would help curb corruption and transfer of funds from illicit means.

He said as more Nigerians sign up to ATM (automated teller machine) usage; the policy would be more justified.

He said the quest by CBN to encourage telephone banking would also fit in with the new environment. “Most of the cash withdrawn from banks serves only to fund corruption. Most individuals have embraced ATM for their cash needs. Businesses are signing up to POS (point of sales) terminal. In addition, the CBN has created Real Time Gross Settlement system that allows same day value.”

However, the low level of deployment of POS terminals, especially in areas outside the major commercial centres in the country may impede the wide embrace of the policy.

Janet Oladeji said the new policy would affect foodstuff dealers, whose business thrive on cash dealings and the convenience that it brings.

According to her, the average foodstuff dealer does not want to rely on cheques, which could be cumbersome due to the settlement system in the country.

“For this policy to be effective, I feel it is necessary to get the economy working electronically before such a policy is put in place,” she added.

Managing Director, Financial Derivatives Limited, Bismark Rewane, said the apex body ought to have consulted stakeholders before giving the directive.

“The limits have to be consensual. Since it is affecting consumption pattern of consumers, there should have been maximum consultations,” he said.

A chartered accountant and the Managing Partner, Odiase and Company, Victor Odiase, said, “It will be very hard for the policy to work in our environment. Nigerians like to move around with cash because they believe so much in it. The one-year period to move to this new system is too short; there should be proper enlightenment.”

The President, Value Fronteira Limited, Dr. Martin Oluba, said it would enhance forensic detection of fraud in the financial sector.

He said, “This policy suggestion is worth celebrating. One would have expected that it had been in place much earlier. Its relevance draws from the fact that it is at the very heart of the panacea for rescuing Nigeria from the fetters of corruption and economic crimes while at the same time offering a lot of potential for enhanced fiscal improvement.”

“Nigeria loses almost 35 per cent (unofficial estimates) of its revenue through unaccountable channels that are propped by our dominant cash-based system of payment,” he added.

The Chief Financial Officer, First Bank Plc, Bayo Adelabu, said that the move was in the right direction.

He said, “The policy is a good one. Although the limit may be too low, we can graduate to it. It will be a bit difficult for market women and other people, who are less enlightened but in the long run, it will be for the good of the economy. Also, if there’s less cash, robbery will reduce in the society.”

Another respondent who does not want his name in print said the new rules may not work as customers could resort to having many bank accounts with several banks and making withdrawals from these accounts.

Head, Research and Strategy, BGL Securities Plc, Olufemi Ademola, said that while the CBN had invested substantially in human, materials – technologies and policies in developing the electronic payment system in recent times, much work was still needed to be done in bringing greater proportion of the transactions in the informal sector into the formal financial system.

For instance, he argued that since Nigeria’s informal sector constituted about 70 per cent of the total transactions, their financial inclusion must be achieved within the next one year for the policy to be effective without creating other problems.

To make operators of this sector bankable, he called for expanded network of bank branches and Automated Teller Machine as well as Point of Sale Terminals across the country.

He said, “The CBN has invested substantially, human, materials- technologies and policies, in developing the electronic payment system in recent times, there seems to be little improvement in the attempt to reduce the size of the nation’s informal economy, which is largely cash-based.

“Nigeria’s informal economy is estimated to constitute about 70 per cent of the total transactions. In other words, substantial mileage needs to be covered in the areas of bringing greater proportion of the transactions in the informal sector into the formal financial system within the next one year when the policy will start for it to be effective without creating other problems.

“A national poll conducted in 2010 indicated that 62 per cent of Nigerian adult of bankable age have no formal relationship with the banking system. The tasks for the monetary authority is to reduce this proportion between now and June. To achieve this, expanded network of bank branches and ATM as well as POS terminals across the country would be required.

“However, the negative effect of the policy can be imagined in the case of a building contractor, who has to pay a daily wage of N2, 000 each to 500 labourers. He has to force them to open bank accounts through which these payments will be effected against the practice of on-site cash distribution.

“If he fails to convince them to own bank accounts or they are unbankable by virtue of their status, the contractor would have to withdraw cash of N1million and incur the additional cost of N100, 000 to get his workers paid (N200, 000 if it were to be a company).”

Stockbrokers said that the new limit on cash withdrawal and lodgements by the CBN may not impact negatively on capital market activities.

