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THE IMPACT OF THE CBN CASHLESS POLICY ON THE DEVELOPMENT OF THE BANKING SECTOR OF NIGERIA
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The recent evolution of technology for financial transactions poses interesting questions for policy makers and financial institutions regarding the suitability of current institutional arrangements and availability of instruments to guarantee financial stability, efficiency and effectiveness of monetary policy. Over the course of history, different forms of payment systems have been in existence. Initially, ‘trade by barter’ was common; however, the problems of barter such as the double coincidence of wants necessitated the introduction of various forms of money (Swartz et al, 2004). Nevertheless, analysts have been predicting the complete demise of study instruments and the emergence of potentially superior substitute for cash or monetary exchanges, that is, ‘cashless society’.
Unlike the barter system which involves the exchange of one good for another, a cashless environment refers to one in which transactions are carried out with minimal exchange of physical cash. It implies that the payment instrument is not physical cash but other instruments such as cheques, electronic transfers, e-payment and so on. The rapid advancement in electronic distribution channels has produced tremendous changes in the financial industry in recent years, with an increasing rate of change in technology, competition among players and consumer needs as argued (Hughes, 2001). Since Nigeria‘s Independence in 1960, there have been different governments, constitutional reforms, change in economic policies and banking reforms, mainly directed at enhancing social welfare and achieving developmental goals but there has been no substantial positive change in Nigeria‘s Human Development Indicators. This also calls to question the effectiveness of the cash-less policy of the Central Bank of Nigeria (CBN). At the end of the 1980s, the use of cash for purchasing consumption goods in the US has constantly declined (Humphrey, 2004). Hence, most LDCs (Less Developed Countries) like Nigeria are on the transition from a pure cash economy to a cash-less ‘one for developmental purposes’. Little wonder why the Central Bank of Nigeria recently introduced a cashless policy. Thus, as part of its regulatory functions, the Central Bank of Nigeria, issued a circular dated April 20, 2011 in which it conveyed to operators and the banking public its decision to introduce a cash less banking policy into the Nigerian financial system with effect from January 1, 2012 using Lagos as the pilot programme that is the policy kick-starts from Lagos and eventually all over the other states in the nation. To enforce the implementation, the Central Bank had, in a circular April last year, declared that “commencing from June 1, 2012, a daily cumulative limit of N150,000 and N1,000,000 on free cash withdrawals and lodgements by individuals and corporate customers respectively with deposits money banks shall be imposed.” Following public outcry, the daily cash withdrawal and deposit limit was raised to N500,000 and from N1,000,000 to N3,000,000 for corporate accounts.
According to CBN, the new cashless policy was introduced for a number of key reasons, including, To drive development and modernization of our payment system in line with Nigeria‘s vision 2020 goal of being amongst the top 20 economies by the year 2020. An efficient and modern payment system is positively correlated with economic development, and is a key enabler for economic growth. To reduce the cost of banking services (including cost of credit) and drive financial inclusion by providing more efficient transaction options and greater reach and to improve the effectiveness of monetary policy in managing inflation and driving economic growth. In addition, the cash policy aims to curb some of the negative consequences associated with the high usage of physical cash in the economy, including: high cost of cash: high risk of using cash, high subsidy, informal economy and inefficiency & corruption (CBN, Website, 2011). Regarding this context, the study seeks examine the cashless economy by exploring its impact on the Nigerian economy.
1.2. Statement of the Problem
As more payment systems have been introduced, pundits have been predicting the emergence of a ‘cash less society’. Today, we still pay with cash and checks, but several other payment instruments, such as credit and debit cards, are widely used. The use of paper money is more declining, but at a rather slow pace. As it were, Nigeria is a country heavily dominated by cash and there are some factors that negatively affect the choice of cash over non-cash instruments, some of these include time spent in counting and verifying cash, susceptibility to loss, time spent in the banking halls, amongst others (Nnanwobu et al, 2011).
