ANALYSIS OF EXPECTED RISKS INHERENT IN CASHLESS ECONOMY IN NIGERIA

SUNDAY C. NWITE Ph.D, ACII, ACIB, IRDI.

SENIOR LECTURER

DEPARTMENT OF BANKING AND FINANCEEBONYI STATE UNIVERSITY – ABAKALIKI

PHONE NO: 080-37743134E-MAIL: nwitewhite2006@yahoo.com

ABSTRACT

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The analysis of expected risk inherent in cashless economy. Long before now, federal government of Nigeria has made known its desire to operate a cashless economy free of paper money and coins so as to align with the financial system and model transactions that are changing rapidly all over the world. Also, as a result of exigency in reducing cost of cash management in the banking industry, the central bank of Nigeria (CBN) in collaboration with the Bankers committee is adopting policies to reduce the high usage of cash, moderate the cost of cash management and encourage the use of electronic payment channels.To achieve inter-operability of local currency point of sales transaction (POS) no card scheme, foreign or local, shall operate exclusive acquire agreement or contact in Nigeria with effect from June 1, 2011. Any payment scheme, processor, switching company, service provider or bank that contravenes this policy may be suspended for a minimum of one (1) month by the CBN, this policy shall apply to both private and public sectors transactions. All financial institutions and loans, mortgage and microfinance banks shall comply accordingly. Compliance with the policy shall be monitored by the banking supervision department and the other financial institutions supervision department of CBN with appropriate sanction applied to earring institutions.KEYWORDSAnalysis of expected risk, cashless economy, risk inherent, financial system, cash management, and hazard.Paper Type: Research Paper

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INTRODUCTION

Banks will be more eager to do business and give the businessman in

the country access to credit. With the age long conventional albatross

of collateral security end or is it possible to open the windows of other

trendier forms of accessing credit in this new regime when most of the

money in circulation will obviously be in banks will be a new business

haven or will it give room to a new set of business challenges. From

the previous of secured credit transaction anything that makes the

repayment of money more assured other than the promise by the

borrower qualities as security. While some form of security is a sine

qua non in a lending transaction, realization. Security is often not

costless, this is why a banker may be reluctant to give the access to

credit if he has the linking that the transaction is likely to fail. This

reluctance to do business endures in so far as it entails the borrower

money or having power to take control of the proceeds of the

transactions channel them to wherever he desires without recourse to

the lender. Where this likelihood, the lender is always on his toes and

will always access the safety of investment before taken a plunge. He

is not even interested in realizing security at point as this is only a

waste resort for him if he cannot help it. In a cashless economy,

however, the banker is more comfortable in a transaction as he is in a

better position to enforce such conditions as domiciling contract where

need be. Where there principles discouraging transactions on basis,

the economic actors will tend to conform more to routing transaction

though instruments as it will be more profitable to do so. Business

transactions will also rely less on people’s integrity, the economy will

move integrated and disclosed accounts will be charged directly with

the own business obligation. Diversion of funds can also be easily

checked.

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CONCEPT OF CASHLESS ECONOMY

A cashless society is one where cash (money) is not carried about. As

a result payment for goods and service are made through electronic

means and by the use of quasi money. In the developed economies

broad money goes beyond currencies in circulation plus Demands

Deposit Plus Time. Deposit (M2=CC+DD+TD) as it is in most

developing economies. In a cashless society, broad money involves all

these electronics means that facilitate payments for goods and

services.

In Nigeria, efforts have been made to make the economy cashless. The

money laundering prohibition Act (MLPA) of 2004 is a good step the

right direction. Most Nigerians do not know that the law prohibits

payment or collection of cash when buying or selling any goods whose

value exceeds five hundred thousand naira (N500000) and two million

naira (2million) doe individuals and corporate bodies respectively.

More so, the violation of this law attracts the fine not less than

N250,000 or two years imprisonment or but a fine and also

imprisonment.

HISTORICAL DEVELOPMENT OF CASHLESS ECONOMY

Long before now, federal government of Nigeria has made known its

desire to operate a cashless economy free of paper money and coins

so as to align with the financial system and mode of transactions that

are changing rapidly all over the world.

Also, as a result will help in reducing cost of cash management in the

banking industry, the central bank of Nigeria (CBN) in collaboration

with the banker’s committee is adopting policies to reduces the high

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usage of cash moderate the cost of cash management and encourage

the use of electronic payment channels.

Starting from June 1, 2012, a daily cumulative limit of N150,000 and

N1,000.000 on free cash withdrawals and budgets by individual and

corporate customers respectively with deposit money banks (DMB)

shall be imposed. Individual, corporate organizations that make cash

transactions above the limits will be charged a penal fee of N100

thousand and N200/thousand respectively for amounts above the

cumulative limits, third party cheques above N150,000 shall not be

eligible for encashment over the counter. If a bank allows third party

cheque encashment, it shall be liable to a sanction of 10% of the face

value of the cheque or N100, 000 which even is higher.

