I am particularly humbled by your invitation to be the guest speaker at this year’s CBN-Delta State Bankers’ Clearing House Award Ceremony. The clearing and award night, I gather, is usually an opportunity to recognise the contributions of the banking sector to economic development. The evening also affords bankers an avenue for social interaction between them and their customers. This is highly salutary, given your obviously very tight schedule which tends to eclipse your social life.
While I am happy to be in your midst today, I am however at sea what must have necessitated my choice, bearing in mind that I am neither a banker nor an economist. But I do appreciate the topicality of the topics you have chosen. I have, however, elected to speak on one of the topics, which is “Cashless Economy and the Nigerian Banking System”.
My appreciation of this topic stems from my conviction that the banking sector in this century must meet with the changing world system which is ICT driven. It is, therefore, my conviction, that our little reflection this evening would bring about a discourse that will propel the processes that will ensure a higher tempo of sustainable development of this very vital sector of our society.
For the purpose of this reflection, I have used cashless economy and e-banking inter changeably and in the same sense.
The Notion of Cashless Economy
The idea of cashless economy or e-banking first came into our everyday lexicon with the disclosure of the apex bank to introduce it. This intention, laudable as it is, has been greeted with lots of scepticism as captured by Gibson who brought religious dimension into the discourse. He said, “I am foreseeing the ANTI-CHRIST stepping in and the fulfilment of Biblical prophecy that a time for cashless society will come and nobody will buy or sell except you have a number”. This short quote aptly captures the feeling of some Nigerians who believe amongst others, that it is a sign of the Biblical end times. With such feeling of scepticism among the populace, many have doubted the workability of the policy.
In introducing the policy, it was the thinking of the Central Bank(so I think) that, by pegging the amount of physical cash to be withdrawn or deposited at a time in banks, it will reduce (not eliminate) the amount of physical cash (coin and notes)in circulation in the economy, and encourage more electronic- based transactions. (Payments for goods, services, transfer etc).
The apex bank went further to give reasons for the introduction of this cash policy.
To drive development and modernization of our payment system in line with Nigeria’s Vision 2020 goal of being amongst the 20 most developed economies by the year 2020.
No doubt, this is anchored on the fact that an efficient and modern payment system, positively correlated with economic development, is a key enabler for economic growth subject to all other factors remaining equal.
To reduce the cost of banking services, including cost of credits, and drive financial inclusion, by providing more efficient transaction options and greater reach.
To improve, the effectiveness of monetary policy in managing inflation and driving economic growth.
Also, according to the CBN, 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: There is a high cost of cash along the value chain from the CBN and the banks, to corporations and traders; everyone bears the high cost associated with volume cash handling.
High risk of using cash: Cash encourages robberies and other cash related crimes. It also can lead to financial loss in the case of fire and flooding incidents.
High subsidy: CBN analysis showed that only 10 percent of daily banking transactions are above N150, 000 but the 10 percent account for majority of the high- value transactions. This suggests the entire banking population subsidizes the costs that the tiny minority 10 percent incur in terms of high cash usage.
Informal Economy: High cost usage results in a lot of money outside the formal economy, thus limiting the effectiveness of monetary policy in managing inflation and encouraging economic growth.
Inefficiency and Corruption: High cash usage encourages corruption, leakages and money laundering, amongst other cash-related fraudulent activities (Central Bank of Nigeria: The Cashless Nigeria Project).
While so much has been said about the likely gains of a cashless economy (or cashless banking), in real concrete terms, the people are not convinced that the agenda like anything Nigerian is for the good of all. This is the result of culture of doubt which currently pervades the minds of our people.
But what is cashless economy? It is an economic system in which transactions are not done predominantly in exchange for actual cash. Simply put, It is an economic setting in which goods and services are brought and paid for through electronic media.
According to the Report of the Technical Committee on e-banking by the Central Bank in 2003 , e-banking is a means whereby banking business is transacted using automated processes and electronic devices such as personal computers, telephones, facsimile, internet, card payments and other electronic channels. It further states that some banks practice electronic banking for informational purpose, some for simple transactions such as checking accounts balance as well as transmission of information, while others facilitate funds transfer and other financial transactions. Cashless banking therefore, is a kind of banking that involves electronic form of money transmission. Here, banking services are fully automated such that transactions are concluded in jiffy.
It therefore implies that e-banking involves the use of computer network in dispensing cash and transfer of funds.
However, it is not suggestive or implied that e-banking refers to an outright absence of cash transactions, in the economy, rather, it connotes one in which cash- based transactions are kept to the barest minimum. In other words, it is not an economic system in which goods and services are solely bought and paid for through electronic media.
