THE PROS AND CONS OF NIGERIA’S NAIRA REDESIGN AND HOW TO:
MOVE TOWARDS A CASHLESS ECONOMY
On October 26, 2022, the Central Bank of Nigeria (CBN) announced the redesign of the N200, N500, and N1000 notes. The CBN Governor disclosed that the federal government had requested the redesign since the last time it was redesigned from paper to polymer was in 2014, which, according to global best practice, should be done every 5 to 8 years. The apex bank gave several reasons for the redesign, including reducing the rate of counterfeiting and hoarding of cash by citizens and entities. However, they failed to mention that physical banknotes undergo a lot of wear and tear during their lifespan, which makes them susceptible to damage and unfit for circulation.
In my observation, the naira redesign appears to be a desperate attempt by the CBN to enforce its cashless policy proposed some years ago. In January 2012, the federal government announced the transition to a cashless economy as part of its goal to rank among the top 20 economies by 2020. The cashless policy aims to reduce the cost of banking services and drive financial inclusion by providing more efficient transaction options and greater reach. It also aims to improve the effectiveness of monetary policy in managing inflation and driving economic growth by reducing the amount of high-powered money (physical money) in the public domain.
However, upon critical evaluation, the cashless policy, disguised as the naira redesign, seems to have brought about the opposite of its predicted objectives. Instead of bringing succor and financial inclusion, it has resulted in hardship, long queues, and financial exclusion of the unbanked, especially those in the informal sector and rural dwellers, including the elderly in our villages who are not conversant with technological devices. The apex bank had thought that electronic banking would replace cash transactions immediately, but millions of Nigerians don’t have access to electronic banking, and those who have access can’t even use it fully due to bad network connections when processing electronic transfers. Many Nigerians are also scared of using electronic banking due to the incessant stealing of their money by scammers and fraudsters, and most times, the fraudsters get away, and their money is never recovered.
All of these factors lead to financial exclusion, both voluntarily and involuntarily. Evidence has shown that financial exclusion hinders people from making decisions that can positively impact their livelihoods and, at a macro scale, limits economic growth, especially when locked out of the formal banking system. The transactional motive for holding money becomes nonexistent, which affects the demand for products. The adverse effects of the naira redesign/cashless policy on Nigerians are numerous, but that will be a topic for another time.
Every right-thinking person knew that the policy was going to fail, just like most of the previously enacted Nigerian government policies. This always happens due to poor quantitative and qualitative research, bad planning, bad implementation, and lack of creativity due to archaic reasoning. Now that the policy has failed and the old naira notes are back in circulation, the potential gains that were expected from the naira redesign/cashless policy in the form of reducing counterfeits, being able to stop corruption through easy tracking of transactions, reduction in the cost of banking services, and driving financial inclusion have all been defeated. I believe the CBN should have studied the methods used by the Bank of England in redesigning its currency. The Bank of England, in December 2022, announced that it would redesign its £5, £10, £20, and £50 notes, and they are expected to enter circulation by mid-2024, compared to ours, which announced the naira redesign in October and expected everyone to conform to its directive by the end of February. That’s just a four-month gap, which is laughable, even after taking around 3 trillion naira in cash out of circulation and releasing only about 300 billion naira in notes back, leaving a deficit of about 2.7 trillion out of circulation without a viable alternative.
What the CBN should have done is mandate all the deposit money banks a year before embarking on this policy, the CBN should have sat all the MDs of banks down, both the traditional banks and the new generation fintech companies, in conjunction with the NIBSS (Nigeria Inter-Bank Settlement System Plc) and the switching companies. NIBSS Plc is the main facilitator of inter-bank funds transfer between banks and discount houses. The CBN should have advised the NIBSS on the reason why it should increase its capacity to process additional volumes of transactions in preparation for the upcoming cashless policy it planned on enacting. Increasing its capacity to take on more transactions would have eliminated the error of failed transactions. If successful, eradicating the errors of failed transactions would have instilled confidence in depositors. Do not forget that when you instill confidence in depositors it also leads to an increase in savings and capital formation. The CBN should have mandated all deposit money banks to increase the number of PoS devices, and the devices should be distributed at a subsidized rate to encourage subscriptions by small business owners. Presently, the average price of getting a POS is around 30,000 naira. If Brazil, with nearly 20 million POS terminals, can achieve this, Nigeria can also achieve it. In a recent report by Collins Nweze, only 167,000 out of 307,000 POS machines are active, which is laughable in a country of about 200 million people. To eliminate fraud from POS transactions, the CBN should also have mandated all merchant acquirers to ascribe something like a social security number to all PoS devices, we can also use the BVN so that every transaction from the POS terminal will have a trail in case of POS frauds, and I also expected the CBN to be at the forefront of orientating People who cannot operate phones and tablets this can include individuals who may be illiterates, elderly, visually impaired, or have limited dexterity to ensure that everyone has equal access to the benefits and opportunities that the cashless policy can provide.
Nigeria needs the cashless policy more than the policy needs Nigeria, so it’s imperative for it to succeed, the gains are much, but we must also learn to put round pegs in round holes, taking away all the cash without providing a well-structured cashless economy has not only backfired, it has also made a lot of Nigerians lose confidence in our banking system, I hope going forward the Apex bank will be able to enact policies efficiently with better implementation, thank you.
