Current and Emerging issues in finance
The issue with Cashless policy
The Central Bank of Nigeria (CBN) last year introduced a new policy on cash-based transactions which stipulates a ‘cash handling charge’ on daily cash withdrawals or cash deposits that exceed N500, 000 for Individuals and N3, 000,000 for corporate bodies. The new policy on cash-based transactions in banks, aims at reducing and not limiting the amount of physical cash circulating in the economy, and encouraging more electronic-based transactions.
The new cash policy, which is one of the reasons why the introduction of the five thousand Naira note did not succeed was introduced for a number of key reasons, including:
- To reduce the cost of banking services (including cost of credit) and drive financial inclusion by providing more efficient transaction options and greater reach.
- 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 improve the effectiveness of monetary policy in managing inflation and driving economic growth.
In addition, the cashless 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 & the banks, to corporations and traders; everyone bears the high costs 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 10percent of daily banking transactions are above 150k, but the 10percent account for majority of the high value transactions. This suggests that the entire banking population subsidizes the costs that the tiny minority 10 percent incurs in terms of high cash usage.
- Informal Economy: High cash 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 & Corruption: High cash usage enables corruption, leakages and money laundering, amongst other cash-related fraudulent activities.
Content of the Cash policy
The following aspects of the policy shall apply from January 1st 2012 in Lagos State (“tagged Cash-less Lagos”):
- Only CIT licensed companies shall be allowed to provide cash pick-up services. Banks will cease cash in transit lodgment services rendered to merchant-customers. This took effect in Lagos State from December 31st 2011. Any Bank that continues to offer cash in transit lodgment services to merchants shall be sanctioned.
- 3rd 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.
The service charges/fees will not apply until March 30th, 2012, in order to give people time to migrate to electronic channels and experience the infrastructure that has been put in place. Therefore, banks should continue to encourage their customers to migrate to available electronic channels, and where possible demonstrate the costs that will accrue to those that continue to transact high volumes of cash from March 30th, 2012 in Lagos State.
In addition, below are some detailed context and pertinent clarifications on the policy:
- The pilot shall be run in Lagos State.
- Account Application
- The cash-policy applies to all accounts, including COLLECTION accounts. Banks should therefore work with their corporate customers to arrange for suitable e-collection options.
- The limits are cumulative daily limits each for withdrawal, and for deposits (e.g. for Individuals, the daily free withdrawal limit is N500,000; while the daily free deposit limit is N500,000)
- The limits apply to the account so far as it involves cash, irrespective of channel (e.g. over the counter, ATM, 3rd party cheques encashed over the counter, etc) in which cash is withdrawn or deposited (e.g. if an individual withdraws N450,000 over the counter, and N150,000 from the ATM on the same day, the total amount withdrawn by the customer is N600,000, and the service charge will apply on N100,000 – the amount above the daily free limit). The limit also applies to cash brought through CIT companies, as the CIT company only serves as a means of transportation.
- The charges shall apply from March 30th 2012 in Lagos.
- The service charge for daily cumulative deposits above the limit into an account shall be borne by the account holder. However, during the pilot in Lagos, individuals paying money from Lagos, into an account outside Lagos, shall bear the charges for any single transaction above the daily limit.
- The service charge for daily withdrawals above the limit into an account shall be borne by the account holder.
- Interstate Transactions
- Charges/fees shall apply for all transactions in Lagos, and on Lagos State based accounts.
- Transactions initiated out of Lagos State, and affecting a Lagos based account shall not attract charges/fees, and shall not be counted as part of the daily cumulative amount on that account since the policy has not been activated outside Lagos. (E.g. A deposit above the limit made from Onitsha into a Lagos state account shall not attract charges/fees).
- Transactions initiated from Lagos State, and affecting an account outside Lagos, shall attract charges/fees (when the specific transaction is above the limit), since the policy has been activated in Lagos. (E.g. A deposit made from Lagos State above the limit, into an account in Abuja, shall result in the initiator paying the relevant charges/fees, while the account into which it is paid outside Lagos shall not be impacted).
The policy will eventually be rolled out to other regions across the country from January 1st 2013. Please note that the policy does not prohibit withdrawals or deposits above the stipulated amounts, but that such transactions will be subject to cash handling charge.
Expected Benefits of the New Cash Policy
A variety of benefits are expected to be derived by various stakeholders from an increased utilization of e-payment systems. These include:
- For Consumers: Increased convenience; more service options; reduced risk of cash-related crimes; cheaper access to (out-of-branch) banking services and access to credit.
- For Corporations: Faster access to capital; reduced revenue leakage; and reduced cash handling costs.
- For Government:Increased tax collections; greater financial inclusion; increased economic development. Increased tax collections; greater financial inclusion; increased economic development.
