Agusto & Co. Newsletter: Redesign gone wrong? – Costly Cashless

Agusto & Co. Newsletter: Redesign gone wrong? – Costly Cashless

How does the Central Bank retrieve 84.5% of a country’s currency in circulation in just 90 days? This was one of the many questions seemingly begging for answers when Nigeria’s apex bank announced its plan to redesign the three higher value notes of the naira (₦200, ₦500 and ₦1,000) on 25 October 2022. Fast-forward three months and three weeks (a week before the general elections) and a majority of Nigerians are now confronted with a shortage of naira notes that is proving disruptive to lives and livelihoods.

Given the analyst consensus that a 90-day window was simply insufficient to complete the project, it is difficult to conceive a scenario where the CBN did not anticipate the challenges which have accompanied this transition period. President Buhari, in his address to Nigerians on 16 February 2023, said…

“I am not unaware of the obstacles placed on the path of innocent Nigerians by unscrupulous officials in the banking industry, entrusted with the process of implementation of the new monetary policy. I am deeply pained and sincerely sympathise with you all, over these unintended outcomes”.

In what appears to be a clear case of buck-passing by the Federal government, the blame is being laid squarely on the banking industry’s purported failings and not any lapses in the policy’s design or hasty execution. Depending on whom you ask, a performance appraisal of the CBN’s execution of the redesign project would range from grossly unprepared to poorly perceived. In our opinion, the CBN failed to do enough through the media (Television, radio, newspapers, new media) to effectively sensitise the public, particularly the rural dwellers, and manage expectations. Most Nigerians assumed a simple exchange of old Naira notes for new ones. However, if we are to believe claims by the Kaduna State Governor, Nasir El-Rufai, the CBN printed circa ₦400 billion in new notes, leaving a shortfall of ₦2.3 trillion. So, while the exercise has reportedly reeled in 80% (₦2.1 trillion) of the ₦2.7 trillion held outside the banking system thus far, the average Nigerian is once again confronted with a test of resilience. Cash has become commoditized, hoarded by many and now commanding outrageous premiums of up to 20-30% at Point-of-Sale (PoS) outlets.

The Road to Perdition is Famously paved with Good intentions.

Public outrage has degenerated to violent protests in some cities, with incidents of vandalism and arson at several banks’ facilities – and PoS outlets. The cash crunch and the uncertainty surrounding the policy are fanning a long-simmering fire of public resentment, triggered by deteriorating economic conditions and recently exacerbated by unending petrol shortages. The result has been a significant loss of man-hours, logistics constraints to many businesses and possible threats to the successful execution of the general elections.

The CBN, when launching the redesign project, outlined the objectives clearly. Perhaps its most compelling arguments centred on the need to combat terrorism and reduce counterfeiting. The others largely revolved around driving the cashless policy through a shift away from cash and toward increased adoption of digital banking channels for transactions. This was underscored by a need to deepen financial inclusion (currently at 64%) and drive an efficient payment system that would improve the efficacy of monetary policy tools in combating inflation.

While the design of the policy gave room for underhand dealings by a privileged few, where the banking industry has really fallen short is in the capacity of the current digital payment infrastructure, which was already plagued by ‘transaction failures’ and an apparent inability to implement instant refunds, to handle the surge in transaction volumes. For context, in the five years leading up to 2021, electronic payments surged by 386% to ₦272 trillion, accounting for over 94% of the entire value of transactions in Nigeria’s banking system. Financial institutions also responded accordingly, by upscaling digital infrastructure to support the increasing adoption of electronic banking.

Recently, the Nigeria Inter-Bank Settlement System (NIBSS) reported a spike in the value of total cashless transactions in Nigeria to N39.58 trillion in January 2023 – a year-on-year increase of 45.41% – largely on the back of the CBN’s redesign and cash withdrawal policy. Nevertheless, on evidence, the abrupt shift to electronic payments, which the current cash shortage has necessitated, has overwhelmed the banking industry’s digital payments infrastructure. Nigerians are currently grappling with an unprecedented rate of electronic transaction failures. To further complicate matters, many transactions have not only failed, but refunds are taking days, even weeks in some instances, leaving many stranded and constraining commercial activity.

Unintended Consequences

The hardest hit by the policy have been the most vulnerable members of the population (the poor, the unbanked and the rural dwellers). Nigeria is still a largely cash-dependent economy, with informal economic activity accounting for approximately 65% of GDP and being dominated by Micro Small Medium Enterprises (MSMEs). These MSMEs account for up to 96% of businesses and 86.3% of the national workforce. These are mostly cash-based businesses – particularly the micro-enterprises which account for 99.8% of Nigeria’s 37.1 million MSMEs. Given the low levels of education and exposure of a significant number of Nigerians in this category, many of whom live in rural areas with inadequate or non-existent telecommunications infrastructure, a quick and seamless transition to digital payment channels was always unlikely. In addition, while mobile phone ownership in Nigeria is estimated at 81% by Enhancing Financial Innovation & Access (EFinA), internet penetration is still a mere 44.3%, as 60% of Nigerians live in rural areas where network outages were widespread even before the latest wave of transaction failures, and coverage was often non-existent, limiting access to traditional banking services. The Unstructured Supplementary Service Data (USSD), launched by banks and TelCos to enable deeper mobile banking penetration in communities lacking mobile data, has also been plagued by network-related setbacks.

The disruption to transactions, trade (domestic & foreign), productivity and all-round economic activity is likely to be significant enough to trigger a contraction in GDP in Q1’23 and possibly a loss of livelihoods for many. Many cash-dependent businesses are being pushed to the brink. For example, cocoa farmers are currently unable to pay their laborers and transporters, jeopardising production and exports. The cash constraint is also likely to compel consumers to prioritise spending on necessities, leaving many businesses, particularly MSMEs, with decreased sales and heightened credit risks. Worse still, living standards could decline further, particularly for many rural dwellers, as an inability to access cash could limit access to critical services like healthcare, stoking public discontent even further.

On the flip side, some of the biggest beneficiaries of the current lapses in electronic transactions have been Fintechs like Opay, Moniepoint, Paga, and Kuda, amongst others, which are reportedly far less prone to glitches and charge significantly lower transfer fees. Whether this is down to lower transaction volumes than traditional banks or the capacity of their digital infrastructure, or both, it remains unclear. However, getting traditional banks to invest in expanding their digital infrastructure in a period of rapid currency depreciation (most of the required infrastructure is imported) and, just as crucially, enhancing their cybersecurity will be crucial in convincing Nigerians to go cashless. Some of the tier 1 banks spent an average of 5.4% of their operating expenses on ‘IT and related expenses” in 2021. Raising this expense in the face of shrinking margins would become increasingly difficult, as it is likely to further impinge on profitability.

Final Thoughts

Many contend that the solution to the immediate problem is rather straightforward: print more of the redesigned naira notes while gradually phasing out the old ones. There is, however, a contrarian view suggesting that agreeing to the aforementioned is to not have a full appreciation of the nuances at play. Perhaps the most significant takeaway from President Buhari’s recent address is clarity over who makes decisions and who must approve any deviation from the current position on which naira banknotes are legal tender. The President concludes his address by noting that the policy’s success in minimising the influence of money in politics was a “positive departure from the past”. Given the timing of the policy, many argue that curbing vote-buying was the overarching objective.

The question is whether the long-term benefits of redesigning the naira outweigh the short-term costs and inconvenience of Nigerians being practically compelled to do away with cash. The hope is that the average Nigerian, now confronted with even greater hardship amid the current cost of living crises, is not a mere pawn in political a chess game.

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