EFFECT OF CASHLESS POLICY ON THE NIGERIAN ECONOMY
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
This chapter deals with the review of related literature. The review was discussed under the following subheadings: concept of a cashless society, concept of economic growth, concept of economic development, concept of CBN cashless policy in Nigeria and theoretical framework.
2.2 Conceptual review
2.2.1 Concept of cashless economy
A cashless economy is an environment in which money is spent without being physically carried from one person to the other. The first issue in the cashless economy is the issue of electronic purse. This is electronic information that is transmitted to a device which reveals the information about how much a person has stored in the bank and how much he can spend.
The advantages of a cashless economy are enormous; cost of transportation and the danger of carrying large sum of money about will possibly reduce. The policy, it is claimed by the makers, will enhance the integration of our economy as presently 78.8 percent of the country’s rural populations are largely unbanked. According to the CBN, this policy, when fully implemented therefore, will drive Nigerian’s huge informal economy which is driven by small scale farmers, traders, craftsmen and other types of small and medium sized businesses and eventually integrate it into the nation’s formal economy.
The move to use electronic cash, commonly dubbed “cashless” however, has its own challenges, which in Nigeria, appear to be accentuated by the perennial problem of inadequate physical and social infrastructure. The introduction of the policy in Nigeria therefore brings up issues that touch on security, privacy, crime and computerization. Societal acceptance of the policy is therefore critical to its sustenance or the tendency to rebel against it by the common man on the street becomes imminent. However, as the financial institutions have implemented such things as debit cards, credit cards, internet banking, etc, it has slowly brought society into the acceptance zone whereby another step could be taken. Without society being able to understand the pros and cons of electronic cash, the full benefit of the cashless society may never be realized.
The cashless policy will potentially result in an extensive application of computer technology in the financial system, as technologies are developing rapidly on the transfer of funds from one place to another. This places the Computer Professional Registration Council at the centre of control and regulation of the emerging technology in our economy.
It has been argued that cashless transactions are viable and more secured mode of payment in any economy. Currently, about 63.7 per cent of Nigerians do not have bank accounts but the new initiative would enhance banking habit among individuals, especially among the rural dwellers so that they can easily transfer money to their people wherever they might be. The high cost of minting the Naira has also necessitated an alternative economic system where less or no cash is required for various transactions. Specifically, the average cost of producing a naira note is about N4.00. Producing N1 billion notes of Nigerian Naira, therefore, means spending N4billion. Hence the cashless policy introduction by CBN to reduce the cost involved in minting the naira as much as possible.
This latest development, according to the apex financial regulatory authority is therefore, coming on the heels of increasing dominance of cash in the economy with its implication for cost of cash management to the banking industry, security, money laundering, among others. The cashless policy itself is the trend in most countries of the world. Almost all the central banks across Africa are bracing up for a cashless economy because almost all African countries have the same problems associated with cash based economy. There is slow processing time involved in counting and queuing for deposits in the bank.
In the other way round, the Naira is not durable and security of handling cash is not guaranteed. Cash is difficult to document because it is difficult to capture all the money in the financial system. About two years ago, a World Bank study revealed that about $10 billion cash transactions that move just between Nigeria, Ghana and Cote de Voire shows no clue about how it comes and how it goes. The transactions were not recorded or reported anywhere in our system. This means government cannot even plan based on that. A cash-based economy encourages money laundering activities. There is also a high level of tax evasion in such an economy.
But the cashless policy is not all roses. It has as much challenges as its benefits. Accordingly, experts and many Nigerians have expressed doubts about the capacity of Nigeria to truly move on progressively as a cashless society. Variously, issues have been raised about the viability of the policy in view of the enormous challenges confronting its effective implementation, and the ability of the CBN to effectively water the storm and carry out the policy as planned.
2.2.2 Concept of cashless society
A cashless society is a culture where no one uses cash, all purchases being made are by credit cards, charge cards, cheques, or direct transfers from one account to another through mobile banking. The cashless society envisioned here refers to the widespread application of computer technology in the financial system.
Electronic cash is a system which allows individuals to purchase goods or services in today’s society without the exchange of anything tangible. The term money still exists, but it is more in an electronic form than previously. Electronic cash is a term becoming more acceptable as the world makes a shift towards a cashless society. Since the 1960’s governments and financial institutions globally have made slow, but steady steps towards the goal of a society without cash. The cashless society is being sold as a more convenient method of payment, and a method of preventing crimes all the way from the robbery of cash from an individual to the extent of money laundering among crime syndicates and cash stockpiling at home by corrupt government officials.
The case may conveniently be made that the future of all businesses, particularly those in the service industry lies in information technology. In fact, information technology has been changing the way companies compete. Banks are companies engaged in banking business. Their future is, therefore, linked to the pervasive influence of information technology.