We have earlier noted the goals of cashless economy as articulated by the CBN. Currently in Nigeria, there are already some shades of cashless transactions in place. Today there exists up to seven different electronic payment channels in the country. Automated Teller Machines (ATM), points of sale terminals, mobile voice, web, inter -bank branch and kiosks. It is needless to say that the Cashless policy initiative in Nigeria has largely been undertaken by indigenous firms and is stimulated by improvements in technology and infrastructure. (Akhalumeh. P&Ohiogha. F: 2012).
To further drive the policy, the CBN, in its pilot scheme in Lagos has now (after reviews) set daily cumulative withdrawals and deposit limits to N500,000 for individuals and N3 million for corporate bodies. Penalty fees of N100 and N200 respectively (now reduced to 50 percent and 13percent respectively are to be charged per extra N1, 000 (see Ezumba : 2011).
It then follows that, what is anticipated by this policy is that instead of large cash withdrawals for payments for goods and services, such monies ought to be kept in the banking system, so that payments can be made electronically.
However, while the gain in operating a cashless policy might be enormous, it must be pointed out that transactions in a cashless economy are not entirely free as the CBN might have us believe. For instance, using the POS comes with a hefty price tag of 1.25 percent of the cost of every purchase or transaction that is effected, in addition to the N5 for every N1,000 commission on turnover that is deposited, which banks are allowed by CBN to charge every time money is taken from the account (Omose K: 2011).
Invariably, many may consider this as being an over burden on the customers, given that this will neither obviate nor lessen the normal commission on turnover charged by banks on withdrawals. This position has been lucidly put thus:
Apart from being an additional charge on bank customers, the charges appear too high. Normal bank commission on turnover is N5 for every N1,000 representing 0.5k% of the amount of such transactions, compared to the CBN approved charges of 1.25% which would mean N12.50 for every N1,000 (Akhalumeh P & Ohiokha .F:2012).
It is also perceived that the problem of record keeping may arise. It is still being questioned if the cards are adaptable for keeping records of a customer’s banking and buying patterns. Can a situation arise where every transaction a person makes is recorded? Will the convenience and versatility of cash be lost as all transactions will come to rely on terminals and passwords? The big issue here is privacy.
Fears have also been expressed by some, that a cashless system might lead to loss of jobs as the banks will not have need for most of the tellers under a cashless economy. Since most transfers and settlements will be done electronically, there is fear that banks will lay off some of the staff who are normally involved in telling jobs. While this fear appears founded, we may need to wait and see the extent of actual impact.
Arising from the above, it is evident that, for Nigerians to fully embrace the cashless culture, she must operate within a functional banking environment as the banks are the purveyors of this project. Ironically, But there is no gain saying the fact that Nigeria has had a chequered banking history that, for now, does not etch the much needed confidence in the citizenry
The Nigerian Banking System (A brief overview)
Banking has been known to man since the earliest times, even at an elementary stage. But modern banking which many allude began with the Jewish Rothschild family has since developed from that primitive banking method to modern- day electronic- propelled banking.
In Nigeria, commercial banking started in 1892 with the establishment of the then Standard Bank now (First Bank). Since then, the number of commercial banks in Nigeria has increased to about 21, considered to be healthy. This is as a result of the various reforms the banking sector has undergone.
Indeed, banking reforms, generally, had been undertaken in most parts of Africa and Asia, including Nigeria, with the intention of a guided deregulation and globalization through some forms of financial liberalism. The objectives have been to: improve the financial strength and lending capacity of banks, through recapitalization; promote real time banking activities; protect depositors’ fund, strengthen prudential regulations (that is, guidelines or rules/regulations designed to control/prevent banks from taking risks with depositors’ fund beyond their capacities); promote competition’ while avoiding market failures; check insider abuse, and evolve a sound banking industry and, by extension, a more efficient financial system (Cameroon: 1972).
