What the cash crises in Nigeria truly means

In Season 3, The Future by Oluwatofarati Oke


Money in the form of currency has existed for at least 3000 years. Earlier, it used to exist in the form of coins. Now, paper bills are more common. Modern money is usually useless on its own, and this is one thing that makes it modern. Money in the form of currency has existed for at least 3000 years. Earlier, it used to exist in the form of coins. Now, paper bills are more common. Modern money is usually useless on its own, and this is one thing that makes it modern. Currency serves as a means of exchanging commodities and services. Money in the form of paper or coins, issued by a government and accepted at face value, is known as currency. In bartering, goods and services were exchanged directly for other goods and services. Currency has replaced bartering as the primary means of exchanging goods and services in the modern world. But currency is actually only a small piece of the monetary economy and just one consideration when looking at the total money supply. Indeed, most money today exists as credit money or as electronic records stored in databases in banks or financial institutions. But still, the bread and butter of everyday transactions is currency, most importantly, money has to be the unit of account, or numeraire, which is a fancy term for the unit that things are priced in within a society, In Nigeria that is the Naira. Once there is a unit of account, people can indeed exchange on credit without the use of physical money. So, what exactly gives our modern forms of currency, whether it’s an American dollar or the Nigerian naira, value? Unlike early coins made of precious metals, most of what’s minted today doesn’t have much intrinsic value. However, it retains its worth for one of two reasons.       First, in the case of “representative money,” each coin or note can be exchanged for a fixed amount of a commodity. The dollar fell into this category in the years following World War II, when central banks around the world could pay the U.S. government $35 for an ounce of gold. In other words, the paper money represented some claim on physical metal and could legally be redeemed for that metal on demand. Most of the major economies around the world now use fiat currencies, since they’re not linked to any physical asset, governments have the freedom to print additional money in times of financial trouble. While this provides greater flexibility to address challenges, it also creates the opportunity to overspend.

The biggest hazard of printing too much money is hyperinflation. With more of the currency in circulation, each unit is worth less. While modest amounts of inflation are relatively harmless, uncontrolled devaluation can dramatically erode the purchasing power of consumers. If inflation reaches 5% annually, each individual’s savings, assuming it doesn’t accrue substantial interest, is worth 5% less than it was the previous year. Naturally, it becomes harder to maintain the same standard of living.

For this reason, central banks in developed countries usually try to keep inflation under control by indirectly taking money out of circulation when the currency loses too much value. Regardless of the form it takes, all currency has the same basic goals. It helps encourage economic activity by increasing the market for various goods. And it enables consumers to store wealth and therefore address long-term needs. Currency was once limited to the domain of physical coins and bills, but today’s digital economy means that money now exists as data stored in ledgers at banks and is even transcending the possibility of tangibility with the development of cryptocurrencies such as Bitcoin which can never be made physical.


The financial system of any economy is responsible for mobilizing savings for productive investments and ensuring efficient resource allocation. Banks have traditionally played an active role in this regard. In recognition of this, various financial policy reforms targeting the banking sector have been pursued in Nigeria. The recent of such policies within the last decade are the recapitalization of banks initiated by the Central Bank of Nigeria (CBN) in July 2004 and concluded on December 31, 2005, formalisation of adoption of electronic banking, and transition from cash based to cash-less financial arrangement. A cash-based economy is a setting where retail and commercial payments are primarily made in cash. The statistical evidence provided by Central Bank of Nigeria (2012) revealed that, cash related transactions accounted for 99% of customers’ activities in Nigeria banks as at December 2011. It estimated the total cash transaction volume through the conventional five payment channels to be 215,015,005 (two hundred and fifteen million, and fifteen thousand and five). Of this figure, ATM withdrawal accounted for 50.9%, over the counter (OTC) withdrawal, 33.72% and cheques 13.56%. Point of sales (POS) and web channels accounted respectively for 0.49% and 1.26%. Obviously, the combination of ATM and OTC withdrawals amounting to 84.96% justifies the claim of the CBN that the Nigerian economy is heavily cash-based and the imperative for cash-less economy Furthermore, a cash-based economy also imposes some costs on the banking system, individuals, and the government. The higher the velocity of cash usage, the higher the processing cost borne by those in the value chain. There is, for instance, the cost of printing new notes to replace the ones that are torn or worn out due to frequent handling. Central Bank of Nigeria (2011) states that this cost is high and also on the increase hence the attempted redenomination of the currency. It puts the direct cost of cash to the Nigerian financial system as of 2009 at a colossal amount of N114.5 billion. The figure is based on actual data from the CBN and 17 banks in the FSI. It excludes bank cash infrastructure cost and employee costs attributable to cash logistics. This amount is broken down into cash in transit cost N27.3 billion (24%), cash processing cost N89.1billion (67%), and vault management cost N18.1 billion (9%). The estimated cost of cash by the end of 2012 was put at N192billion. Clearly, this evidence provides a platform for migration to cash-less economy. This section of this paper is to fill the perceived knowledge gap existing in the extant literatures on the benefits and challenges of cash-less economy.

