Wednesday, May 04, 2011

Nigeria and cash

The biggest enemy in fighting poverty is physical cash. The fact that people living at the bottom end of the pyramid need to conduct their business with paper notes (and coins) is the main reason why they are often stuck there. That is why it is important to apply all means to change this - technology, business solutions and regulations.

That is why I found a recent article interesting (Read here). According to this article, the Central bank announced a new cumulative limit to the withdrawal of cash for both individuals and corporations. This leads to the following questions:
  • Knowing Nigeria, and the dependency of the country on cash, I am intrigued how it is possible that this legislation could possibly fly. How is it possible to restrict the supply of cash, when electronic payment infrastructure are limited and cheques are viewed with apprehension.
  • Also, the application of this directive will be difficult. To really ensure that banks adhere to this direction, integration between banks will have to be much tighter. The cost and infrastructure required could surely be spent on other parts of the banking industry.
One could argue that, rather than implementing this type of regulation, the industry should rather focus on providing electronic payment capabilities (like mobile banking), at a faster rate. This will be a more effective way to eliminate cash.

2 comments:

BigChief said...

One of the main reasons the CBN is doing this is to promote "Cashless" channels. They are in fact providing a lot of incentives to promote POS deployment and MobileBanking. I dont think any country uses cash as much as Nigeria and by cash I mean notes and not coins. Coins are durable but notes are not. Nigerians never took to coins and because of notes the cost of cash management in Nigeria is over the roof. The challenge is not with the CBN but with the entire industry and their ability to quickly bring innovations to the market. For any nationwide transactions platform to work, beyond interoperability with other platforms ubiquity is important. Ubiquity is helped by creating nationwide distribution channels or franchises. The biggest problem with current MobileBanking agency models is still Cash Management. The Bank Agency approach which was recently adopted in Kenya may be a good way forward as the banks still have most of the money anyway. There is a transition period as this policy will be applicable initially in the major urban areas and we may see criminals and money launders migrate to rural areas. This too could make them easily visible and easy to identify. Drastic situations deserve drastic measures and the CBN got this one right. Inertia is our biggest problem in Nigeria when it comes to growing our payment system. We needed this collective kick in the backside to make things happpen

Anonymous said...

"The biggest enemy in fighting poverty is physical cash. The fact that people living at the bottom end of the pyramid need to conduct their business with paper notes (and coins) is the main reason why they are often stuck there"

This is a drastic simplification. The industrial revolution occurred on a cash-based economy. Moreover, a cash-based economy is more likely a symptom of a larger, deeper issue such as corruption, lack of good political institutions, etc.