Review of the Impact of Naira Redesign and Cashless Policy Enforcement on MSMEs and the Unbanked Population in Nigeria by Dr Bode Oguntoke, FCA

Before October 26, 2022, Nigerians were dealing with general economic issues without any idea that their local currency would become a commodity to be purchased with its own Naira. It was not envisaged that the banking hall and premises would become a no-go area, not because of the COVID-19 pandemic but due to a lack of cash to give across the counter and through the Automated Teller Machine (ATM). Nigerians did not foresee a country returning to trade-by-barter, nor would they anticipate that cash of N1,000 in hand is worth more than N100,000 in bank account balance. These were not part of the expected outcome of the Naira redesign and enforcement of the cashless policy as announced by the Governor of the apex bank, Central Bank of Nigeria.

The Central Bank of Nigeria raised concern that over 85 per cent (N2.73 billion) of currency in circulation are outside the vaults of commercial banks as of September 2022. The Bank identified challenges around currency management, shortage of clean and fit notes; financial stability, counterfeiting and overdue state of cash redesign. It was expected that this action would bring about optimal performance of the Naira, an opportunity to entrench the cashless policy, making monetary policy efficacious and helping in the reduction of terrorism and kidnapping. Therefore, the Bank redesigned N200, N500 and N1,000 notes. There was a reduction in daily cash withdrawals and deposits of old notes until January 31, 2023, when the old currencies would cease to be legal tender.

The question was, why would such a laudable and well-intended policy become a pain to Nigerians? Were there unintended consequences in the implementation? This paper presents a simple analysis of why and how the unbanked population and Micro, Small and Medium Scale Enterprises (MSMEs) were highly impacted by the implementation approach of the policy.

This paper presents a simple analysis of why and how the unbanked population and Micro, Small and Medium Scale Enterprises (MSMEs) were highly impacted by the implementation approach of the policy.        

Economy – Contribution of Sectors to GDP

The Gross Domestic Product (GDP) is distributed across economic sectors which are broadly Agriculture, Industry and Services. There are formal and informal segments also contributing to each of the main sectors. The formal segment of the economy has its activities regulated by the government to ensure compliance with a set of rules and regulations. The government can access records and reports via tax returns, financial statements, and other official records. In contrast, the informal sector refers to economic activities that are not regulated or monitored by the government, official records and statistics are difficult to access, and nearly impossible enforcement of labour standards, consumer protection, and business practices.

Some economic activities are over 90% formal, for instance, the Oil & Gas sector, ICT sector and financial services (Bank and Insurance) while some sectors like agriculture, trade, art, entertainment, real estate, accommodation and food services are over 65% informal. In fact, the agricultural sector is over 90% informal. The informal sectors are driven by micro, small and medium-scale entrepreneurs. The transactions in informal segments of the economy are difficult to capture because they are mostly cash-based.

Banking and the Unbanked

The banking business traditionally involves accepting deposits from customers and extending credit facilities to interested borrowers. The records of the Central Bank of Nigeria and Nigeria Bureau of Statistics show that Nigeria still has about 55% unbanked population. The unbanked population essentially depend on cash for their transactions and other economic activities. However, the remaining 45% have bank accounts and conduct economic activities through cash and bank transfers. There are two categories of bank account holders namely, Large Balance Account Holders and Low Balance Account Holders.

Nigeria still has about 55% unbanked population. The unbanked population essentially depend on cash for their transactions and other economic activities.        

The bank customers with large balances or high value are few and are referred to as high net-worth individuals (HNIs), commercial businesses and corporate customers. On the other hand, low-balance accounts are large in number in various banks with total value less than even the sum of the HNIs’ balances. This category is called the retail customer segment and these customers are a large percentage of the populace. These individuals hardly leave money in their accounts, they will prefer to withdraw over 90% of their balance, for instance, they will withdraw all their salary credited and hold the cash at home because they are transacting with traders that don’t have bank accounts. The conclusion here is that everybody holds cash in proportion to the balance held in the bank. This is why ATM is for the retail customers to withdraw up to N100,000 or thereabout, while the HNIs will request for delivery of as much as N500,000.

Monetary Policy and Cash in Circulation

Monetary Policy involves the actions taken by the Central Bank to regulate the value, supply, and cost of money in the economy, to achieve the Government's macroeconomic objectives. The specific objectives of monetary policy may vary from country to country, with some countries explicitly stating these objectives in their central bank laws, while others do not. Two primary views on monetary policy exist, with one calling for the achievement of price stability alone and the other seeking to achieve price stability alongside other macroeconomic objectives.

The Central Bank of Nigeria, like other central banks in developing countries, aims to achieve its monetary policy goals through the regulation of the money supply. In Nigeria, the money supply is defined as narrow and broad money. Narrow money (M1) consists of currency in circulation with non-bank members of the public and demand deposits or current accounts in banks. Broad money (M2) includes narrow money plus savings and time deposits, as well as foreign-denominated deposits. Broad money measures the total volume of money supply in the economy.