They said this in reaction to fears that a limit on cash withdrawal might affect transactions by investors, thus reducing profitability in the market.

The operators noted that payment activities in the market were structured.

Managing Director, Lambeth Trust and Investment Limited, David Adonri, said that market activities might not be affected by the new directive, going by the current guidelines of cash disbursement for the sale and purchase of shares in the market.

He said, “Right now, stock broking firms are prohibited from taking cash or paying by cash to investors for stock broking transactions. Consequently, the policy will have no effect on stock broking business.

“The policy is laudable because of gains in security and the cost-effectiveness associated with cashless transactions. It is our hope that the implementation will be successful, and we believe that the CBN should put in place mechanisms that will aid its implementation.”

He, however, added that, due to the relatively low banking penetration in the economy and with Nigeria being a cash economy, compliance with the policy might be difficult initially.

The Chief Responsibility Officer, Value Investing Nigeria, Seye Adetunmbi, said, “As for the capital market, by virtue of its structure of dealings, it is elitist and as such, the standing rule is that all disbursement on share sale proceeds must be made by cheques issued in favour of the shareholder. It thus should be a welcome development.

“It is good if it can be effectively implemented. It will curb corruption and all forms of cash settlements outside official dues in our terribly compromised system. Once we can overcome this, then Nigeria is truly set to move forward progressively.”

He, however, warned that it was important for the CBN to ensure that the economy was ready for the huge transition, adding that the apex regulator had a lot of work to do in this regard.

Adetunmbi asked: “Is the largely cash transaction-dependent economy ready for this development? In the just- concluded elections for example, millions were disbursed to party agents and as inducement for the electorate to vote.

“The informal sector players are essentially not disposed to the cheques/current account system. Perhaps, if the rule is established, it may make everyone to comply with time.”

Mazi Okechukwu Unegbu, former president, Chartered Institute of Bankers of Nigeria (CIBN), said the step is a positive development as use of cheques in business takes off a lot of book workings as well as checks some infractions prevalent among clients and some traders.

“Stockbrokers have been clamouring for less use of cash in transactions so that the policy if implemented to the letter will be to operators’ advantage. The CBN also meant to check activity of fraudsters and other money laundering-related transactions. It will also reduce robbery as it is not easy to cash cheques that are not written on your name,” he said.

Nigeria’s quest of migrating from cash to cashless economy has been on the front burner.

Analysts have posited that to meet the target of becoming one of the leading world economies by 2020, efforts must be made to embrace electronic payment system in its entirety.

It was in this consciousness that the CBN came up with a reform policy to check the increasing dominance of cash in the banking sector in order to enhance e-payment system in the economic landscape.

The currency in circulation as at the end of March this year stood at N1.42 trillion.

Also, the currency outside bank vaults stood at N1.025 trillion at the end of February, from N1.033 trillion and N1.082 trillion in January 2011 and December 2010, respectively.

The payments system plays a very crucial role in any economy, being the channel through which financial resources flow from one segment of the economy to the other.

It, therefore, represents the major foundation of the modern market economy. Essentially, there are three pivotal roles for the payments system namely: the monetary policy role, the financial stability role and the overall economic role.

Given the important role that well-functioning payments system has on monetary policy, financial stability and overall economic activity, the CBN has put in place a set of national payments system policy objectives as a broad guideline and framework for all payments system initiatives.

According to the Director General, Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf, the apex bank is so much in a hurry to enunciate policy without taking into cognisance the peculiarities of the country.

He pointed out that such a policy was not implementable as the time stipulated for its take off was too short.

“This policy was planned without taking into consideration the present state of e-banking in the country. Migration from cash transaction is not something that should be done in a hurry. We should talk of issue that is practical and realistic in Nigeria. What we should talk about is raising confidence. That is what the CBN should first of all address. I believe the velocity is too high. Let’s examine and develop the e-payment system first,” he advised.

A university don and economist, Dr. Osaro Obobaifoh, believes CBN was on the right path but craved for more time to create the much-needed awareness.

He was optimistic that the policy would further help to build up the e-payment culture obtained in the developed countries, stressing that the emphasis should also be targeted at enforcing the relevant laws guiding the use of dud cheque.

“There is a need for the CBN to ensure that the policy was properly enforced, through the use of moral suasion to drive it. Coercive measure should be out of it. On the long run, the economy will be better for it,” he said.