A cash-based economy is one which is characterized by the psychology to physically hold and touch cash a culture informed by ignorance, illiteracy, and lack of security consciousness and appreciation of the merit of digital payment (Ovia, 2002). Cash, as a payment system, attracts lots of negative consequences such as high cost of handling cash, risks of using cash and keeping them in houses which eventually lead to high rate robbery, financial loss in the case of fire and flooding incidents. High cash usage results in lots of money outside the formal economy, thus limiting the effectiveness of monetary policy in managing inflation and encouraging economic growth. Also high cash usage enables corruption, leakages, money laundering, counterfeiting, mis-management, mutilation and depreciation in value if not invested. Some or most of these factors are one which exists in the Nigerian economy today thus creating gap for this current study.
In Nigeria today, infrastructure is a major problem that hinders the money deposit banks from attaining full potential in terms of certain policy implementations and its impact on financial transactions in the banking industry. The infrastructure in Nigeria over the years hasnt been reputable and thus has given way to ineffectiveness to the sincerity in financial transactions in the banks. The level of technology in the nation is rather poor and increasing at a slow pace and as such hasn’t given room for major development and policy implementations that may have risen. The technology available for carrying out banking transactions are not as effective as they ought to be therefore leaving people with no other choice than to keep cash in their houses in order to avoid having to spend lots of time in the banking halls due to low servers, interrupted power supply, bad internet services. Illiteracy and the low level of education of people does nothing else than leave people in the dark and therefore results into the inability of the people to understand when developments are being put into place. Many people do not see the need to keep their money in the banks or invest them due to the lack of understanding they have and also insufficient publicity and awareness measures are what have being in existence which if dealt with would at least reduce the lack of understanding of many and make them see viable reasons why they should keep their money in the banks and invest them other than keep them in their houses as a route to the safety of many lives and better growth of the economy and as such increase the standard of living. This of course, is the motivation behind this study.
As a matter of fact, the demand for money is being taken in terms of demand deposits in banks and liquid assets outside the banks that is the average willingness of people to either hold money in cash or keep it as demand deposits in the banks effects the activities of commercial banks in controlling the amount of money in circulation, which in turn determines the hold of the CBN on the economy in terms of monetary policy implementations. The analysis of banking innovations and the response of the public towards them would help determine the hold of the Central Bank of Nigeria (CBN) on the extent to which they have been able to foster financial transactions in money deposit banks across the nation.
The introduction of E-commerce has made room for various tools in transacting business, although not all of these tools have been fully utilised. The new policy adopted is such that has been made to affect the whole economy and to put in full use all of these tools which include the monetary and fiscal policies, and in turn will maximise the effort of the e-commerce innovation.
1.3 Research Questions
What is the relationship between Cashless policy and accessibility to customers’ accounts?
To what extent does the Cashless policy affect queue-ups in banking halls?
What relationship exists between Cashless policy and cash-related robbery in money deposit banks?
What is the relationship between Cashless policy and the promptness of bank-related transactions?
1.4 Objectives of the Study
The broad objective of this study is to establish the relationship between CBN’s Cashless policy and the development of the financial sector and the Nigerian economy. This broad objective is broken down to the following specific objectives which are;
To ascertain the relationship between Cashless policy and accessibility to customers’ accounts.
To investigate the relationship between Cashless policy and queue-ups in banking halls.
Ascertain the relationship between Cashless policy and the promptness of bank-related transactions.
1.5 Hypotheses of the Study
H1: There is a significant relationship between accessibility to customers’acountsand cashless policy.
H0: There is no significant relationship between accessibility to customers’accounts and cashless policy.
H1: There is a significant relationship between queue-ups in banking halls and cashless policy.
H0: There is no significant relationship between queue-ups in banking halls and cashless policy.
H1: There is a significant relationship between cash-related robbery in money deposit banks and the cashless policy.
H0: There is no significant relationship between cash-related robbery in money deposit banks and the cashless policy.
H1: There is a significant relationship between the promptness of bank-related transactions and the cashless policy.
H0: There is no significant relationship between the promptness of bank-related transactions and cashless policy.
