The Central Bank of Nigeria (CBN) on October 26 2022, announced the introduction of redesigned N200, N500 and N1,000 banknotes into the financial system. According to CBN, the redesigned denominations of N200, N500 and N1,000 naira notes and new limits on large cash withdrawals would help curb money laundering and make digital payments the norm, hence promoting cashless policy in Africa’s biggest economy.

However, the Nigerian economy is a middle-income, mixed economy and emerging market that is based on physical cash transactions. The Nigerian economy is a cash based system. Meanwhile, this new Naira policy has become a comprehensive approach in addressing the enormous challenges facing the economy.

The Genesis
In Nigeria as in many developing countries, cash is the main mode of payment thus making the economy heavily cash – based. Cashless policy was introduced in Nigeria by the Central Bank of Nigeria (CBN) in December 2011 and was kick-started in Lagos in January 2012. Several states like Rivers, Anambra, Abia, Kano, Ogun and the F.C.T took effect of the policy on the 1st of July 2013. Meanwhile, a full implementation of the policy nationwide was implemented in July 2014.

However, monetary policy has been a tool for economic management to bring about sustainable economic growth and development. While Monetary institutions are saddled with the responsibility of using monetary policy to grow the economy. Realistically, the CBN’s cashless policy has led to the expansion of various payment channels across the country. For example, the number of ATMs rose from 10,865 in 2011 to 19,355 in 2021. The number of Point of Sale (PoS) terminals rose from around 155,000 to 1.1 million as of April 2022. Cash continues to lead payment options in Nigeria, with debit cards and mobile payments the most popular cashless choices while credit cards struggle to make a mark on the payments landscape. 

The CBN naira policy aim is to bring an estimated 2.7 trillion naira ($6 billion) that circulates in informal channels into the regular banking system and carefully monitors transactions ongoing in the financial institutions.

A Comprehensive Approach 
In a bid to solve Nigerian economic woes, the pursuit for a cashless based economy does not imply an outright end to the circulation of cash (or money) in the economy but that of the operation of a banking system that keeps cash transactions to the barest minimum. 

This is why the Central Bank of Nigeria (CBN) now allows individuals to withdraw up to N500,000 weekly and organisations, N5 million weekly. The CBN new naira policy has continued to generate reactions. With President Muhammadu Buhari’s approval of a 10-day extension of the expiry date of the old naira notes from January 31, 2023, to February 10, 2023, it was expected that more bank customers would take advantage of the window to return all their old banknotes.

However, according to CBN Governor, Godwin Emefiele, there was significant hoarding of naira notes by members of the public, with statistics showing that over 80 per cent of the currency in circulation was outside the vaults of the commercial banks. 

According to him, as of September 2022, a total of N3.2 trillion was in circulation, of which N2.73 trillion was outside the vaults of the banks, describing the development as unacceptable as this has the potential to harm monetary policy actions, further leading to higher inflation and currency speculation, thereby exposing vulnerable Nigerians to further economic hardship.

Emefiele said the CBN acted in good faith towards the achievement of the bank’s objectives and the betterment of the country. Essentially, Emefiele said there had been concerns about the management of the old series of banknotes as well as currency in circulation, particularly those outside the banking system in the country, stressing that currency management remained a key function of the CBN, as enshrined in Section 2 (b) of the CBN Act 2007.

Notwithstanding the antagonism against the CBN’s cashless policy direction, critical stakeholders have thrown their weight behind the move, noting that the decision to limit cash withdrawal limits to individuals and corporate organisations following the currency redesign programme was the right way to go if the country must move forward and address the economic problems.

The central bank had placed a cap on cash withdrawals under the new dispensation, restricting the maximum cash withdrawal over the counter (OTC) by individuals and corporate organisations per week to N500,000 and N5 million respectively. The move by the apex bank was generally believed aimed at discouraging vote-buying as the 2023 general election approaches as well as addressing hoarding of the local currency in a bid to check inflationary pressures as well as address critical security issues.

However, this policy is a comprehensive approach in ensuring that the CBN can circulate the new notes, controlling the level of liquidity in the system for monetary stability and when the CBN regains control over money supply, it is believed that the soaring inflation, which reached 20.77 percent in September 2022, might be controlled. Also, According to Forbes, one significant monetary way to curb inflation is to control money supply in the economy.

Challenges 
It is imperative that the new policy would negatively affect small businesses especially those who are into day-to-day cash transactions and mostly based in the rural communities. The timing and short transition period for this demonetization will have negative impacts on economic activity, in particular for the poorest households.

Currently, there is an upsurge that households and firms already face elevated financial pressures from prolonged, high inflation, recently compounded by external food and fuel price shocks, and phasing out existing naira notes over a short time period may add to their challenges.

Many believed that the CBN new naira note is the cause of the rising fuel prices and the short transition period is what has led to the banking system being overwhelmed by the high rate of depositors who in turn need new naira notes.

It is important for the banking system to improve on their network to actualize the full potentials of this new Naira Policy aimed at driving a cashless based economy. With an appropriate measure needed in the financial institutions, this policy is a comprehensive approach that needs to be embraced by all stakeholders and the populace to enjoy its benefits.

Solutions 
Countries around the world redesign and reissue their legal tender for several reasons. Main motive is the prevention of counterfeit currencies. Redesigning currencies improves a currency’s security by enabling countries to keep counterfeiting low and stay ahead of threats.

While the CBN has laudable causes in view, achieving the redesign, production and distribution of new currencies, as well as recalling the current notes in a manner that will effectively actualise the set goals within the 3 to 4 months’ timeline has sparked a great concern amongst Nigerians.

It is imperative that the Central Bank takes note of actions taken by countries that have undergone significant reforms in terms of currency stability and redesign. The National Council of State recently has shown support of this policy but suggests an aggressive circulation of the new notes across the country. This will bring relief and ensure stability towards the implementation of the policy.

Also, there is a need to ensure a rapid response from banking institutions in respect of ensuring the circulation of new notes. The issue of ineffective network services occurring in financial institutions needs to be addressed. The Central Bank of Nigeria (CBN) needs to collaborate with Fintech brands to reduce the overwhelming demand on the financial sector and ease the burden on citizens when transacting and exchanging old naira to the new naira. It is important that all Deposits Money Banks and Payment platforms show commitment and ensuring a flexible timeline on expanding their support services 

The Central Bank of Nigeria needs to collaborate with other ministries like the Ministry of information and relevant organs to commence a major public enlightenment campaign to educate the citizens on understanding the cashless policy adoption. Also, the central Bank and other relevant MDA’s should form a committee for an oversight over the cash supply gaps and deal with current issues to meet the needs of the people.

With the above solutions, the potentials of this policy will be actualized while the Nigerian economy successfully transits into a cashless based system and exit the traditional cash based economy.