Information technology is more than computers. It encompasses the data that a business creates and uses as well as a wide spectrum of increasingly convergent and linked technologies that process such data. Information technology thus relates to the application of technical processes in the communication of data.
As earlier noted, information technology can help reduce transaction costs for banks, which will translate to lower prices for services to customers. Information technology for banks takes different forms. The forms include:
(a) Computerization of customers’ accounts and accounts information storage and retrieval;
(b) Deposit and withdrawal through Automated Teller Machines (ATMs); and
(c) Networking to facilitate access to accounts from any branch of the bank.
Further forms include bio-metrics used in finger-printing and handwriting identification which should dispense with the use of passwords or Personal Identification Numbers (PIN) in the initiation of transaction by customers. The use of the internet and websites to bundle a host of services that go beyond traditional financial services which is increasing among banks, is also a product of information technology in banking.
Among other things, the cashless policy will save the banking system the cost of printing, distributing and handling large volume of cash. It is estimated that over 70 per cent of cash in circulation in the Nigerian economy exists outside the formal banking system. It has been argued that cashless policy has cost implications for the economy. Physical cash has life span; it gets destroyed easily. This means government spends a lot of money replacing cash with new ones. If cash is not in the formal system, it can’t be used for lending, but if an aggregate is known, that is, how much money is available to kick-start the economy, it makes lending and production easier.
The cost of funding is also said to be high because the amount in circulation is not captured in a synthesised manner. Part of the reason the CBN is introducing the policy is to reduce the cost of funds by making sure that a significant amount of the capital around is captured in the formal system. With this, when the law of demand and supply sets in, there will be enough cash to lend to individuals, corporate bodies as well as small and medium enterprises. If the apex bank gets the cashless policy right, therefore, it will be a major driving force for business in the years to come in Nigeria. This should be of interest to business owners. The cashless policy is also believed to be a step towards curbing money laundering in the financial system.
2.2.3 Introduction of the cashless policy in Nigeria
At the dawn of January 1, 2012, the pilot scheme of mobile money, one of the financial services introduced by the Central Bank of Nigeria, via a CBN circular Ref. No. COD/DIR/GEN/CIT/05/031 dated 20th April, 2011, to achieve a cashless economy took off in Lagos, the commercial nerve centre of the country. Other financial services under this payment platform are consumer accounts information and updates, alerts, which have been in existence but not widely subscribed to by account holders. Payment of bills, person-to-person transactions and remittances in different forms also form part of the cashless economy drive. With the introduction of the mobile payment, Nigeria is only keying into a fast evolving global payment system. The mobile money platform is a technology driven payment system that will open up several other business opportunities in the economy.
Essentially, mobile money payment system allows users make payments with their GSM phones. It is a savings and transfer system that turns GSM phones into a savings account platform, allowing the owner save money in it and from which withdrawals or transfers could be made. Under the payment system, customers could do their normal basic financial transactions on a daily basis by making payments for goods and services or by engaging in person-to-person transfer directly on their GSM phones. For instance, the system also allows for payment to be made through a mobile phone after purchases have been made at a supermarket or shopping mall. The shop owner in turn, receives instant payment electronically. Through the system, users can also pay utility bills, school fees, flight and hotel bookings, and house rents, among other transactions, using a mobile phone device. One important thing about mobile money is the fact that it thrives on agency network, thereby taking traditional banking and its cumbersome processes in the cities to the streets in sub-urban areas where accredited mobile money agents also operate.
The cashless Nigerian society, when fully implemented, has many benefits. Some of these benefits include:
• Reduction in money laundering
• Check on terrorist financing
• Effectiveness of the monetary policy
• Creation of more employment opportunities in the financial sector
• Provision of evidence against bribe givers and takers, especially the civil servants and politicians.
• Growth in the real sector of the economy. This is because credit will be available for investors.
2.2.4 Concept of economic growth
Economic growth has been defined in two ways. In the first place, economic growth is defined as sustained annual increases in an economy’s real national income over a long period of time. In other words, economic growth means rising trend of net national product at constant prices according to Siyanbola (2013).
This definition has been criticized by some economists as inadequate and unsatisfactory. They argue that total national income may be increasing and yet the standard of living of the people may be falling. This can happen when the population is increasing at a faster rate than total national income.
For instance, if national income is rising by 1% per year and population is increasing at 2% per year, the standard of living of the people will tend to fall. This is so because when population is increasing more rapidly than national income, per capita income will go on falling. Per capita income will rise when the national income increases faster than population (Ako, 2016).
