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Much Ado about cashless economy

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By Gozie Irogboli

Since last year, there have been so much fuss about Cashless Economy in Nigeria. Some have come to think of it as an alien and abstract concept. This piece therefore is in reaction to the whole din about cashless economy and the misleading notion that it can be decreed into existence.
The past Central Bank of Nigeria (CBN) regimes especially that of Professor Chukwuma Soludo made very remarkable efforts to improve the payment system in Nigeria. This is borne out of the desire to follow global trend, control the cost of minting currency, reduce the risk associated with handling and carrying cash, check the scourge of money laundry and most importantly, aid speedy transaction and efficient resource mobilization for production, economic growth and development. The overall objective is for efficiency, safety and reliability.
Within this period, the payment system witnessed a transformation. The establishment of Nigerian Interbank settlement scheme (NIBSS) facilitated electronic funds transfer among banks. There was also the Nigerian Automated Clearing System (NACS). The CBN authorities knew that a robust payment system is a key requirement for promoting financial stability. The use of the electronic payment system in payment, clearing and settlement led to the replacement of the manual cheques with the Magnetic Ink Character Recognition (MICR) cheques. Clearing settlement period reduced from 21days to 3 days. At present CBN maintains effective presence in all state capitals and runs two clearing sessions on daily basis.
The banks responded accordingly. Some IT firms keyed in by developing and providing supportive electronic platforms that enable banks interface with their customers and other banks. E-business became the buzz word in the sector. The banks fortified their Information Technology Units and acquired sophisticated software to support e-commerce. Different banks established e-business department. So many electronic banking products and portals were developed for internet banking, transaction notification, enquiries, funds transfer and payment. Automated Teller Machine (ATM) were acquired and deployed to various business locations across the country. Credit cards and debit cards were customized and given to customers. Bank in their quest to expand their market shares developed branches in every nook and cranny of the country. Point of sale (POS) devices and other electronic modems were acquired and deployed to customers. This electronic interface allowed firms and government agencies access to multichannel payment system that enable them collect fees, revenues as well as remittances and salaries for improved efficiency, fraud control among other benefits. Now all payments and remittances in government Ministries, Departments Agencies (MDAs) are done electronically.
Despite these revolution in e-business, the Nigerian economy remains largely a cash and carry affair due to low level of literacy especially financial literacy, technical inadequacy, low level of trust on financial instrument, on-line payment fraud, system unreliability, absence of credit facility and poor credit administration due to the absence of credit bureau. 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.
Thus achieving cashless economy will be much more than pegging the deposit and withdrawal limits as CBN has done, fixing =N=150,000 for individuals and =N=1,000,000 for corporate bodies. It must 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 some other times  in a more menacing dimension. This attempt by the current regime to fix deposit and withdrawal limits may lead to the following:
1)    The banks may grant waivers to their valued customers especially key distributors who make daily huge cash lodgments and withdrawals.
2)    People may be compelled to open multiple accounts in different banks to facilitate multiple deposits and withdrawals without paying the penalties.
3)    Again and more dangerously, depositors may in an attempt to avoid the payment of the cash processing fee, hold more cash after paying in the stipulated amount permissible.
4)    Some may be forced to change their money into hard currency and hold them in their private vaults.
5)    Worse still, those who are not rate sensitive may carry on their usual cash transaction regardless of the processing fee.
Do not forget that bank customers are not new to cash processing fee. This has been introduced in the past by banks to discourage cash transactions but it proved ineffectual due to the inherent constraints in our economy.
Without doubt, attempt to improve our payment system through the use of Electronic Payment System (EPS) started long before Sanusi Lamido Sanusi CBN. The Nigerian Payment System (NPS) policy has long been articulated as a prelude to the West African Monetary Zone (WAMZ). So, 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. CBN has options depending on what it intends to achieve. CBN can reconsider Soludo’s Currency Redenomination proposal for instance if it wants to reduce the cost associated minting, processing and holding cash. CBN can further reduce the cheque clearing and settlement days.
It is not out of place to say that it is difficult to figure out the direction of the current CBN regime. For instance some of the steps taken by Sanusi upon assumption of office as CBN governor were antithetical to the   apparent cashless economy drive. Sanusi ordered banks to remove ATM from public places. He also halted branch expansion thereby denying some areas access to banking services in a developing economy like ours with very uneven spatial distribution of banking facilities. Also, Sanusi’s actions tend to criminalise lending. Remember that a cashless economy is more or less a credit economy.