1.6 Justification for the Study
Nigeria can be regarded as a cash-based economy because majority of retail and commercial payments are made in cash. According to a recent CBN survey, cash-related transactions account for 99 percent of customer activity in Nigerian banks today. In addition, it discovered that cash transactions above N150,000 was largest in terms of value (N1,469 billion) and second smallest in terms of number or volume (10 percent). However, some other policy agenda did not enjoy as much acceptance as did the recapitalization agenda; for instance, the redenomination proposal was snubbed and judged to be counterproductive. In the same vein, the non-interest, Islamic banking concept has been greeted with a lot of skepticism, and the initiators are accused of masking under some hidden agenda. The same may be said of the proposal on the introduction of “cashless economy”. The reaction of one Gibson sums up the skepticism in certain quarters about the “cashless economy,” he remarks that “I am foreseeing the ANTI-CHRIST stepping in and the fulfillment of Biblical prophecy that a time for cashless society will come and nobody will buy or sell except you have a number, be wise”. This may mean that not enough has been done to address the genuine concerns of the citizenry about the cashless economy. So much may have been said about the anticipated gains attendant to the adoption of e-payment and cashless economy (or cashless banking), but in concrete terms people have not been convinced that the agenda is for the good of all. While we may point to such economies as the Japanese or U.S, we must be very ready to accept the fact that these are economies with functional institutional basis which cannot also be said about Nigeria with much conviction. Apart from the institutions, one fear that has been expressed is the state of Nigerian infrastructural decay. Have we assessed the impact of infrastructure on the implementation of ‘cashless economy’ or is it an assumption that the infrastructural platform needed for the cashless economy to perform will simply come with the cashless economy? From the foregoing problems, The significance of this study can in no form be overemphasized as it aims to aid in improvement of the policy which would raise it chances of being implemented successfully. This study would therefore aid in pin-pointing the problems in the policy, the benefits of the policy and its application and how it affects money deposit bank transactions in Nigeria respectively. Therefore, exploring intense understanding of the whole cashless policy process and its implementation is that of grave importance to this study at the moment.
Existing studies on the topic was examined and thus more light was thrown to the topic in question by this study following this regard. This study is one of the recent works addressing the effectiveness and impact of the cashless policy on money deposit bank trasactions in Nigeria although previous studies have shown that works have been done on it in other countries and this anticipated will help bridge the gap between current perceptions about the cashless economy and the actual operations of the system.
1.7. Scope of the Study
This study examined CBN cashless policy by exploring its impact on the Nigerian economy. Since cashless policy is a recent economic policy with no previous data and more so, the study seek the opinion of the people by examining the impact analysis of the policy. Basically, for this study, both primary and secondary sources of data was used in carrying out this research. For the primary data, a survey would be carried out within the Lagos State metropolis as it is the only state where the policy is being implemented for now, while the secondary data focuses on every available from the Central Bank of Nigeria (CBN) within reach and various paper publications.
1.8. Study Plan
This study would be presented in five (5) chapters. The first chapter is the introduction which includes the background to the study, statement of the problem, research questions, research hypothesis, objectives of the study, justification of the study, scope of the study, and the study plan.
Chapter two focuses on the conceptual and theoretical review, the analytical review and review of related literature on the cashless policy. It will also provide an overview of what the policy is about, the aims, objectives, merits, shortfalls, application and the implementation and how it affects money deposit bank based transactions. This chapter will also discuss few experiences of other countries with the cashless economy.
Chapter three includes the research methodology that is data specification, method of data collection, method of analysis and sources of data.
Chapter four is basically data presentation and analysis
Chapter five is the summary, conclusions and recommendations.
REFERENCES
Bamidele A. (2005). The imperatives of E-banking for monetary policy in Nigeria. Central Bank of Nigeria economic and financial review. (43).
Ernest S.O and Fadiya B.B (2012). Cashless Banking in Nigeria: Challenges, Benefits, and Policy implications.
Hughes T. (2001). ‘Market orientation and the response of UK financial services companies to changes in Market conditions as a result of e-commerce’, International Journal of Bank Marketing, 19(6).
Nnanwobu P. Okafor E. Odoekwu J. and Sanni O. (2011). Mobile Money: Can it Work in Nigeria?. Research Intelligence Magazine
Oladejo M. and Akanbi T. (2012). Bankers perception of Electronic banking in Nigeria: A review of Post consolidation experience. Research journal of finance and accounting (3).