Therefore, the second and better way of defining economic growth is to do so in terms of per capita income. According to the second view by Ewim (2015) “economic growth means the annual increase in real per capita income of a country over the long period. Thus Professor Arthur Lewis says that “economic growth means the growth of output per head of population.” Since the main aim of economic growth is to raise the standards of living of the people, therefore the second way of defining economic growth which runs in terms of per capita income or output is better (Ewim, 2015).
Another point which is worth mentioning in regard to the definition of economic growth is that the increase in national income or more correctly increase in per capita income or output, must be a ‘sustained increase’ if it is to be called economic growth. By sustained increase in per capita income we mean the upward or rising trend in per capita income over a long period of time. A mere short-period rise in per capita income, such as that occurs over a business cycle, cannot be validly called economic growth (Nduka, 2016).
Now, almost universally, rates of economic growth are measured both in terms of increase in overall Gross National Product (GNP) or Net National Product (NNP) and increase in per capita income. While Gross National Product (GNP) measures the total output of goods and services which an economy is capable of producing, per capita income measures how much of real goods and services which an average person of the community will have for consumption and investment, that is, average level of living of a citizen of a country.
Thus, world organizations such as World Bank and IMF have been employing both these measures of economic growth in their annual World Development Reports for comparing growth and levels of living of the developed and the developing countries.
2.2.5 Impact of the cashless policy on the economy of Nigeria
In examining the implications of cash-less system, it is necessary to review how conventional money has evolved over time. Money performs a number of roles in economic activity; it is a unit of account, store of value, medium of exchange and means of deferred payment. Also, money has evolved over the centuries to minimize the friction of transaction costs that are involved in mediating exchange. In fact, the process can be observed from the development of the very first monetary products. For instance, conducting economic transactions in barter economies involved high transaction costs as considerable time and effort was required in finding suitable partner.
Subsequently, another facet in the evolution of money was the need for fungibility and divisibility. Hence, the advent of study money (notes and coins) made the process less costly by allowing people specialize in production based on their strengths and by enabling the monetary authorities to mint coins in convenient denominations, thereby creating divisibility (Baddeley, 2004).
However, there has been drift towards electronic money, which is quite difficult to define because it blends technological and economic characteristics (Basel Committee, 1998; BIS, 1996). According to ECB (1998), electronic money is broadly defined as an electronic store of monetary value on a technical device that may be widely used for making payments to undertakings other than the issuer without necessarily involving bank accounts in the transactions, but acting as a prepaid bearer instrument.
Analogous to this definition is that of cashless economy wherein there exist no notes and coins issued by central banks but by private financial institutions (Costa and De Grauwe, 2001).
Several scholars have attempted to analyze the cashless system or e-banking. However, it becomes clear that few studies present a comprehensive evaluation of cash-less banking implications in developing countries. Most ignore its economic benefits of the equation while some do incomplete examination of its negative implications. This is often due to unreliable panel data for monetary and macroeconomic indicators. Although, this study focuses on Nigeria, it is difficult to translate cashless studies from one country to another. Even payments instruments that look similar across countries on the surface may be different due to historical and legal variations (Daniel et al, 2004).
On theoretical side, early studies in this regard attempted to explain the root cause of price indeterminacy, some of which are Fisher (1896) and Patinkin (1965). It established the following basic result: for any given real demand for money, there are infinitely many combinations of money stock and price levels that will do the job of bringing about money market equilibrium. In other words, economic agents do not care whether additional money desires are realized by increases in money stock or declines in price level.
Also, Humphrey and Berger (1990) present one of the earliest attempts to comprehensively estimate the private and social costs for nine separate payment instruments- cash, cheques, credit cards, money orders, point of sale (POS), Automated Clearing House Transfers (ACH), ATM bill payments, travelers‘ cheques and wire transfers. They find that from a social cost perspective, cash is the cheapest payment instrument, followed by ACH, POS and ATM bill payment. From a private perspective, cheques emerge as the cheapest payment method followed by cash, ACH and POS bill payments. However, the influence of government intervention was prematurely considered as there was no calculation of net benefits of such payments instruments (Daniel et al, 2004). In recent times, there is a consensus that central banks have the capacity to control the price level. One of the approaches is through controlling money supply (advocated by monetarists) and has led many central banks to implement money-supply-targeting procedures (Claudia, 2001). Another approach is the Taylor-principle, which is, adjusting short-term interest rate in response to movements in expected inflation and state of economic activity, as shown in Taylor (1993), Clarida et al (1997) and Woodford (2003).
Looking at empirical issues, however, in a cashless economy, money demand equation can be derived without influencing output and inflation (Gali, 2008). In this case, money plays the role of a unit of account and the amount of real money balances follows residually after output, inflation and interest rate have been determined.