In order to enhance the global ranking of Nigerian banks, the Central Bank of Nigeria, on July 6 2004 addressed a meeting of the Committee of Bankers, and outlined the following elements of the banking reforms:
i) Minimum capitalisation for banks of =N=25 billion with full compliance by December 31, 2005;
ii) Phased withdrawal of public sector funds from banks starting in July, 2004;
iii) Consolidation of banking institutions through mergers and acquisitions;
iv) Adoption of a risk-focused and rule-based regulatory framework;
v) Adoption of zero tolerance in the regulatory framework, especially in the area of data/information rendition/reporting;
vi) Automating the process for the rendition of return by banks and other financial institutions through the enhanced Financial Analysis and Surveillance System (e-FASS);
vii) Establishment of a hotline, confidential internet address (Governorcenbank.org) for all those wishing to share any confidential information with the Governor of the Central Bank on the operations of the banks or the financial system;
viii) Strict enforcement of the contingency planning framework for systemic bank distress;
ix) Establishment of an Assets Management Company as an important element of distress resolution;
x) Promotion of the enforcement of dormant laws, especially those relating to the issuance of dud cheques, and the law relating to the various liabilities of the board members of banks in cases of failings of the banks;
xi) Revision and updating of relevant laws, and the drafting of new ones relating to the effective operations of the banking system.
xii) Collaborating closely with the Economic and Financial Crimes Commission (EFCC) in the establishment of the Financial Intelligence Unit (FIU) and the enforcement of the anti-money laundering and other economic crime measures; and rehabilitating and effectively managing the Nigeria Security Printing and Minting (NSPM) Plc to meet the security printing needs of Nigeria, including the banking system which constitutes over 90 per cent of the NSPM’s business (Central Bank of Nigeria, 2004).
Going by these reforms, the Nigerian banking sector has seen great transformation, has been reshaped and with increased competition. Following the bank mergers and recapitalization, many have alluded to the now healthy status of our banks. But, when compared to other advanced economies of USA, which had over 7,000 cases of bank mergers since 1980 and the UK which followed similar trends of 203 mergers and acquisitions between 1997 and 1998; and developing countries of Korea which left only eight commercial banks after consolidation, and Malaysia that reduced bank size from 80 to 20 banks within one year, Nigeria might just be beginning, both in terms of capitalization, total assets and global competitiveness. Hence, the Central Bank of Nigeria felt, that the banking industry needed an overhaul in order to become globally competitive and aid development of the domestic economy (E.J. Ofenson et al; 2010).
Plausibly, the product of these reforms has ensured a diversified strong and reliable banking industry, where there is safety of depositors’ money, and has repositioned the banks to play active development roles in the economy (Cfr Adegbaju A.A., Olokoyo F.O: 2008).
Benefits of a Cashless Economy
Financial experts have repeatedly pointed out the monumental gains in the cashless bank policy. Chief amongst these is the idea that it will enhance the quality of life amongst, the populace. They also alluded that it will ensure:
(1) Faster transactions – reducing queues at point- of- sale.
(2) Improving hygiene on site – eliminating the bacteria spread through the handling of notes and coins.
(3) Increase sales
(4) Simplify cash collection – time spent on collecting, counting and sorting cash is eliminated.
(5) Managing staff entitlements.
The CBN believes that, with the cashless system, there would be economic development in the country that would greatly enhance the elimination of corruption, check money laundering and the security of cash in transit.
Equally of note is the perceived impact on the naira. It is believed that the cashless system will greatly reduce the pressure on the naira. Opponents of the policy have, however, countered that this is only possible if there is effective and standard cross-boarder electronic transmittal system (Ezumba: 2011).
Invariably, it is anticipated that the cashless system will ensure transparency in business transactions.
It is also envisaged that the cashless system will reduce transfer/processing fees, increase processing/transaction time, offer multiple payment options and gives immediate notification on all transactions on customers account. It is also beneficial to the banks’ merchants; (there) ensures large customer coverage, international products and service, promotion and branding, increase in customer satisfaction and personalized relationship with customers, and easier documentation and transactions tracking (cfr Moses Ashike in Akhalumeh P.& Ohiokha F: 2012).
The idea of cashless transactions it was also believed will bring about greater interest in modern banking culture especially in a society where over 60 percent of the banking populace are still enmeshed in the traditional mode of banking.
This position was captured by Nonor: 2011 when he asserted: “Cashless economy will nurture the culture of savings in the unbanked majority in the country”.
Apparently toeing this same line of thought, it was argued that:
Most Nigerians are still unbanked and so we have a large proportion of the citizenry not subjected to such monetary policy instruments as are used in the banking system. This development will make CBN’s policy tools more effective for achieving economic development and stability goals (Akhalumeh P. & Ohiokha F: 2012).
While it is evident that the cashless policy might be advantageous to the economy, yet many argue that the relevant conditions necessary for its effective take- off were not yet in place. According to this school of thought, the CBN attempt was akin to placing the cart before the horse. Invariably, this raises the fundamental question of what are the conditions necessary for the smooth take off of the policy, if Nigeria is to optimally maximise the benefits. Are the banks and people equipped to embrace such policy considering our present level of development? Simply put, is Nigeria ripe for a cashless economy, given the avalanche of multiple negatives that confront her, particularly her stunted infrastructural growth?