Current Awareness/Engagement Status
The CBN has been running a set of targeted stakeholder engagement sessions as a first stage of its planned communication campaign. These have targeted key groups that will be most impacted by the cash policy, with the objective of creating awareness and providing an opportunity for them to raise issues and concerns. The stakeholders so far have included markets, associations, professional bodies, etc. These stakeholder sessions were concluded in November 2011. We are now implementing the phase 2 of the communication strategy, which is the Mass communication campaign, leveraging the inputs derived during the stakeholder sessions.
Fiscal policy challenges
THE Central Bank of Nigeria (CBN) is achieving its core mandate but the greater challenge of the economy is the fiscal policy challenges, a member of Finance Market Dealers Association of Nigeria (FMDAN), Mr. Wale Abe has said.
He declared that the CBN has been trying in terms of trying to control inflation growth rate and the foreign exchange, noting that the fiscal policy has been the major drawback that has made the monetary policy not felt by the people.
He stressed that the fiscal dominance and growth will keep the inflation battle tough to win, saying as the apex bank mops up funds from the economy to control inflation, there would be an upward pressure on the cost of money as interest rates would continually soar, making it hard for the real sector to get the funding that they need.
Also, speaking at the Finance Correspondence Association of Nigeria (FICAN), Round Table meeting with Financial experts, Mr. Bade-Ajidahun, Oludahun projected that the nation’s currency will depreciated further to N170 to a dollar before the end this year.
He doubted the possibility of the local currency appreciating to N120 to a dollar, saying, “The excessive demand pressure at the foreign exchange market remained unabated in 2011 even into 2012, causing the value of the Naira to slide against the US dollar.”
Bade-Ajidahun noted that the trend so far in the Nigerian foreign exchange market has been quite disappointing. This according to him was caused largely by the poor economic performance of the country, insecurity issues, and poorly implemented economic policy.
He said that current situation has driven the exchange rate in the parallel market to over N164 to a dollar. He said that for the Central Bank of Nigeria CBN to ensure stability in this market, it employed some measures both conventional and unconventional.
Some of the measures include, Increase in the sale of foreign exchange, at the expense of foreign reserves, removal of limit of dollars sold to Bureau De Change (BDCs), target audit of the authorized dealers to prevent speculative demand for dollar, lifting of restriction on the holding period in government securities by foreign investors ,the reduction in net open limits of banks shareholders funds and devaluation in the value of the Naira.
He said although the country has one promising reforms going on in the country, but the effect may be seen much more later, probably 2013/2014.
Current Financial Issues: the decline of US’s superpower status
Before the global financial crisis took hold, some commentators were writing that the US was in decline, evidenced by its challenges in Iraq and Afghanistan, and its declining image in Europe, Asia and elsewhere. According to Paul Reynolds, in US superpower status is shaken, he stated thus: The financial crisis is likely to diminish the status of the United States as the world’s only superpower. On the practical level, the US is already stretched militarily, in Afghanistan and Iraq, and is now stretched financially. On the philosophical level, it will be harder for it to argue in favor of its free market ideas, if its own markets have collapsed.
… Some see this as a pivotal moment.
The political philosopher John Gray, who recently retired as a professor at the London School of Economics, wrote in the London paper The Observer: “Here is a historic geopolitical shift, in which the balance of power in the world is being altered irrevocably.
“The era of American global leadership, reaching back to the Second World War, is over… The American free-market creed has self-destructed while countries that retained overall control of markets have been vindicated.”
… “How symbolic those Chinese astronauts take a spacewalk while the US Treasury Secretary is on his knees.”
Yet, others argue that it may be too early to write of the US, Paul Reynolds, also stated in US superpower status is shaken that The director of a leading British think-tank Chatham House, Dr Robin Niblett … argues that we should wait a bit before coming to a judgment and that structurally the United States is still strong.
“America is still immensely attractive to skilled immigrants and is still capable of producing a Microsoft or a Google,” he went on. “Even its debt can be overcome. It has enormous resilience economically at a local and entrepreneurial level.
“And one must ask, decline relative to whom? China is in a desperate race for growth to feed its population and avert unrest in 15 to 20 years. Russia is not exactly a paper tiger but it is stretching its own limits with a new strategy built on a flimsy base. India has huge internal contradictions. Europe has usually proved unable to jump out of the doldrums as dynamically as the US.
“But the US must regain its financial footing and the extent to which it does so will also determine its military capacity. If it has less money, it will have fewer forces.”
The concentration of this paper was mainly on the Cashless Policy System and the Central Bank of Nigeria Fiscal Policy challenges and the decline of US’s superpower status which is seen as current and emerging issues in the economy, as regards emerging issues in finance. Hence, the Cashless Policy will not be a success if some distractions like, the introduction of new Five Thousand Naira note and others are not well taken care of.
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