In examining the cost implications of cashless banking instruments, Gresvik and Owre (2002) studied how much it costs Norwegian banks to process various payment instruments. It finds that payment cards used for cash withdrawals at ATMs cost considerably more since the transactions involve cash replenishment, maintenance and security costs. In addition, the cost of using cheques for cash withdrawals was found to be three times more expensive than cash withdrawals at ATMs.
Cross country studies such as Humphrey et al (1996) analyzed patterns in the use of cash and other e-payment instruments in 14 developed countries, including the US. Whilst treating payment instruments as if they were traditional goods, the authors construct measures of the cost (analogous to prices) of various payment methods in order to study whether differences in cashless instrument usage across countries can be explained by differences in the relative prices of such instruments. The result showed that such price differences failed to determine the usage of e-banking instruments. In other words, the ―convenience‖ of using a particular instrument—a factor that is not measured --- may outweigh the price differences that users face (Carrow and Staten, 2000).
In another study comparing costs across nations, De Grauwe et al (2000) examined the costs of cash and payment cards in Iceland and Belgium. These countries were selected because they provide a clear contrast as Iceland has one of the lowest rate of cash usage while
Belgium is at the other extreme. For the cash payment system in Iceland, the study estimate the cash production and distribution costs incurred by Central Bank and the subtract the revenues obtained through interest foregone on cash in circulation whereas, for the card-based system, they examine the card companies, commercial and savings banks, cardholders and merchants.
From a social perspective, it was concluded that a card-based system is considerably more efficient than a cash-based system for two reasons. First, diseconomies of scale in cash supply rises as cards displace cash, while economies of scale improve for cards. Secondly, the displacement relegates cash to smaller transactions because smaller transactions must cover the fixed costs of the cash system. Recent empirical studies such as Kriwoluzky and Stoltenberg (2010) attempted to estimate the cashless and monetary economy in US by employing Bayesian estimation techniques. The data set, which was split into two parts, ranged from first quarter 1964 to third quarter 2009, as done in Lubik and Schorheide(2004); Clarida et al (2000). Whilst treating GDP deflator, output per capita and real wages as observable, its findings suggest that interest rate policy was passive in the monetary but active in the cashless economy. According to Gali and Gambetti (2009), volatilities in output and inflation declined due to observed loss in the predictive power of money in a monetary economy. A similar conclusion was also reached by Stock and Watson (2002), Kim and Nelson (1999).
In assessing the role of central bank in a cashless society, Claudia and De Grauwe (2001) stressed that central banks gradually lose their monopoly position in the provision of liquidity combined with its subsequent small size which makes it hard to control the short-term interest rates. On the contrary, Marco and Bandiera (2004) argue that increased usage of cashless banking instruments strengthens monetary policy effectiveness and that the current level of e-money usage does not pose a threat to the stability of the financial system. However, it does conclude that central banks can lose control over monetary policy if the government does not run a responsible fiscal policy.
2.2.6 Workability of the CBN cash-less policy in Nigeria
Essentially, the regulatory framework for mobile (electronic) payment services released by the CBN imposes some restrictions on the volume of transactions a customer can do in a day. For the unbanked, for instance, who requires only his name and phone number to carry out transactions, the maximum limit of N3, 000.00 and daily limit of N30, 000.00 are stipulated. The semi-unbanked has a maximum transaction limit of N10, 000.00 and daily limit of N100, 000.00 However, in line with the CBN’s Know Your Customer (KYC) policy, the customer would be required to present his phone number, name, photograph and biometrics. The third level, which requires the customer to have a full bank account, allows a maximum transaction limit of N100, 000.00 and daily limit of N1, 000,000.00. For the customer to be able to access his mobile money account there is a Personal Identification Number, (PIN) which his mobile money operator requires him to enter just like the ATM card.
It was hardly surprising that at the take-off of the scheme, it was very obvious that it had many challenges to contend with. On the eve of the take off, the CBN had announced that all charges associated with the emerging payment system be suspended till the end of the first quarter of the year (i.e. 2012) That was primarily aimed at creating time for potential users of the payment system to gain better understanding of how it works. Even after the pilot scheme had taken off, most of the banks are yet to meet customers’ demand on the new payment systems. For instance, there are reports of some banks being overwhelmed by demands for ATM cards. Lack of awareness and education, poor infrastructure, and insecurity in the cyberspace are issues that must be addressed to achieve penetration in the adoption of the cashless policy. The low level of awareness and education on the payment system are responsible for the pilot scheme being limited to Lagos. Although the licensing and establishment of payment agencies will create jobs and new business opportunities, the hurdles before the cashless policy have raised concerns over how it is going to work.