Under this policy, banks will cease cash in transit lodgment services

rendered to merchants customers from June, 1, 2012. in this regard,

customers could engage the services of the CBN licensed cash

movement to and from their banks a mutually agreed terms and

conditions.

REASONS FOR CASHLESSNESS IN NIGERIA

This policy and the eventual cashless economy will reduce snatching

of money from customers at gun point, on the street and also reduce

the incentive for robbery and employee theft. The nation’s economy

will witness less money in circulation as huge of quasi money is

expected to be in the vault. There will be reduction in the cost as well

as frequency of printing and minting of money by the central bank of

Nigeria.

Recently, CBN stated that it incurs about N34billion to print money

annually. Use of electronic money which may be the outcome of the

policy, will reduce cost associated with storage, transportation and

security of cash.

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However, the policy will face the challenges of inadequate power

supply, shortage or critical technological infrastructures, lack socio-

cultural support and absence of regulatory framework that are

required to operate seamless and effective electronic payment system

in the country. As it is today, many people have lost confidence in the

security of our electronic payment system as ATM system is fraught

with frauds and irregularities to the detriment of unsuspecting

customers.

It is expected that the policy may lead to “explosion” of mobile

financial services companies in Nigeria, therefore creating more

employment opportunities for ICT knowledge workers. Potentials of

mobile banking in Nigeria. According to the enhancing financial

dunovation and access (EFINAC) report, 67 percent of Nigeria’s

population is unbanked and 78 percent of the nation’s rural population

is without a bank account, Nigeria’s unbanked population reflects

Africa’s average with only 20percent of African families having bank

accounts, the mobile money remains the only and most available

feasible means to provide mass market alternative to get more people

banked in Nigeria. The internet has only a penetration rate of 6

percent in a population of more than 140 million people but mobile

technology is close to 50percent penetration with huge prospects for

growth. Introduction of mobile financial service companies cash in

transit at servicing companies and may affect those staff of the banks

that are currently involved in cash management to either be

redeployed to curb banking activities or downsized.

CASHLESS ECONOMY IN ITS ERA OF POOR INFRASTRUCTURE

DEVELOPMENT

The Nigerian government as a developing nation is characterized by

poor infrastructural development like epileptic electric supply, poor

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road network in Nigeria, no water, poor security and other basic

amenities that make life meaningful.

In Nigeria, where the banks are mostly concentrated in the urban cities

and the few banks that have branch officers are always threatened by

high level of theft, because of the level of insecurity in Nigeria.

There has been cases where one go to bank to collect or withdraw

money and it will be that there is no network or that the server is not

working and all these do constitute problems to the person who wants

to make the withdrawal.

In Nigeria as a nation where one can never be sure of power, what will

be the fate of somebody who after purchases of some consumables

went to collect money and the system developed problems.

Again, the type of business we do in Nigeria has encourage holding of

cash because it is difficult to create trust among Nigerians because of

the level of fraud.

Further to this, by the level of insecurity in Nigeria, it is very obvious

that one may pick the money and arm robbers will snatch the same

amount in the same spot and they do this by always shooting

sporadically in the air, Nigeria by the level of our development is not

ready for cashless economy.

THE IMPLICATIONS OF CASHLESS ECONOMY IN NIGERIAN

ECONOMIC DEVELOPMENT

Nigeria is a developing nation. The type of business done in Nigeria is

yet to develop to the standard we see in advanced countries.

Recently, the CBN governor under the leadership of Sanusi Lamido

Sanusi announced the intending introduction of cashless economy

where one can withdraw N150, 000 and corporate body N1 million and

any excess of that the person concerned will pay penalty. The

implications of these are;

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The people who are doing business will be delayed in carrying out their

normal business

- It is also assumed that fraud will reduce, but it is obvious that

ATM even encouraged more fraud.

- It will also make people that have gotten some cash to withhold

it, because of the fear that it will be difficult t get another one in

the bank.

- It will also make the people who engage in major transactions not

to engage in their normal business. It will indirectly create

unemployment for people who engage in business that needs a

lot of cash.

- The intention of mobilizing fund from the rural dwellers may not

be achieved because they may keep the money so that they will

not have problems of sourcing for cash from the bank because of

the ceiling by the apex bank on the maximum of withdrawal.

We are also aware that most of money laundering done in the

bank are connivance with bank managers, because of the bad

moral hazard in Nigeria, the managers may arranged with the

withdrawers and disadvantage other banks, so these has to be

revisited for all the participating banks have level playing ground.

Assuming that after purchases and there was no network from

the cash point or that the server developed problems, what will

happen.

VARIOUS RISK INHERENT IN CASHLESS ECONOMY

The various risk inherent in a cashless economy may be positive or

negative to banks and customers during the course of business

activities and financial transactions.