But some operators also frowned at the policy, saying that with the low level of the banking population in the country, the move would further discourage financial inclusion.

Former Managing Director/Chief Executive Officer of Liberty Bank and a public policy analyst, Lawson Omokhodion, said the regulators needed to study the policy and ensure it meets the expectations of Nigerians.

“How can you tell me that in a country that is still so cash conscious, that total withdrawal is a maximum of N150, 000? Is the CBN governor going to tell that to traders in Kakuri Market, Kaduna, or their counterparts in Aba and Port Harcourt?” he asked.

He challenged CBN to ensure the effectiveness of the law against the issuance of dud cheques, such that defaulters could be prosecuted speedily in a court of law, unlike the situation currently where the matter is treated with kid gloves.

The situation, he believes, could lead to a plethora of deferred transactions, a development where people have to wait for cheques to go through the clearing before goods purchased with them are released to the buyer.

Managing Director, H.J Trust and Investment, Harrison Owoh, who doubted the workability of the policy, said that under the new directive, it would take a corporate organisation five working days to withdraw money that would enable it do business transaction worth about N5 million.

He commended the principle behind the initiative, but agreed it would be difficult to transform the nation’s economy overnight from cash to a cashless society since most Nigerians were only retailers.

The consensus opinion of the cross-section of respondents is that most people would now prepare to keep their money under their pillows than face the restrictions and limitations imposed by the CBN.

However, many Nigerians also agree with the CBN that the new policy will reduce the high usage of cash, moderate the cost of cash management and encourage the use of electronic payment channels. They said it would further reduce the risks associated with cash movements across the country, while at the same time checking the further abuse of the local currency.

Moreover, it would help to develop other payment channels and assist in generating accurate data for planning within the country.

However, Nigeria cannot be aiming to build a modern economy when its settlement patterns are dominated by cash and anonymous payments which are not easy to track.

Therefore, the transition from a cash-based economy to an electronic one should obviously take more than one year and ought to be preceded by the gradual introduction of the fundamental structures upon which it will be based.

In the circumstance, the CBN should rather tread the part of caution.

While, granting more time for the take-off of the programme, it will be wise for it to undertake massive enlightenment and education campaigns and to take concrete steps to ensure availability of the required Information and Communication Technology (ICT) infrastructures.

It would be only proper in the interim, for it given the current value of the Naira, to take a more critical look at the limits already decided with a view to reviewing them upwards.

That way, the CBN would be seen to have properly carried the people along and the implementation of the new policy would become easier even as the targeted results would be achieved.

  1. ephraim
    February 19, 2012 at 3:15 pm

    please send me with project materials on the topic: Accounting procedures in hotel

  2. Iheme Justin
    January 6, 2012 at 3:44 am

    pls semd me a research material on effect of a cashles society in economic development of nigeria. Urgently

  3. Abass from Lasu
    May 23, 2011 at 7:38 pm

    I critically examined the comments on this site before i decided to share my opinion even when there is no time to state analysis as it regards the New Policy by CBN governor! Literally, it is a defeat of purpose when you wish for more than you can get in this life.

    As a man who has been privileged to know what management is about! should know and ideally conceive this policy as a worthless innovation that will push nothing but discomfort and increase ambiguities that is already prevalent among Nigerians even the rich.

    I believe the CBN governor has been studying too hard and basically confused on what to do right to demonstrate his retarded knowledge on risk and financial management so to assume, with all intense and purposes this policy is not workable in an economy that faces rapid inflation everyday, where most economic indicators are default and immense shortcomings in social and economic standards.

    I am tired typing because i assumed its very ridiculous and makes me wonder if CBN governor observed management courses in the University! or i will suggest he should go to the graves of great management theorist to consult them before he decided on such an evasive policy.

    Obviously it will create additional chaos and instability in life of Nigerians. he should try to read properly ., orderly and interpret the purpose of any ideas he found in books written by most sophisticated management scientist in developed economy.

    Nigeria is a state with collapsed and sluggish economy. Please go to bed and rethink this will serve no positive purpose except hardship, it will obviously depict to the whole world how government failures has made Nigerian wretched and poverty consumed people.

    It will kill SMEs and disrupt the chain of distribution and relatively endanger productivity of the nation.

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