This policy, as beautiful as it is, faces great challenges here in Nigeria. A few of these challenges are treated below. To begin with, there are challenges associated with illiteracy/computerization. As it is commonplace in any developing country, the literacy rate is still very low in Nigeria especially in the Northern part of the country. The business men/women here prefer to keep their money in their own vault while there are banks scattered all over the country. Also, computer usage, skills and knowledge of Nigerians even among the educated is still poor.
There is also the issue of lack of trust and the Bounced-Cheque Syndrome.Trust is lacking in Nigeria’s business environment. As a result, business operatives believe in cash and carry business transactions. The bounced cheque issue is a very common thing in Nigeria and as a result people place less trust on the use of cheques too.
More so, Concerns have continued to trail the level of ‘pocket-friendliness’ of the policy on the common man. In recent times, the welfare of the common man has become more relevant in Nigeria’s decision making process, unlike the virtually complete neglect of the masses when decisions were taken in the past. The term, “anti-people” has also become mainstream language. With this development, the welfare of the common man needs to be considered in policy formulation and implementation.
Many businesses in Nigeria make very little profit. In a very remarkable number of such cases, transactions are made with huge sums of capital input in both financial and non-financial terms, but the resultant profit is often disproportionate to the amount of capital invested. Despite this, the common man continues to struggle to survive, desperately holding unto his lifeline in form of the very businesses he is involved in. This implies that charges on exceeding the Five Hundred Thousand Naira (N500, 000.00) set by the CBN for individual accounts and the Three Million Naira (N3 million) limit set for corporate accounts will naturally eat deep into any businessman’s profit, and in some cases, not only wipe out such profit, but also dig into the financial capital as well, thus, causing gradual erosion of capital, creating a new class of poor people in the country. This occurrence can be described as “electronically-generated poverty” as the poverty comes through the application of electronic process in deducting commissions from the business man’s account as well as through the non-usage of electronic substitutes for payment. The occurrence can also be described as “policy generated poverty”, as the poverty comes through the direct implementation of policy.
Apart from business people and money being transferred from one person to another for transactionary reasons, money can be transferred for personal, non-business and non-transactionary reasons as well, by both business persons and non-business persons alike. The price to pay for this is quite huge, as it will imply including the CBN’s charges in one’s budget, when transferring money for very personal reasons. In other words, the banking sector has a share of money (whether profits are made or not) in almost any transaction and any transfer of money which one undertakes.
It is easy to say that if people do not want to incur charges, then they must use electronic means to effect payment. How many people know an iota about electronic means of payment? Among those who are electronically-literate, how many of them are brave enough to undertake this process, going by the huge loss of money due to fraud, encountered by some who have dared to do this in the past? Among the brave who have dared to undertake this process, how many of them can be careful enough to ensure they do not lose their media of cash holding, such as debit cards and credit cards or lose the privacy of their Personal Identification Number (PIN) to even someone as close as a family member, who needs just those few numbers to wreck havoc on the holder’s bank account? PINs do not need to be stolen before being known by another person. A good number of people willingly hand over their PINs to others, literally begging such recipients to assist them in effecting the use of the PINs, as they, the PIN holders, are often not technologically exposed or savvy enough to use the PINs or otherwise seriously engaged at a pressing period.
It goes without saying therefore that in addition to the probability of widening the poverty gap and increasing the incidence of poverty in the country, other challenges to the success of the cashless policy are ICT literacy, conviction of service safety and greater client exposure to fraud as a result of service/instructional support seeking from third parties, and also, of entrusting the individual with all his money, which he or she prefers to entrust to the care and safe-keeping of the bank.
Functionality also comes into question. Many Automated Teller Machines (ATMs) do not function at all times. Either the bank complains of no network service, no electricity power and in some cases, no money in the machines. This short-circuits the customer’s intention of using some of the available means of electronic-based transactions. Resorting to physical, over-the-counter means of financial payment attracts charges for the customer who will be, in essence, paying dearly for the inefficiency of the system.
The cashless policy can however, promote the wide application of technology-enhanced business such as e-business and related web, internet and mobile phone/communication based businesses, but this will benefit only a limited number of people, as the vast majority of the populace are not endowed with such skills of using technological applications for business, and are either not yet ready to acquire such skills, or are not even in a position to acquire such skills. Despite these setbacks, the e-business community and other virtual platforms of transaction will undoubtedly receive a boost with the introduction of the cashless policy, no matter how little.
2.2.7 CBN Cashless Policy in Nigeria
The Central Bank of Nigeria detailed on its yearly bulletin what the cashless policy in Nigeria means. According to information on the 2018 CBN bulletin, policy on cash-based transactions which stipulates a cash handling charge on daily cash withdrawals that exceed N500,000 for Individuals and N3,000,000 for Corporate bodies. The new policy on cash-based transactions (withdrawals) in banks, aims at reducing the amount of physical cash (coins and notes) circulating in the economy, and encouraging more electronic-based transactions (payments for goods, services, transfers, etc.). They further outlined reasons for the introduction of the cash policy to include; driving 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, reduction in the cost of banking services (including cost of credit) and drive financial inclusion by providing more efficient transaction options and greater reach improvement in the effectiveness of monetary policy in managing inflation and driving economic growth. In addition, the cash 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 10percent incur 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.