Excess money supply or liquidity may occur in the economy when the amount of broad money is greater than the level of total output in the economy. Regulating the money supply is necessary because of the stable relationship between the quantity of money supply and economic activity. If the money supply is not limited to what is required to support productive activities, it can result in undesirable effects such as high prices or inflation.

Table 1 - Currency in Circulation as a Ratio of Total Money Supply (<2022)

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Table 1 shows the currency in circulation as a ratio of total money supply in 2022 for advanced economies like the UK, US, Germany, and France was at over 10% while Nigeria was about 5.82%. China has a low ratio due to the high development of payment systems and internet penetration. According to the World Bank's Global Findex database, in 2017, around 14% of China's adult population (aged 15+) did not have a bank account, while Nigeria is just improving to 55%. China has an internet penetration rate of around 60.6%, while Nigeria has a rate of around 47.1% (Internet World Stats, 2021). This suggests that Nigeria does not have too much cash in circulation considering the level of the unbanked population and internet penetration. Any squeeze in cash in circulation will be felt quickly on the street. However, it is important to re-design the currency to check any currency in circulation but not being used for productive economic activities.

Nigeria does not have too much cash in circulation considering the level of the unbanked population and internet penetration. Any squeeze in cash in circulation will be felt quickly on the street.         

Convergence of Cash, the Unbanked and MSMEs

Due to difficulty in getting cash, ATMs had no cash loaded, the loaded ATMs had huge crowds and banking halls were chaotic. Many POS agents lost patronage as they couldn’t access cash, while those that could buy cash had no choice but to sell the Naira for as high as a 20% fee. POS agents sourced for cash at high cost from places like filling stations whose POS machines ‘refused’ to work. One would expect that bank platforms would be available for the cashless policy through channels like USSD, mobile money, money apps, fund transfer, online banking and so on. Unfortunately, it was an era of failed transactions and delays in payment confirmation due to pressure on the various bank platforms. Having as much as N10,000 in a week was sadly a proud feat.

Although CBN reversed the implementation approach in March 2023, the implications on economic growth might not end so fast, especially for a country that wants to grow its MSMEs. The monetary authority should know that MSMEs that drive the informal sector of the economy have a large proportion of the unbanked and where they are banked, they maintain low-balance bank accounts. The implementation impacted effective demand which dropped, while inventory rose with the associated cost. The perishable of the inventory indeed perished as seen in the food markets like Mile 12 in Lagos, Bodija, Oje in Ibadan, etc. The price of non-perishable rose to cater for the holding cost and fixed cost on one hand. Some businesses were forced to sell at discounted prices simply to dispose of the inventory. All these are poisonous recipes for MSMEs.

Many retail businesses that offer non-essential goods such as clothing, electronics, and furniture were impacted by the cash shortage showing reduced consumer spending, decreased sales, and reduced profits for these businesses. Other businesses adversely impacted are entertainment and hospitality; beauty and wellness like haircuts, massages, and facials; as well as travel and tourism. People preferred trekking to ride a commercial motorcycle ‘okada’ due to cash shortage and the fear that transfer may fail.

Conclusion and recommendations

During my first presentation on this topic, I recommended that the limit on cash withdrawal as well as the implementation timeline should be reviewed knowing that cash holding is in the proportion of account balance and transaction type. Afterwards, the CBN issued a statement dated March 13, 2023, recognising N200, N500 and N1,000 as legal lenders until December 31, 2023, following the ruling of the Supreme Court. The Bank has directed deposit money banks to revert to the initial cash limit of N500,000 for individuals and N5,000,000 for corporate organizations. It is imperative to note that the Naira redesign and cashless policy are good policies, however, the maturity of our informal sector for electronic banking should be at a level favourable for this implementation approach and timeline. Otherwise, the small businesses would suffer, and the street would be in chaos.

It is imperative to note that the Naira redesign and cashless policy are good policies, however, the maturity of our informal sector for electronic banking should be at a level favourable for this implementation approach and timeline. Otherwise, the small businesses would suffer, and the street would be in chaos.         

Meanwhile, the new timeline of December 31, 2023, might not be different if some key actions are not taken ahead of time. The new timeline might be characterized by the total withdrawal of the old design notes and the rationing of the new design notes. Flooding the country with the old design notes should be for short-term socio-economic stability. The process for replacing the old notes should be concluded in six months or by September 2023 such that the old and new will be deposited to banks and be withdrawable freely to June 2023. During this first phase, the pay-out of old to new notes from banks should be a ratio of 40:60. The second phase of July to September should be for high availability of new notes growing to 20:80. This ratio should be applied to cash CBN pays to the commercial banks such that by September 2023, bank customers will be sure of getting new notes at the ATM and across the counter. This systematic approach will prevent cash shortage considering that 5.82% is not too high for Currency in Circulation as a Ratio of Total Money Supply.?