Ovia J. (2002). Payment system and the financial innovations. A paper presented at the Annual Policy Conference, November 2002.
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The recent evolution of technology for financial transactions poses interesting questions for policy makers and financial institutions regarding the suitability of current institutional arrangements and availability of instruments to guarantee financial stability, efficiency and effectiveness of monetary policy. Over the course of history, different forms of payment systems have been in existence. Initially, ‘trade by barter’ was common; however, the problems of barter such as the double coincidence of wants necessitated the introduction of various forms of money (Swartz et al, 2004). Nevertheless, analysts have been predicting the complete demise of study instruments and the emergence of potentially superior substitute for cash or monetary exchanges, that is, ‘cashless society’.
Unlike the barter system which involves the exchange of one good for another, a cashless environment refers to one in which transactions are carried out with minimal exchange of physical cash. It implies that the payment instrument is not physical cash but other instruments such as cheques, electronic transfers, e-payment and so on. The rapid advancement in electronic distribution channels has produced tremendous changes in the financial industry in recent years, with an increasing rate of change in technology, competition among players and consumer needs as argued (Hughes, 2001). Since Nigeria‘s Independence in 1960, there have been different governments, constitutional reforms, change in economic policies and banking reforms, mainly directed at enhancing social welfare and achieving developmental goals but there has been no substantial positive change in Nigeria‘s Human Development Indicators. This also calls to question the effectiveness of the cash-less policy of the Central Bank of Nigeria (CBN). At the end of the 1980s, the use of cash for purchasing consumption goods in the US has constantly declined (Humphrey, 2004). Hence, most LDCs (Less Developed Countries) like Nigeria are on the transition from a pure cash economy to a cash-less ‘one for developmental purposes’. Little wonder why the Central Bank of Nigeria recently introduced a cashless policy. Thus, as part of its regulatory functions, the Central Bank of Nigeria, issued a circular dated April 20, 2011 in which it conveyed to operators and the banking public its decision to introduce a cash less banking policy into the Nigerian financial system with effect from January 1, 2012 using Lagos as the pilot programme that is the policy kick-starts from Lagos and eventually all over the other states in the nation. To enforce the implementation, the Central Bank had, in a circular April last year, declared that “commencing from June 1, 2012, a daily cumulative limit of N150,000 and N1,000,000 on free cash withdrawals and lodgements by individuals and corporate customers respectively with deposits money banks shall be imposed.” Following public outcry, the daily cash withdrawal and deposit limit was raised to N500,000 and from N1,000,000 to N3,000,000 for corporate accounts.
According to CBN, the new cashless policy was introduced for a number of key reasons, including, To drive development and modernization of our payment system in line with Nigeria‘s vision 2020 goal of being amongst the top 20 economies by the year 2020. An efficient and modern payment system is positively correlated with economic development, and is a key enabler for economic growth. To reduce the cost of banking services (including cost of credit) and drive financial inclusion by providing more efficient transaction options and greater reach and to improve the effectiveness of monetary policy in managing inflation and driving economic growth. In addition, the cash policy aims to curb some of the negative consequences associated with the high usage of physical cash in the economy, including: high cost of cash: high risk of using cash, high subsidy, informal economy and inefficiency & corruption (CBN, Website, 2011). Regarding this context, the study seeks examine the cashless economy by exploring its impact on the Nigerian economy.
1.2. Statement of the Problem
As more payment systems have been introduced, pundits have been predicting the emergence of a ‘cash less society’. Today, we still pay with cash and checks, but several other payment instruments, such as credit and debit cards, are widely used. The use of paper money is more declining, but at a rather slow pace. As it were, Nigeria is a country heavily dominated by cash and there are some factors that negatively affect the choice of cash over non-cash instruments, some of these include time spent in counting and verifying cash, susceptibility to loss, time spent in the banking halls, amongst others (Nnanwobu et al, 2011).