This policy was applied from January 1st 2012 in Lagos State where only CIT licensed companies were allowed to provide cash pick-up services and a subsequent ban on banks doing cash in transit lodgement services rendered to merchant-customers in Lagos State from December 31st 2011 with a provision for sanction on defaulters. The law then further stipulated that 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 from March 30th, 2012, thus giving people time to migrate to electronic channels and experience the infrastructure that has been put in place. Banks were to use this period as grace 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.
The CBN hoped that the policy would increase convenience; more service options; reduced risk of cash-related crimes; cheaper access to (out-of-branch) banking services, access to credit and financial inclusion for consumers, enhance faster access to capital; reduced revenue leakage; and reduced cash handling costs for corporations and increased tax collections; greater financial inclusion; increased economic development, increased tax collections; greater financial inclusion; increased economic development for the government.
Nnaman et al, (2014) noted that the CBN, in collaboration with the Bankers‘ Committee, aimed to achieve an environment where a higher and increasing proportion of transactions are carried out through Cheques and Electronic Payments (epayments), in line with the global trend, in recognition of the need to balance the objectives of meeting genuine currency transaction demands and combating speculative market behaviours that may negatively affect economic growth and stabilisation measures and that this new cash withdrawal policy will ensure that a larger proportion of currency in circulation is captured within the banking system, thereby enhancing the efficacy of monetary policy operations and economic stabilisation measures. They further identified the legal implications of the policy to include; the fact that the policy does NOT in any way stop account holders from withdrawing any amount of money they desire from their accounts, that the policy simply recognises that banking is a business and, as with any business, there are costs that are sometimes shared between the business and the customers and that the policy stipulates that to withdraw more than N150,000 (for individual account holders) and more than N1,000,000 (for corporate account holders), there will be a nominal transaction cost, as stated in the circular.
EFFECTS OF CASHLESS POLICY IN NIGERIAN ECONOMY
Pos1tive Effects of Cashless Policy
i. Prompt settlement of transactions: E- banking speeds up settlement of transactions both locally and internationally, where the bank stands as paying bank to the customers for settlement of transaction or as collecting bank for collection of payment on transactions;
ii. Reduction in the frequency of visits to banks: unlike before customers can now transact their banking businesses in branches nearer to them and they can also withdraw money from any ATM including the ones located outside the bank where they have account. They can also transact banking business at home with the aid of telephone iii. Stimulation of cashless policy: e- banking paves way for cashless society as the introduction of electronic machine has reduced the use of raw cash thereby transiting the country into a cashless society . iv. Reduction of theft: since robbers are attracted by volume of cash movement through bullion vans, the use of alternative electronic payment system will no doubt reduce incidence of robbery in the society, this is one of the reasons why CBN continues to emphasize that people should buy into the policy as soon as possible. v. Clearance of goods: payment system in the custom services help in ensuring easy facilitation of clearance of goods by importer, this is apart from the fact that money due to government would be paid electronically to the right account, thereby reducing the incidence of fraudulent practices of diverting government funds to individual pockets. vi. With cashless policy , CBN will reduce cash management costs by as much as N192 billion annually. CBN is of the opinion that the cash handling accounts for at least one third of infrastructural and labour costs in the sector , hence cashless policy will impact negatively on employment of those handling cash in the bank. The policy will also reduce cash related vices like robbery, cost of processing cash, revenue leakages from cash handling and inefficient treasury management through cash processing.
