THE ECONOMIC CONSEQUENCE

OF INTRODUCTION OF HIGHER

CURRENCY NOTES IN NIGERIA

CHAPTER

ONE:

BACKGROUND OF STUDY

STATEMENT OF RESEARCH PROBLEM

OBJECTIVES OF THE STUDY

SCOPE OF THE STUDY

SIGNIFICANCE OF THE STUDY

THE STATEMENT OF THE HYPOTHESIS

LIMITATIONS OF THE STUDY

DEFINITION OF TERMS

Work in Progress

FEBRUARY 13TH, 2011

CHAPTER ONE: INTRODUCTION

Background of the Study

Amidst complex economic development problems (broadly, summarized under huge

external and internal debts, chronic fiscal deficit and serious economic decline,

reflecting in stagflation pressure despite abundant primary resources), there is the

general consensus in Nigeria that the primary goal of current macroeconomic policy

is to put the economy back on a path of sustainable, non -inflationary and self reliant

growth of output, employment and income. In this regard, this primary goal is

subsequently reinforced by the general assumption that control over the value of the

Naira, its circulation (volume and process) as well as its management, price and

exchange rate stability are necessary and amongst relevant concerns for the growth

of output, employment, income and overall economic development.

This assumption is couched under the awareness that economic instability are

injurious to existing producers, new investors and consumers alike as they introduce

uncertainty which discourages long-term commitments without which sustained self-

reliant growth of output, employment and income will be difficult to achieve. In

recognition of the foregoing, both the monetary and fiscal authorities have usually

aimed at the attainment of price economic stability. In this regard, while the monetary

authorities in Nigeria constantly search for the optimal quantity of money, that would

support a stable economy, the fiscal authorities on their part constantly look for the

constellation of government revenues and expenditure that will attain the same

objective all in a bid to foster economic growth and development. Given the

foregoing, it is conventional to assign the goal of economic stability and ensuing

consequences primarily to monetary authorities. Thus, over the years, the primary

goal of monetary policy in Nigeria always relates to that of the achievement of price

and exchange rate stability through various techniques, enunciated by the Central

Bank of Nigeria (CBN) in its various issues of Monetary, Credit, Foreign Trade and

Exchange Policy Guidelines.

This research therefore proposes to provoke some thoughts on the direct implication

of higher currency notes in the Nigerian.

Statement of Research Problem

The introduction of higher currency notes in Nigeria is driven by a number of factors;

these are with respect to the failure of lower currency denominations to sustain and

support the level of increase in economic activities in the nation, without many un-

required encumbrances. Among them presumably was a requirement for a high-

value medium of exchange - especially in the absence of other widely available and

acceptable alternative methods of payment - and a store of value of significant worth,

in response to expansion in economic activities and also a response to growth of

incomes in the society. The Central Bank of Nigeria (CBN) opined that the

introduction of higher currency denominations would, among other things, help curb

inflation and improve convenience. Additionally, while it is true that a higher currency

denomination do tend to improve convenience of conveyance and usage for the

citizenry, it is only a good option until the wake of the Nigerian cashless society.

In contrary stand to the above, economic analysts are of the opinion that the

introductions have nothing but hindered sustainable currency value and promoted

inflation. They further assert that the introduction of higher currency denominations

could affect adversely the distribution of currencies thereby distorting commerce in

the economy. This study would strive to provide an answer to the question of the

economic consequences of higher currency notes in the country.

1. Is the introduction of higher currency notes improving the flow of economic

activities and the efficiency of payments systems in Nigeria?

2. Is there a relationship between economic growth and the introduction of

higher currency notes?

3. Is there a relationship between inflation and the introduction of higher

currency notes?

4. Are there other alternative solutions to support the increase in the flow of

economic activity and efficiency in payment systems than the introduction of

higher currency notes?

5. Is there a relationship between the Naira value and higher currency notes?

Objectives of the Study

The need to understand and bring to bear the economic reason behind the

introduction of higher currency notes guides this study. It is expected that this would

contribute to economic expansion at several points. History shows how that in

response to expansion in economic activities and to facilitate an efficient payments

system, the N100, N200, N500, N1000 were introduced in December 1999,

November 2000, April 2001 and October, 2005 respectively. The purpose of this

study is to examine:

1. The nature of the relationship between higher currency and economic

development and growth.