Hindrances to the Cashless Economy Policy
A cashless economy is at its prime when all modes of payments are made electronically with a very minimal use of cash. The advantages of a cashless society are enormous, ranging from regulating, controlling and even securing the financial system of the country.
However, Nigeria, compared to the rest of the world, as it relates to e- payment is still in the woods. Some Nigerians are still tied to the traditional mode of banking, especially the rural populace. Many factors can be attributed for their aversion to the banking system; but suffice it to say that the underlying factor appears to be the fear of losing such funds. This fear, without doubt is rooted in Nigeria’s long romance with serial bank failures.
Even for those who ordinarily would have loved to bank with the conventional banks, there is the dearth of these banks in the rural areas. The existing banks do not have enough branches in the rural areas and, bearing in mind that over 60 per cent of Nigerians live in the rural areas, it connotes that a very significant per cent of the population do not have access to banks. And where that exists, the distance is usually too discouraging to the average rural dweller that might need to travel over 20 kilometres to carry out a transaction.
For those who are willing to go such distances, they are not helped by the stringent identification policy adopted by the banks. The point being made here is that most of those within that bracket do not have means of identification and, in such situations, how are the rural dwellers expected to do banking more so in the near absence or epileptic infrastructure?
Equally disturbing is the unduly cumbersome requirement of collateral. This is particularly bad in the face of the fact according to Prof Peter Adeniyi, chairman Presidential Technical committee on Land Reforms,(on Radio Link, a Radio Nigeria program on 2/2/13),that more than 97 per cent of the total land is not documented. The result is that with that kind of scenario, where undocumented land cannot be an effective collateral, the vast majority of Nigerians have no other agreeable collateral to source facilities for development.
Due to the subsistence nature of the businesses of a large chunk of the populace, especially the rural populace, the high interest rate charged by banks are too frightening to encourage banking..And this segment of the society is too critical to be ignored, if the cashless policy is to succeed.
Even in the best of situations, the banks operations are still epileptic, (though not entirely the faults of the banks) but largely because of faulty infrastructure. Given the state of infrastructure in the country, where a large percentage of the population are not ICT- compliant and; in the midst of poor and nauseating electricity supply, how many Nigerians can truly use electronic banking services? This implies that concerted efforts must be made to reach the unbanked majority in our society.
Issues like this abound everywhere and it lends credence to the people’s fear that while the CBN policy is plausible, its workability is doubtful at least for now. For these sceptics, it is placing the cart before the horse. What foundations really exist for the take off of the cashless policy?
Another issue that should be considered is the level of awareness and literacy of the populace. It is argued that:
Those who have also frowned at the policy argued that the high level of illiteracy in the country, low level of banking population and porous banking system are factors that would work against the system (Dada P & Onsanye S: 2011).
Taking the issue of literacy further, Ogu: 2011 stated:
People need to know how else one can pay illiterates who do no have bank accounts; it is pointed out that the high level of illiteracy among Nigerians makes the use of cheques and electronic payments unsuitable, in some cases.
The problem with illiteracy among the populace is the likelihood of their over reliance on the literate few who might want to defraud them. Pushing further this issue of security, it is known that a lot of financial scams take place using the internet, and since Nigeria is described as a hub of internet scams, one wonders how the unreliability of the cashless system to various forms of internet- related crimes will be addressed.
However it is advised that:
The Central Bank of Nigeria and other regulatory agencies in the financial sector must ensure that service providers adhere to the minimum security standards on their web-based platform, the current move by the country towards a cashless economy might end up being a fruitless exercise. (Azeez K: 2011)
This position was supported by Akhalumeh P. & Ohiokha F: 2012 when they postulated:
Nigeria is replete with cases of internet scam and this will only increase as we enter into e-payment era If the issue of security is not comprehensively addressed. Another facet to the cyber security concerns is the recent spate of cyber attacks worldwide. Can we guarantee a sufficient sophisticated system as to scale the hurdle of cyber attacks which are capable of derailing the whole cashless system.
This point is ably emphasised by Laja Sorunke, at an Information Security Society of Africa, Nigeria (ISSAN) organised forum when he posited:
If we must go cashless, cyber security must be guaranteed by government first. I want to assure you that Nigeria at the cyber space is under threats. We have vulnerability. We have issues bothering on our payment networks.