Negative Effects of Cashless Policy
The following are the constraints that affect effectiveness of e- banking in Nigeria presently: i. Erratic power supply and communication link: power failure negatively affects e- banking infrastructures like ATM, network failure of communication link due to much congestion, change in weather also affect the policy ii. Non- existence of computer back-up: there is bound to be total loss of data on customers’ accounts if there is no back up and the entire file is damaged. This may lead to misappropriation of customers’ account, hence bank should maintain back up of all its information outside the bank’s premises. iii. Inadequacy of fund to invest in information technology: most banks find it difficult to fund procurement of modern equipments needed for e-banking. Nevertheless, there has been tremendous improvement in automation of bank operation in the country in the last 5years but there are still rooms for further expansion so as to catch up with hi-tech , which is in vogue in developed countries; iv. Replacement of workforce by machine: electronic banking has now somehow reduced the number of employees needed to handle most transactions in the bank as most work done by workers are now being handled by machines thereby translating to increase in the rate of unemployment in the country; v. High bank charges for the use of e- banking machines : commission charged by bank on ATM transactions, as an example , is too high , thereby discouraging customer from using it;Central Bank of Nigeria is working out a modality to stop forthwith charges for usage of ATM. This will be a sort of relief and stimulates the effectiveness of the policy in Nigeria, if fully implemented. vi. Low acceptance by the public: many people have burnt their fingers as a result of fraudulent withdrawals from their accounts through the use of ATM by unscrupulous individuals who believe in using master cards to withdraw money from unsuspecting individuals. Not to mention situations whereby customers are debited by the ATM with withdrawals not supported by cash that fail to drop down from the machine as expected. Customers are discouraged to use the machine as it takes longer time before the wrong debit is reversed if it does not end up unsolved. vii. Inadequate securities around the ATM location: most ATM locations are not secured thereby making it easier for fraudulent persons to carry out their fraudulent activities without any arrest. Computer hackers also use the porous security system to steal data by breaking the codes or passwords. viii. Encouragement of excessive withdrawals: customers can use their cards to effect withdrawals as many times as possible, even on weekend and during public holidays. They can even make impulse withdrawals while attending a ceremony with the use of their credit cards.
BENEFITS OF CASHLESS POLICY
1. Faster transactions- through reduction in queue at the banking halls. It has been proven from time to time that queue at point of sale terminals has been reduced which leaves much time for employees to enjoy their break, there has been an improvement in the speed of rendering banking services 2. Improving Hygiene: it has eliminated bacterial spread through handling of notes and coins from one individual to another. 3. Increased Sales: it has been demonstrated that with the introduction of a cashless policy, there has been increase in sales by 20%. Vending and catering purchases are often dictated by the amount of loose balance we have in pockets. With the introduction of cashless policy, this is never a problem; the value on the card is available 24hours and 7days a week 4. Cash collection made simple: time spent on collecting, counting and sorting cash is eliminated. The cashless system offers a choice of top-up options including payroll reduction, credit and debit cards. Removing all the cash from your site removes the security issues relating to cash handling significantly and reduces the risk of vandalism and theft from your vending and catering points of sale. A payroll loader, where money is transferred from your salary to your smart card, or a credit card, where money can be loaded from Access, Visa or Master card directly to your smartcard offers you and your customers a truly cashless system. 5.Managing staff entitlements: free vends, corporate cash, royalty and hospitality are all entitlements which can be programmed in to the card, this can be refreshed daily, weekly or monthly while the card can be configured so that any unused allowance is accumulated depending on the client’s request. In some instances, it may be necessary to charge different tariffs for visitors and staff. 6. Reduction in cash circulation: a cashless system prevents too much of cash in circulation thereby curbing armed robbery and cash related crime.
Benefits to the Stakeholders
Having considered the benefits of the cashless policy generally, the advantages of the policy to stakeholders cannot be overemphasized. A variety of benefits are expected to be derived by various stakeholders from an increased utilization of e-payment which includes:
i. 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 ii. For Corporations; faster access to capital, reduced revenue leakage, and reduced cash handling costs iii. For Banks; efficiency through electric payment processing, reduced cost of operations and increased banking penetration (Oyetade and Ofoelue, 2012) iv. Benefits to the economy; through the system, users can also pay utility bills, school fees, hotel booking, house rents, among other transactions, using a mobile phone device v. For Government; increased tax collection, greater financial inclusion, increased economic development. The government will also benefit from the cashless policy in the area of adequate budgeting and taxation, improved regulatory services, improved administrative processes (automation), and reduced cost of currency administration and management (Ashike,2011).
The cashless system which is cultured to the use of e-payment increases profitability through the following ways:
i. Convenience - removing administrative resources required by invoices, cheque and cash ii. Immediacy - credit cards enable instant purchases without delay iii. Improved cash flow - payment at the time of purchase reduces the pressure caused by 30days invoicing iv. Growth – opens additional payment channels via the phone, mail order, internet and increases customers’ base. More customers means more revenue v. Competitive advantages –match and beat the services of competitors and gain the edge.
2.3 Theoretical framework
Some basic theories as being formulated with respect to the management of money by most scholars. The following theories are some of the basic theories of this study;
2.3.1 Quantity Theory of Money (QTM)
This theory propounded by Nicolaus Copernicus (1517) is a macroeconomic policy of government designed to control the level of economic activity in the country. The theory stated that the level of prices in the economy is directly related to the quantity of money in the economy. According to Hetzel (1993) QTM is the most useful ideas in economics which explains the determination of variables measured in dollars (or naira) such as the price level.