A cash-based economy is one which is characterized by the psychology to physically hold and touch cash a culture informed by ignorance, illiteracy, and lack of security consciousness and appreciation of the merit of digital payment (Ovia, 2002). Cash, as a payment system, attracts lots of negative consequences such as high cost of handling cash, risks of using cash and keeping them in houses which eventually lead to high rate robbery, financial loss in the case of fire and flooding incidents. High cash usage results in lots of money outside the formal economy, thus limiting the effectiveness of monetary policy in managing inflation and encouraging economic growth. Also high cash usage enables corruption, leakages, money laundering, counterfeiting, mis-management, mutilation and depreciation in value if not invested. Some or most of these factors are one which exists in the Nigerian economy today thus creating gap for this current study.
In Nigeria today, infrastructure is a major problem that hinders the money deposit banks from attaining full potential in terms of certain policy implementations and its impact on financial transactions in the banking industry. The infrastructure in Nigeria over the years hasnt been reputable and thus has given way to ineffectiveness to the sincerity in financial transactions in the banks. The level of technology in the nation is rather poor and increasing at a slow pace and as such hasn’t given room for major development and policy implementations that may have risen. The technology available for carrying out banking transactions are not as effective as they ought to be therefore leaving people with no other choice than to keep cash in their houses in order to avoid having to spend lots of time in the banking halls due to low servers, interrupted power supply, bad internet services. Illiteracy and the low level of education of people does nothing else than leave people in the dark and therefore results into the inability of the people to understand when developments are being put into place. Many people do not see the need to keep their money in the banks or invest them due to the lack of understanding they have and also insufficient publicity and awareness measures are what have being in existence which if dealt with would at least reduce the lack of understanding of many and make them see viable reasons why they should keep their money in the banks and invest them other than keep them in their houses as a route to the safety of many lives and better growth of the economy and as such increase the standard of living. This of course, is the motivation behind this study.
As a matter of fact, the demand for money is being taken in terms of demand deposits in banks and liquid assets outside the banks that is the average willingness of people to either hold money in cash or keep it as demand deposits in the banks effects the activities of commercial banks in controlling the amount of money in circulation, which in turn determines the hold of the CBN on the economy in terms of monetary policy implementations. The analysis of banking innovations and the response of the public towards them would help determine the hold of the Central Bank of Nigeria (CBN) on the extent to which they have been able to foster financial transactions in money deposit banks across the nation.
The introduction of E-commerce has made room for various tools in transacting business, although not all of these tools have been fully utilised. The new policy adopted is such that has been made to affect the whole economy and to put in full use all of these tools which include the monetary and fiscal policies, and in turn will maximise the effort of the e-commerce innovation.
1.3 Research Questions
What is the relationship between Cashless policy and accessibility to customers’ accounts?
To what extent does the Cashless policy affect queue-ups in banking halls?
What relationship exists between Cashless policy and cash-related robbery in money deposit banks?
What is the relationship between Cashless policy and the promptness of bank-related transactions?
1.4 Objectives of the Study
The broad objective of this study is to establish the relationship between CBN’s Cashless policy and the development of the financial sector and the Nigerian economy. This broad objective is broken down to the following specific objectives which are;
To ascertain the relationship between Cashless policy and accessibility to customers’ accounts.
To investigate the relationship between Cashless policy and queue-ups in banking halls.
Ascertain the relationship between Cashless policy and the promptness of bank-related transactions.
1.5 Hypotheses of the Study
H1: There is a significant relationship between accessibility to customers’acountsand cashless policy.
H0: There is no significant relationship between accessibility to customers’accounts and cashless policy.
H1: There is a significant relationship between queue-ups in banking halls and cashless policy.
H0: There is no significant relationship between queue-ups in banking halls and cashless policy.
H1: There is a significant relationship between cash-related robbery in money deposit banks and the cashless policy.
H0: There is no significant relationship between cash-related robbery in money deposit banks and the cashless policy.
H1: There is a significant relationship between the promptness of bank-related transactions and the cashless policy.
H0: There is no significant relationship between the promptness of bank-related transactions and cashless policy.