A Panoramic View of the Cash-less Policy

 Cash-less banking is that banking system which aims at reducing, but not eliminating, the volume of physical cash circulating in the economy whilst encouraging more electronic based transactions. In other words, it is a combination of e-banking and cash-based system. It is essentially a mobile payment system which allows users to make payment through Smart phones with or without internet facilities. In 2011, it was estimated that 99% of over 215 million customer transactions in Nigeria banks were through ATM and over the counter, and this was valued at about N2.1 trillion. It is estimated that an average Nigerian transacts about N65 in cash out of N100 income earned. The operation of the cash-based system has been at a significant cost to the Nigerian economy. The estimate shows that cash distribution cost accounts for 60% overheads in the banking industry while cash management operations require up to 80% of the industry’s infrastructure base and staff strength (CBN, 2012). Furthermore, the direct cost of transporting, processing and storing (vault) huge volume of cash borne by the financial system was valued at N114.5 billion in 2009 and it was estimated to rise to N192 billion by the end of 2012. Again, heavy cash users (i.e., those with transaction value above N150, 000) account for only 10% of transaction volume but 71% of the transaction value. It appears therefore, that implicit cash holding costs for the minority class of cash users are being subsidized by the majority. In response to this trend, the Central Bank of Nigeria by its legal mandate initiated the policy shift from cash-based system to cash-less one. In 2005, the CBN initiated the National Payment Systems (NPS) specifically to achieve the objectives of promoting efficiency and effectiveness of payment system, promoting safe and sound banking practices and protection against systemic risks. It also set the objective of migrating to cash-less mode of payment, such as electronic debit/credit instruments, credit/debit cards, ATM – sharing Electronic Fund Transfer at Point of Sales and Real Time Gross Settlement System (RTGS). Other objectives of NPS include; to ensure payment system audit transparency and full transaction reporting and to achieve acceptance and confidence through information dissemination, customer convenience and total quality delivery. Eventually, the NPS initiative metamorphosed into the cash-less policy on April 20, 2011. According to CBN, the cash-less policy aims at reducing the amount of physical cash in circulation and to encourage more electronic based transactions. The policy came into effect in January 1, 2012, with partial implementation in Lagos State and later moved into full execution in that State in April 1, 2012. Thereafter, the policy was extended to five states (Kano, Ogun, Rivers, Anambra, and Abia) and Abuja on October 1, 2013, and to the entire country on July 1, 2014. The cardinal objectives of the policy are: (i) to drive development and modernization of Nigeria payment system in line with vision 2020 goal of Nigeria becoming one of the top twenty economies of the world by year 2020, (ii) to reduce the cost of banking services (including the cost of credit) and drive financial inclusion by providing more efficient transaction options and greater reach, (iii) to limit high cash usage outside the formal sector and thereby improve the effectiveness of monetary policy in managing inflation and encouraging economic growth, and (iv) to curb some of the negative consequences associated with high physical cash usage, including high cost of cash: robberies, corruption and leakages through money laundering, fraud and cash-related crimes. However, the following are vital issues of the cash-less policy. First, there is a threshold of daily cumulative cash of N500, 000 and N3 million on cash withdrawals and lodgements by individual and corporate bodies respectively free of processing fees. At the conception of the policy in 2011, these were pegged at N150, 000 and N1 million but were later reviewed. This limit applies to all account so far as it involves cash, irrespective of the channel used. Second, there are processing fees for withdrawals above the limit, and it is 3% for individual and 5% for corporate bodies. Lodgement above the limit attracts 2% and 3% processing fee for individual and corporate bodies respectively. These processing fees are subject to review every six months. Thirdly, these fees do not apply to accounts operated by Ministries, Departments and Agencies of the Federal and State Governments, solely meant for the purpose of revenue collections. Exemptions are also extended to Embassies, Diplomatic Missions and Multi-lateral and Aiddonor Agencies, as well as Micro Finance Banks and Primary Mortgage Institutions Reducing the huge population of Nigerians who do not have access to financial services is one of the major targets of the CBN. A survey on enhancing financial innovation and access in 2010, revealed a marginal increase of those served by formal financial market from 35% in 2005 to 36.3% in 2010; five years after the launch of Micro finance policy which was thought could massively mobilize rural Nigerians into formal financial services (Onyinye, 2012). The survey attributed the reasons why most Nigerians do not have or maintain a bank account to unsteady income, unemployment and distance to bank branches. Accordingly, the CBN targeted to increase the number of Nigerians in the formal sector from its figure of 36.3% in 2010 to above 70% by 2020.