2. To determine the nature of the relationship between inflation and higher

currency notes.

3. To establish an estimated cost benefit relationship of introducing higher

currency notes to other forms of convenient payment systems in Nigeria.

Scope of the Study

This study is limited to the economic consequence of introduction of higher currency

notes in Nigeria following an empirical examination path. There is a particular

reference to inflation and convenience of payment systems over the periods of

introduction. A careful consideration would be made to analyse the cost benefit of

higher currency notes over the implementation of other payment systems. The time

frame covered in this study is the twelve years (12yrs) period spanning 1999 till date.

It is believed that the result of this study can be generalized to other Third World

Nations maybe with slight variations.

Significance of the Study

In January of the year 2011, the central bank of Nigeria (CBN) declares having a

total of ONE TRILLION, THREE HUNDRED AND FORTY BILLION, FOUR

HUNDRED AND TWELVE MILLION NAIRA (N1, 340,412,000,000) in circulation in

Nigeria (http://www.cenbank.org/Currency/historycur.asp). Interestingly this figure

represents all denominations in Nigeria (one kobo (1k) through to one thousand

naira (N1, 000). Before 1999 the sum would have been “ridiculously” made up only

fifty Naira (N50) notes or less. Yet surprisingly some Nations don’t have a single note

higher than one hundred (100) and others have singles notes in tens of thousands.

Presently, Nigeria has as its highest single as a thousand Naira, there certainly is a

reason behind this position. Whether this position assumed in policy is being

achieved in reality, is one question and if that position is proven as better than all

other possible position is another outcome. If most of the research questions are

answered, this documentation could serve as a quality reference for decision

makers.

The apex money institution in Nigeria makes reference to efficiency of payment

systems and expansion of economic activities as reasons for the introduction of

higher currency notes; this study would seek to question these actions as a

worthwhile response to the obvious. After been juxtaposed against the advent of a

near cashless economy, this study might advise the apex body on a turnaround

strategy.

The Statement of the Hypothesis

The following null hypotheses have being used as tentative responses to the

research question:

1. The introduction of higher currency notes does not improving the flow of

economic activities and the efficiency of payments systems in Nigeria.

2. There is no relationship between economic growth and the introduction of

higher currency notes.

3. There is no relationship between inflation and the introduction of higher

currency notes.

4. There are no other alternative solutions to support the increase in the flow of

economic activity and efficiency in payment systems than the introduction of

higher currency notes?

5. There is no relationship between the Naira value and higher currency notes?

Limitations of the Study

Certain constraints are limitations to the findings of this study. The scope is centered

on Nigerian currency and most data also being researched makes reference to the

Nigerian Apex bank; to this extent information used may be subject to bias. Some

external factors not within the variables intended may have influenced the results of

the study in some specific ways which means that the results may not be

meaningfully generalized to Nations outside this scope.

The study relies heavily on the use of secondary data; these may be subject to

various methods of window dressing, which means that the findings must be

interpreted with some element of caution and reservation. The researcher may even

be biased in the data collection exercise though not intended, either way, the

findings in the study can be negatively impacted. Thus the research may not be as

conclusive and far reaching as would be desirable.

Definition of Terms

Currency: A system of money in general use in a Country (Concise Oxford English

Dictionary (Eleventh Edition) Electronic Version).

Economic Indicators: An economic indicator (or business indicator) is a statistic

about the economy. Economic indicators allow analysis of economic performance

and predictions of future performance. One application of economic indicators is the

study of business cycles. Economic indicators include various indexes, earnings

reports, and economic summaries. Examples: unemployment rate, quits rate,

housing starts, Consumer Price Index (a measure for inflation), Consumer Leverage

Ratio, industrial production, bankruptcies, Gross Domestic Product, broadband

internet penetration, retail sales, stock market prices, money supply changes

(http://en.wikipedia.org/wiki/Economic_indicator).

Economic Growth: Economic growth is the increase of per capita gross domestic

product (GDP) or other measure of aggregate income, typically reported as the

annual rate of change in real GDP. Economic growth is primarily driven by

improvements in productivity, which involves producing more goods and services

with the same inputs of labor, capital, energy and materials. Economists draw a

distinction between short-term economic stabilization and long-term economic

growth. The topic of economic growth is primarily concerned with the long run. The

short-run variation of economic growth is termed the business cycle

(http://en.wikipedia.org/wiki/Economic_Development).