And as stated by the central bank of Nigeria CBN, the various risk

inherent in a cashless economy is that the policy will face the

challenges of inadequate power supply, shortage of critical

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technological infrastructure, lack socio cultural support and absence of

regulatory framework that are required to operate seamless and

effective electricity payment system in the country. As it is today

many people have lost confidence in the security of an electronic

payment system as ATM system is fraught with irregularities to the

detriment of unsuspecting customers.

It also expected that the policy may lead to the “explosion” of mobile

financial companies in Nigeria therefore creating more employment

opportunities for ICT knowledge workers. It will also stop people for

taking money to the bank while keeping this money in the house and

this will lead to rubbery issues.

VARIOUS WAYS OF MANAGING SUCH RISKS

In a cashless economy, the aim is to avoid the risk of holding excess

fund and also to reduce the risks of all these internet scams.

But one thing is that if one if running from one risk, he is exposing

himself to another risk that is why it is always said that a man is a

bundle of risk. Various ways of managing the risk of cashless economy

are;

Keeping some cash handy incase of any disappointment of the persons

bank through network. Again, to have bank accounts with some other

banks so that if one is disappointed in one bank, one can easily go to

another bank cash point.

Again, one may have various accounts with different children of his to

enable him with draw more than the withdrawal limit.

It is also very necessary to have different banks to facilitate multiple

withdrawal from different banks.

To the government, armed personnel should always be sent to guide

banks and protect both those depositing and those making

withdrawals.

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THE EXPECTED ROLE OF THE GOVERNMENT IN MANAGING

SUCH RISKS

The banker is eager to finance the expirations of a newly elected

legislator, however very much unwilling to finance a new small or

medium scale enterprises because the former is more viable. The

simple truth is that most banks in Nigeria are not really financing

business enterprises as in their view, the attendant risk accompanying

is still too high. The cash carrying nature of the economy is also

responsible for large pool of money in the land the unbalanced income

distribution in Nigeria is also a serious concern.

Conversely in a mixed or cashless economy, a significant if not the

entire percent of the money must be routed through the conventional

banking annuals. Hence the picture of the size and nature of the

economy is clearer. Government policies easier to implement. Such

international commercial crimes as money laundering can be easier to

track and possibly ripped in the land, these are just some of the

reasons why the present central bank target of making Nigerian

economy a cashless by the year 2015.

Bank will more eager to do business and give the businessman in the

country access to credit. Will the age long conventional albatross of

collateral society end or is it possible to open the windows of other

trendier forms of accessing credit in this new regime when most of the

money in circulation will obviously be in banks? Will it be a new

business haven or will it give room to a new set of business

challenges.

From the preview of secured credit transaction anything that makes

the repayment money more assured other than the promise by the

borrower qualifies as security. While some form of security is a sine

qua non in a lending transaction, realization security is often not

costless. This is why a banker may be reluctant go give the lead

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access to credit if he has the linking that the transaction is likely to fail

regardless of low attractive the venture may be.

INSURANCE INDUSTRY AS A PUT OPTION

Man by creation is a bundle of risk. Risk is one of the institutions

created by God; hence man cannot do without risk. It is because of the

risk inherent in man’s activities that brought about insurance. In the

banking industry, staff work there, and it has been noticed and

reported in most cases that there has been fraud from people using

ATM, so to enable this work, the bank, individual need to take different

classes and types of insurance policies. For instance, individual who

are staff hold and play with people’s money, hence they have to take

up dishonesty insurance or fidelity insurance policies.

Again, people may be taken to court by the attitude of the staff.

Variously, hence need to take up legal expenses insurance.

Banks also give advise to people and their advise may not be in line

with the approved norms, hence need to take professional indemnity

insurance, because the person is a staff of the banks and the bank

concerned may be held vicariously liable .

Banks also carry cash about from place to the other, so they also need

to take up cash in transit insurance some risks also arises in cash in

vault.

It has also been noticed that attacked by arm robbers is a big

problems to the banking industry hence need to take theft insurance

fire can occur to the building, damaging people’s property, hence need

fire insurance, accident, keyman insurance etc.

IMPLICATIONS OF EFFECTIVE MANGEMENT OF RISK INHERENT

IN CASHLESS ECONOMY

Most business transactions in the country are still cash-based which

means businessmen would need to withdraw huge sums of money to

purchase their product or goods and pay for transportation to Lagos.

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For instance. the traders in the hinterland from whom they buy their

goods know only one form of payment that is except cash would thus

be confronted with a bigger dilemma if this policy is eventually

implemented as it is in interviews, with newsman, Ade Martins Odigie,

president national union, banks, insurance and other financial

institutions employees (NUBIFIA) warned against implementing such

monetary policy in Nigeria.