 As much as the aforementioned metrics have highlighted how beneficial a potential cashless economy would be for Nigeria, there are several underlying issues that just show that the country is not equipped to fully take on such a massive change. Nigeria’s push to replace its paper money with newly designed currency notes has created a shortage of cash, leaving people unable to buy what they need and forcing businesses to close across the West African nation. The Central Bank of Nigeria says the redesigned denominations of 200 (43 U.S. cents), 500 ($1.08) and 1,000-naira ($2.17) notes and new limits on large cash withdrawals would help curb money laundering and make digital payments the norm in Africa’s biggest economy. But the process to replace the old currency notes is rushed and commercial banks don’t have enough new cash to give to customers, pushing demand higher than supply. The central bank has tried to push the agenda and habit of not spending cash and tried to get Nigerians do more transactions electronically, but you can’t legislate a change in behaviour, It will be extremely difficult to get a country that has a population of over 200 million a large number of who are not tech savvy, there is also the matter of  convincing people see reasons and ensure those channels are reliable. Critics are sceptical, pointing to decades of chronic corruption in which government officials are known to loot public funds and create more hardship for the many struggling with poverty.

Nigerian authorities said the redesigned banknotes and new withdrawal limits would help curb the use of money to influence the Feb. 25 presidential election, though experts argue the currency changes are being done at the expense of most Nigerians. They’re already facing inflation of 21.3%, a 37% increase in the rate in a year, although this problem was said to be one that would solve itself as an influx of the cash was meant to help the economy. As of October, more than 80% of the 3.2 trillion naira ($7.2 billion) in circulation in Nigeria was in private hands, but 75% of that has now been deposited with financial institutions, this however barely helped.

Digital payments run by banks are often unreliable in Nigeria, leaving businesses struggling as growing numbers of customers have been unable to find the cash to pay for goods and services. The situation has created a parallel market for people to illegally sell the new banknotes. “The two critical sectors of the economy trade and commerce as well as agriculture have been very badly affected because they do a lot of transactions in cash, especially in rural areas. This policy has brought their economic activities to a halt. The authorities did not do one of the most important things which should be to allow more time for the old notes to be gradually replaced by the new ones, as is in the Nigerian constitution. To make matters worse, the supply is extremely limited. 

 It remains to be seen how long it will take for the cash issues to be resolved, but any extended period of disruption clearly will put a dent in the country’s economic performance over the first half of the year. On a more positive note, companies are optimistic that output will increase over the next 12 months, amid hopes that economic conditions will improve. Getting cash into people’s pockets will be key in helping demand to recover.