Economic Development: Economic development is the increase in the standard of

living in a nation's population with sustained growth from a simple, low-income

economy to a modern, high-income economy (Myint and Krueger, 2009). Also, if the

local quality of life could be improved, economic development would be enhanced

(Blair and Carroll, 2009). Its scope includes the process and policies by which a

nation improves the economic, political, and social well-being of its people (Sullivan

and Sheffrin, 2003).

Economic activities: Economic activity involves the use of scarce resources in the

provision of goods to satisfy unlimited wants. It is a measure for meeting the problem

of making a living; other categories of work are not related to this problem. There

may be differences in nature between one source of livelihood and another but the

underlying similarity in all spheres of economic activities is that work is performed

against ware or remuneration. In the modern social scheme of things, these activities

rotate around the financial axis and that is why all the activities involving money

earning and money spending are called economic activities

(http://www.blurtit.com/q993747.html).

Inflation: In economics, inflation is a rise in the general level of prices of goods and

services in an economy over a period of time. When the general price level rises,

each unit of currency buys fewer goods and services. Consequently, inflation also

reflects erosion in the purchasing power of money – a loss of real value in the

internal medium of exchange and unit of account in the economy. A chief measure of

price inflation is the inflation rate, the annualized percentage change in a general

price index (normally the Consumer Price Index) over time

(http://en.wikipedia.org/wiki/Inflation).

Gross Domestic Product: The gross domestic product (GDP) or gross domestic

income (GDI) is the market value of all final goods and services produced within a

country in a given period of time. It is often positively correlated with the standard of

living (Sullivan), although there are alternative measures to GDP for that purpose.

Gross domestic product comes under the heading of national accounts, which is a

subject in macroeconomics.

Introduction

Economic reforms are as old as history and the concept of money as old as barter or

exchange. The inherent need to reach convenience, comfort, flexibility, uniformity,

acceptance and security has guided the evolution over several centuries. This process is

however not void of political influence sometimes guised as economic development policy

changes; at other times the genuine need for reforms have patterned the direction in which

Nations headed. The introduction of higher currency denomination in Nigeria has its own

trends and economic relevance as x-rayed from diverse perspectives by several schools of

thought.

This review captured the details of the historical trends of Naira’s reform, the views

expressed by variant economist to the introduction of higher currency denominations and its

impact, other monetary reform concepts. The review also examined payment solution in

Nigeria its achievements and effectiveness, and the inflationary trends in Nigeria and

possible causes. The economic position of the Nigerian State was also considered.

Trends and Changes in the Nigerian Currency System, Colonial Period - 2008

In his article Chukwu, 2009, did an exhaustive review of the trends and changes in the

Nigerian currency system. In his review, he states that the currency reforms of the first

decade of the 21st century in Nigeria necessitated a review of currency development in the

country over time and concludes that political and economic exigencies were the primary

reasons why these reforms ever occur. The reforms include the introduction of a four-digit

N1000 banknote (Kajo 2005; Ozoemena, 2005) and a re-emergence of the coins in the

economy. Before the introduction of cash economy in Nigeria by the European colonialists in

the nineteenth century, the country’s economy had been localized and trade was carried on

by barter (Bovill 1970; Hanson 1972) and a retinue of currencies. Seen against this

background, it may be underlined that the graduation of the currency denominations in the

country over the years is a response to the country’s phenomenal growth in the economy

and political leadership.

Currency and Money Defined

Writing some years ago, R.C. Temple described barter as “the exchange of one article for

another”, adding that “currency implies exchange through a medium” (Kirk-Greene 1960).

On his part, Paul Einzig has defined “currency as money actually in circulation or capable of

being put in circulation” (Kirk-Greene 1960). The deduction that could be made from the

latter definition is that the efficiency of a currency item is dependent on its availability. Put

succinctly, once an item has been chosen for use as money, “its value tends to increase”

(Hanson 1972). Thus, people have come to regard money merely as a medium of exchange

(and not as something with an intrinsic value), as long as it is generally acceptable and

relatively scarce. Perhaps, the medium of exchange is what Temple refers to as exchange

through a medium. Which is perhaps why it has been contended that the purpose of

currency in any economy (whether developed or developing) is to facilitate transactions, and

by extension, serve as a store of value. It normally consists of coins and banknotes

(Ikuseedun 2006).