While the fear of internet related fraud is germane, there is also the fear of fraud that takes place in the banks in the ordinary but daily banking activities due to insiders abuse?.How do you explain the hidden charges? This creates credibility crises for the sector.
Indeed, the issue bothering on the success of the cashless Nigeria project is daunting, at least, for now, in the area of POS (Point of Sales) terminals.
The situation is so frightening, if the warning by the Business Day Newspaper is anything to go. Business Day investigations reveal that there are only about 3,000 functioning POS terminals in the country out of the existing 13,000. Spain for instance, has 1.6 million active POS terminals, with a population of 14 million people, while India which has deployed 500,000 POS terminals, conducts 360 million transactions per annum. It then follows, that for a population of about 160 million people in Nigeria, 3,000 active POS terminals are grossly inadequate for a take-off of the project.( See Akhalumeh.P& Ohiokha: 2012)
Arising from this, what are the expected roles the banks can play in ensuring that Nigerian truly embraces the Cashless Policy?
Cashless Economy and the Nigerian Banking Sector
To ensure an effective cashless economic policy, while the government has a herculean task in driving it to success through the provision of the much needed infrastructure requirement, the banks have an odious task of providing excellent services. This should be such that it would encourage a banking culture which is still alien to a significant segment of our population. It, therefore, behoves on the banking sector to open channels of expansion especially in the rural areas where the unbanked majority reside.
A situation whereby POS terminals and ATM machines are not available and where there are, do not function optimally cannot be a viable catalyst for the transition to a cashless economy. The banks can, therefore. be of immense service if the basics are provided, such that they are not only physically available but functionally available.
Equally tied to this is that the banks must imbibe high ethical standards in its operations.
Instances abound whereby some cyber -related frauds have been traced to the active connivance of bank staff, can not encourage a sustainable level of modern banking culture amongst the citizenry.
In order to properly place themselves in a favourable position during the transition to cashless economy, banks are expected to properly place themselves for competitions and be one of those corporations to be reckoned with. It is, therefore expected that, in this age and time, all staff and managers in a modern bank need to be able to search and gather data from several types of sources, analyse them, select relevant ones and organise them in such a manner to allow them make informed decisions, based on the data generated.
However, the banks must know that there is the risk of information technology taking precedent over core business of banking. In the long run, it may permanently impair the future competitiveness of Nigerian banks. Evidently, as seen in most developed economies, IT deployments has always come with massive job cut, it might not be different here, more so ,as there are no verifiable evidence that those who lost their job were gainfully retrained and resettled in new jobs.
It will help the banking sector and to a large extent the economy, if the real sectors of the economy are not neglected. It is a known fact that most banks give short term loans for commerce rather than medium and longer term credits that can support industry and agriculture, both of which drive the economy. If this is done the banking culture will be embraced.
There is no gain saying the fact that the success of the cashless economy is tied to the extent to which the banks are investing in IT and using it in an innovative manner. It does not augur well for the populace to find it difficult to make withdrawals or transfer cash due primarily to internet related hiccups.
We have taken a look into the noble idea of the cashless economy policy and the banking sector. It is the contention of this paper, that much as the intention of the policy is highly noble and commendable, however, the essential factors, in terms of infrastructures, enlightenment and literacy level of the populace amongst others needed for its operation and successful takeoff are not yet in place.
However, to encourage the banking culture amongst the rural people, there is need for the banks to be closer to the people, this, which can be done through the establishment of branches in the rural areas.
It is also ,equally important for the banks’ to check their identification policy as most rural dweller and low income earners cannot meet such stringent conditions attached to opening account. It means invariably, that from onset, that they have been excluded by law, and which is highly discriminatory. In such circumstances, they have no alternative but to resort to their traditional mode of banking. While the CBN must be commended for its new banking regulations intended to bridge this gab, however, the anticipated gain might be lost, if the banks do not fully key into it.
In order to embrace the culture of banking especially in the rural areas, there is need to introduce mobile banking in those communities which do not have banks especially on their traditional market days. While the issue of security might be a discouraging factor, the use of law enforcement agents can come in handy.
Due to the problem of financial fraud aided by information technology, it would be desirable, if Nigerian banks can invest in information technology and human capital to meet the challenges of the evolving world
It is my opinion that the CBN is over regulating the banking sector. While it is normal for them to occasionally step in, they must however, bear in mind that it is a competitive market and charges should therefore, be market driven. A situation whereby CBN set what the interests should be, does not augur well for the sector.
In conclusion, in order to tame information technology propelled financial crimes; there is urgent need for the National Assembly to enact a stiff legislation against it.
Thank you for your attention.
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