Clearly, the current CBN regime cannot elicit trust about its sincerity of purpose neither does it inspire confidence about its capabilities to move the economy forward. Other economies have recovered from the shock of the global meltdown because they did proper diagnosis and took right decisions but ours is still comatose.
Three years after present reform, neither the economy nor the parties to the financial intermediation process has benefited from it. Depositors have become disillusioned and some are forced to convert their deposits into other assets. Some changed theirs into hard currency and kept them in their private vaults. Investors no longer have access to investment funds as was the case hitherto. Some now source their funding offshore. The banking sector is currently in a state of topsy-turvy. Our banks are no longer rated. Before now the sector was obviously booming and bourgeoning, acquiring and partnering with foreign banks and spreading beyond the shores of Nigeria. It was driving the economy and contributing significantly to employment. But now its vitality is gone. Now we have forceful merger and insidious acquisition. A situation where only 5 out of surviving 22 control over 50% of the total deposits is very unhealthy. Over 50,000 bank workers have been sacked in the past three years. Some have received demotion, wage slash and casualization. Those in the system are searching for job since they are not sure of their positions. The stench of uncertainty is hanging in the air like a time bomb. The morale is very low. When morale is low, commitment and productivity are low and employee fidelity doubtful.
The overall effect is that our economy is still in the doldrums. Unemployment situation is dangerously very high. Dependency ratio with its attendant crime and social vices are on the upward swing. Economic growth is visibly on the downward slide. Businesses are operating below their installed capacity. Some are closing and moving into more stable economic environment. Prices are still very far from stable as the cost of living and doing business in Nigeria are suffocatingly high. Our external balances measured in terms of foreign reserve, foreign debt, exchange rate, balance of payment and others are still very far from the desired position.
Genuine economic progress is not achieved by fiat or propaganda but by planning and developing systems, structures and institutions that will support productive activities. We have waited patiently. The whole din about reform only exists on the pages of newspapers and on the lips of some ignorant members of the public. Reforms are carefully articulated programmes of action aimed at making a fundamental impact on a system. Reforms are strategic, cohesive and result-oriented.
As I told Joseph Sanusi the former CBN governor about ten years ago, (see “The Banks and the Rest of Us”. Thisday Newspaper 16th June, 2002 page 14.) Central Banking is not just about bank supervision. In a developing economy like ours, it goes beyond manipulating monetary aggregates. Essentially it requires a holistic developmental approach. The financial system is the blood of the economy. Nigeria needs a virile financial system. We cannot get there by ad hoc half-hearted arrangement.
After the Banking Consolidation, the system was awash with too much equity funds with which some banks indulged in cut-throat competition and with their universal banking licence, they began to diversify deeply into areas outside their core competences. Some of their subsidiaries were not contributing to the bottom line. Moreover, with the bourgeoning capital market stimulated by the bank consolidation, the banks were helplessly exposed to margin lending. In the midst of these came the global meltdown in 2008 and the collapse of the stock market. Remember that Nigerian economy is not insulated from external shocks. This was the mess that Sanusi met. Instead of following up with the post consolidation steps or some other positive steps, he blew the situation out of proportion by playing to the gallery.
We witnessed the hullaballoo that greeted the update of customer information in 2010. It was as if the system will come to an abrupt end by December 31st 2010 if not completed. But it was clear that the heat and the measure were uncalled for. Again, when the issue of Islamic Banking came, Sanusi passed the buck. Instead of dwelling on the merit of non-interest banking as expected, he shocked everybody by saying that it was professor Soludo that approved Islamic Banking yet when he established Asset Management Corporation of Nigeria (AMCON) he never gave Soludo the credit for the idea.
Sanusi need to change his style and consult widely if he must make any meaningful impact. Often times, a marked difference exists between actual and expected result of a programme when the critical success variables are not factored into the design process. I believe that for public office holders especially economic managers the Structure and Problems of Nigerian Economy should be a prime necessity in programme identification, design and implementation. That is a sure way to have the desired result.
Gozie Irogboli is a trained economist, banker, consultant and a public policy analyst This e-mail address is being protected from spambots. You need JavaScript enabled to view it

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