According to him, current CBN’s management should be called to

order instance, if you compel an entrepreneur who is transacting a

daily business of buying and selling for about N400,000 to limited his

cash lodgments and withdrawal to N150,000, it means his operations

would be reduced by 60 percent. This unimaginable and should not be

accepted in any form.

Austin Airbornian, a medical equipment supplier also believe that the

policy would cause some distortions in the economy in the economy in

the short term.

According to him, some customers always insist on cash payment

before they would release their goods. How do we make these

changes in a short time? Airobamin however stated that CBN ought to

have carried out sensitization programme to prepare Nigerians for

transition. Not everybody sees it as a wrong policy.

Ogho Okiti Business Day’s Chief Economic believes that Sanusi is right

on matters limited amount of cash in circulation. Nigeria is one of the

only few big countries where people move huge amounts of cash

around. When cash is not in the banking system means banks cannot

lend that cash that simply means that the cash is not working for the

economy.

The second thing is if Sanusi is right on first principle what are the

things he wants to correct? But there are underlying principles; there

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is the issue of efficiency, there issue of corruption and issue of waste

or mismanagement.

Okiti, however admitted that the policy is not sufficient for the

implementation of new measure. For instance, he wants CBN as a

matter of urgency to commence other means of payment outside

cash.

PROBLEMS OF RISK MANAGEMENT IN CASHLESS ECONOMY

There are always two sides to a coin, to cashless economy. It will not

be achieved in Nigeria and it will cause the following problems.

1. It will disturb business transactions in Nigeria.

2. It will frustrate business men from paying for their transactions

incase of power failures.

3. There are poor infrastructural development in Nigeria, which we

all know

4. Banks are concentrated in the urban cities and the level of

insecurity in Nigeria is at a very rate. How can we improve our

security over night.

5. Theft is very high in Nigeria and the level of the cashless

economy work in Nigeria with those in the village.

6. If there is big organizations that engages in millions of business,

it will be difficult for them.

7. It will create even more unemployment in Nigeria because most

of the work will be done by machine.

8. It will encourage more hoarding of fund.

PROSPECTS OF RISK MANAGEMENT IN CASHLESS ECONOMY

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The prospects of risks management in a cashless economy is as

follows:

1. More funds will be in the bank to use in transacting any business.

2. The major functions of bank will come back as fund mobilization

3. Nigerian can always know the money in the economy and control

inflation

4. It will reduce theft and arm robbery which is very prevalent today

in Nigerian economy.

5. It will help the government to plan because they can understand

the general financial situation of the public.

6. All these politicians that steal our money will be exposed, if well

managed.

7. It will even encourage the operation of due process among the

people in power.

8. It will reduce capital flight in Nigeria which have paralyzed our

economy and improved that of foreign countries.

9. It will place Nigeria in the world globally that has embraced

cashless economy. All these are on one side.

CONCLUSION

Its important to note that the nation is not very ripe for a stringent

analysis of expected risk inherent in a cashless economy. As Nigerian

economy is dominated by informal sector where use of banking

services is highly limited. A survey by Gallop (A Notable research firm

in US) revealed that about 38 percent of Nigerians have bank account

while about 62 percent of Nigerian have no relationship with the

banking industry.

Another report by EFINA research company stated that as at the year

2010, only 25.4 million Nigerians representing 30 percent adult

population as members of informal sector may find the policy

cumbersome at the beginning.

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Definitely, there will be decline or operating exposes per customer in

the finance sector. In the long run, there will be less traffic in the

banking hall when many Nigerians would have adopted culture of e-

transaction or keeping cash at home.

By and large, human habits and socio cultural attachments to the

traditional use of money in Africa may also be another hurdle that may

be faced by the policy amongst many Nigerian. I wish to urge central

bank of Nigeria (CBN) to encourage and intensify awareness among

citizens especially amongst the informal sector of the economy and

put in place necessary measures to make the dream for cash economy

a success hence it is difficult for cashless economy to work now in

Nigeria.

RECOMMENDATION

Risk is also said to be the sugar and salt of life so since risk is inherent

in all human activities and finance attracts more risk than others. It is

recommended that

1. Banks should embrace various insurance policies.

2. Insurance companies also should educate banks on the

importance of their policies.

3. Individuals and corporate organizations should also embrace

insurance business and their services mostly in his era of

cashless economy.

4. Security is the business of all, both the government, individual

should do everything possible to provide adequate security in

Nigeria.

5. Banks should also be made to have security to guide the

customers that are doing such transactions

6. There should be adequate provision of infrastructures to facilitate

cashless economy.

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7. Enough training and education on people about the economy

should be gradual to enable people understand and get

acquainted with the practiced of cashless economy before

making it compulsory.

8. Adequate security provision in the rural areas and also providing

infrastructures will be encouraged, with no more banks branching

in the rural areas.

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