From the theory therefore, it can be deduced that the amount of money in circulation has a direct impact on prices in the economy. This justifies the attempt by economists to constantly seek to control the amount of money in circulation at every given point in time. The CBN in this case is charged with making monetary policies that will direct reflect on the nation’s economy hence the introduction of the cashless policy in Nigeria aimed at regulating cash circulation especially in reducing it to a significant minimum.
2.3.2 Classical economics
In a sharp contrast to the above theory where a nations economy’s performance is tied to the quantity of money in circulation, Adam Smith et al proposed the classical economics theory in the 18th and 19th century which states that markets function is best without government interference. Many writers found Adam Smith et al (1918) idea of free markets more convincing than the idea, widely accepted at the time, of protectionism.
The fundamental message in Smith's influential book was that the wealth of nations was based not on gold but on trade: That when two parties freely agree to exchange things of value, because both see a profit in the exchange, total wealth increases. The Classical economists observe that market generally regulate themselves, when free of coercion. Adam Smith referred to this as a metaphorical "invisible hand," which moves markets toward their natural equilibrium, when buyers are able to choose between various suppliers, and companies which do not successfully compete are allowed to fail. This theory therefore does not believe that the government should make monetary policies but allow the dynamics of trade to determine how money should circulate in a country.
Both theories have their basis of argument, however, the first theory best aligns with this study which is based on the cashless policy. The second theory, however, seeks to offer a slightly different view on what is considered okay to drive economic growth and development beyond monetary control thus a free market economy free of government regulations or interferences.
2.4 Empirical Review
Ejoh and Okpa (2014) examined the cashless economic system so as to assess its feasibility and practicability in the Nigeria context Vis-à-Vis; timeless preparedness and adequacy against the backdrop of our level of development both technologically and educationally. The study used a sample size of 120 respondents. Results showed that majority of Nigerians are already aware of the policy and adequate payment facilities in the banking sector have been developed to enhance the policy in the economy. Moreover, Ejoh, Adebisi, and Okpa (2014) carried out a study that examined the cashless economy in other to evaluate the relationship between ICT and implementation of cashless policy. They administered 120 questionnaires and tested the data using chi-square. The results showed that there exists a significant level of relationship between ICT and cashless policy implementation in the Nigerian financial environment. Moreover, public awareness should be done to encourage cashless economy in Nigeria.
Latifat and Alhassan (2015) embarked on a research to examine the pre-and post-implementation period of cashless policy tools in Nigeria. They focused the relationships between the cashless policy tools and currency outside deposit money banks (DMBs) in the Nigerian economy it was between 2009 and 2012. The data was regressed upon using the ordinary least square method to test the effects of this tool on the level of currency in circulation. Their findings show that not a single cashless policy tool has a significant relationship with currency in circulation outside banks mainly due to high collinearity between the tools of cashless policy.
Kehinde and Adelowo (2016) carried out a study to assess the level of Nigerians preparedness for e-commerce and cashless policy using the level of Information Communication Technology (ICT) adoption, usage and infrastructure available covering a space of 13 years. The paper concluded that ICT policy needs to be fully implemented and private and public sectors collaborations or partnership should be supported to facilitate the ecommerce and cashless policy. Taiwo, Kehinde, Afieroho and Agwu, (2016) carried out a study to appraise the implementation of the cashless policy since its introduction into the Nigerian Financial system in 2012. Another objective of the study was also to access the persistent challenges facing its implementation. They issued 120 questionnaires to respondents in Zenith Bank, First Bank, and United Bank of Africa. The results were analyzed using the Statistical Package for Social Sciences (SPSS) and one sample t-test. The results showed that the cashless policy will have the desired impact if a lot is done to ensure the implementation of an effective cashless policy system.
Akhalumeh and Ohiokha (2012), analyzed primary data using simple percentages to address the perceived benefits and problems of the cashless policy. Also, odior and Banuso (2012), Okey (2012) and Yaqub et al (2013), used a theoretical approach without quantitative data to address the subject and Osazevbaru et al (2014) focused on the analysis of secondary data to ascertain the impact of cash-less economy on banks’ income in general. The research avenue opened by that study requires analysis of secondary data specifically on the impact of other POS stakeholders’ income on the overall income of the banks. They find that cashless policy also have significant impact on banks and the economy. Their study also correlate to this present study since both study focused on cashless economy impact on the economy. On the other hand, both studies differs from each other in that their studies employed simple percentage in analysing the secondary data while this current study employed linear regression in analysing the primary data collected.
Kriwoluzky and Stoltenberg (2010) in their study on the impact of cashless economy attempted to estimate the cashless and monetary economy in US by employing Bayesian estimation techniques. The data set, which was split into two parts, ranged from first quarter 1964 to third quarter 2009. Their findings suggest that interest rate policy was passive in the monetary but active in the cashless economy.