1.6 Justification for the Study
Nigeria can be regarded as a cash-based economy because majority of retail and commercial payments are made in cash. According to a recent CBN survey, cash-related transactions account for 99 percent of customer activity in Nigerian banks today. In addition, it discovered that cash transactions above N150,000 was largest in terms of value (N1,469 billion) and second smallest in terms of number or volume (10 percent). However, some other policy agenda did not enjoy as much acceptance as did the recapitalization agenda; for instance, the redenomination proposal was snubbed and judged to be counterproductive. In the same vein, the non-interest, Islamic banking concept has been greeted with a lot of skepticism, and the initiators are accused of masking under some hidden agenda. The same may be said of the proposal on the introduction of “cashless economy”. The reaction of one Gibson sums up the skepticism in certain quarters about the “cashless economy,” he remarks that “I am foreseeing the ANTI-CHRIST stepping in and the fulfillment of Biblical prophecy that a time for cashless society will come and nobody will buy or sell except you have a number, be wise”. This may mean that not enough has been done to address the genuine concerns of the citizenry about the cashless economy. So much may have been said about the anticipated gains attendant to the adoption of e-payment and cashless economy (or cashless banking), but in concrete terms people have not been convinced that the agenda is for the good of all. While we may point to such economies as the Japanese or U.S, we must be very ready to accept the fact that these are economies with functional institutional basis which cannot also be said about Nigeria with much conviction. Apart from the institutions, one fear that has been expressed is the state of Nigerian infrastructural decay. Have we assessed the impact of infrastructure on the implementation of ‘cashless economy’ or is it an assumption that the infrastructural platform needed for the cashless economy to perform will simply come with the cashless economy? From the foregoing problems, The significance of this study can in no form be overemphasized as it aims to aid in improvement of the policy which would raise it chances of being implemented successfully. This study would therefore aid in pin-pointing the problems in the policy, the benefits of the policy and its application and how it affects money deposit bank transactions in Nigeria respectively. Therefore, exploring intense understanding of the whole cashless policy process and its implementation is that of grave importance to this study at the moment.
Existing studies on the topic was examined and thus more light was thrown to the topic in question by this study following this regard. This study is one of the recent works addressing the effectiveness and impact of the cashless policy on money deposit bank trasactions in Nigeria although previous studies have shown that works have been done on it in other countries and this anticipated will help bridge the gap between current perceptions about the cashless economy and the actual operations of the system.
1.7. Scope of the Study
This study examined CBN cashless policy by exploring its impact on the Nigerian economy. Since cashless policy is a recent economic policy with no previous data and more so, the study seek the opinion of the people by examining the impact analysis of the policy. Basically, for this study, both primary and secondary sources of data was used in carrying out this research. For the primary data, a survey would be carried out within the Lagos State metropolis as it is the only state where the policy is being implemented for now, while the secondary data focuses on every available from the Central Bank of Nigeria (CBN) within reach and various paper publications.
1.8. Study Plan
This study would be presented in five (5) chapters. The first chapter is the introduction which includes the background to the study, statement of the problem, research questions, research hypothesis, objectives of the study, justification of the study, scope of the study, and the study plan.
Chapter two focuses on the conceptual and theoretical review, the analytical review and review of related literature on the cashless policy. It will also provide an overview of what the policy is about, the aims, objectives, merits, shortfalls, application and the implementation and how it affects money deposit bank based transactions. This chapter will also discuss few experiences of other countries with the cashless economy.
Chapter three includes the research methodology that is data specification, method of data collection, method of analysis and sources of data.
Chapter four is basically data presentation and analysis
Chapter five is the summary, conclusions and recommendations.
REFERENCES
Bamidele A. (2005). The imperatives of E-banking for monetary policy in Nigeria. Central Bank of Nigeria economic and financial review. (43).
Ernest S.O and Fadiya B.B (2012). Cashless Banking in Nigeria: Challenges, Benefits, and Policy implications.
Hughes T. (2001). ‘Market orientation and the response of UK financial services companies to changes in Market conditions as a result of e-commerce’, International Journal of Bank Marketing, 19(6).
Nnanwobu P. Okafor E. Odoekwu J. and Sanni O. (2011). Mobile Money: Can it Work in Nigeria?. Research Intelligence Magazine
Oladejo M. and Akanbi T. (2012). Bankers perception of Electronic banking in Nigeria: A review of Post consolidation experience. Research journal of finance and accounting (3).
Ovia J. (2002). Payment system and the financial innovations. A paper presented at the Annual Policy Conference, November 2002.
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