CURRENCY REFORMS OF INDEPENDENT NIGERIA

The characteristics of the currency of independent Nigeria are as follows:

I. The currency is issued by the Central Bank of Nigeria (CBN) which began operations

in 1959;

II. The currency normally bears the inscription, the “Federal Republic of Nigeria”; and

III. The currency bears the portrait of Nigerians or places of socio-economic interest

within the country.

As the country approached the date of political independence in 1960, moves were made to

position it for economic independence and stability. Among these moves were the

establishment of a bank of issue in 1959, and the introduction of a new currency for the

country. Thus, in 1959, the bank of issue (the Central Bank of Nigeria) had issued different

denominations of the Nigerian currency, subject to political and economic mood of the

country at the time. For example, on July 1, 1959, the CBN issued the first indigenous

Nigerian currency in the denominations of 5 shillings, 10 shillings and one pound notes

(Central Banking 1979). With the issuance of the new Nigerian currency, the West African

Currency Board (WACB) notes and coins that had hitherto circulated in the country began

the process of withdrawal as legal tender from the Nigerian economy (Central Banking

1979). This changeover was, however, completed in December 1962. As at the time of

complete changeover, a total of £65 million notes and coins of the WACB was redeemed

and its equivalent in sterling paid at par by the WACB to the CBN (J.B. Loynes 1957).

Following the attainment of a republican status by the country in 1963, a political decision

was taken to replace the existing currency notes. To this end, a decision to remove all the

stocks of the new notes to a branch of the CBN and all the sub-centres was taken in June

1964, and implementation began on July 1, 1965. At the end of the exchange exercise in

June 1966, a total of £68.5 million was redeemed (Central Banking 1979). Although, there

was no change in the denominational value of the currency, the new currency outfits showed

some changes in colours. However, the old and new currencies still bore pictures of

Nigeria’s main export commodity – cocoa, groundnuts and palm produce.

In 1968, independent Nigeria went through another currency exchange in compliance with

the Central Bank (Currency Conversion) Decree No. 51 of December 30, 1967. Since, at the

time of the Decree, the country was engaged in a civil war that lasted between 1967 and

1970, it is obvious to say that the currency conversion of 1968 was aimed (Central Banking

1979).

I. To ensure the success of the trade embargo on the secessionist (Biafran) areas;

II. To forestall the use of un-issued currency notes that were burgled from the CBN

vaults in Enugu, Port Harcourt and Benin (the war ravaged areas); and

III. To frustrate the flourishing illegal trafficking in the Nigerian currency known to be

going on in some foreign countries at the time.

At the end of the currency conversion exercise, a total of £86.5 million made up of £66.5

million and £20 million ex-gratia award for the three states (East Central, South Eastern and

Rivers States) affected by the Nigerian Civil War, was said to have been redeemed (Central

Banking 1979).

In January 1973, the Nigerian currency was decimalized. This was sequel to the compelling

need for the economic integration of the country with other virile, global economies. This

development in the country’s currency history may have no doubt put paid to the use of the

Nigerian pounds, shillings and pence. In their place came the Naira and Kobo. For a take-off

of the new currency, four denominations of banknotes were issued. They were 50k, N1, N5

and N10. On the front view of the N5 is the portrait of Nigeria’s former Prime Minister, Alhaji

Abubakar Tafawa Belewa, and the N10 note bears the portrait of Alvan Ikoku, one of

Nigeria’s foremost educationists. Meanwhile, on July 3, 1972 (six months to January 2,

1973, the date the new currency came into use) the CBN introduced coins in the values of

1/2k, 1k, 10k and 25k in the economy. The Bank had embarked on this line of action “with

the directives to shops and stores to fix prices of their commodities in the new as well as the

old currency units” (Central Banking 1979). The advance arrangement was meant to provide

enough enlightenment to members of the public. On its part, the Decimal Currency Board of

the CBN, through its publicity unit, embarked on the distribution of posters, conversion

tables, leaflets and other publications to educate the public on the decimalization

arrangements. As in December 1972, all commercial banks operating in the country had

received adequate stocks of the new notes and coins from the apex bank in readiness for

the January 1973 commencement of circulation (Central Banking 1979).

The 1970s experienced a significant increase in the volume of economic activities in Nigeria.

With the phenomenal growth in the volume of commercial transactions, coupled with the oil

boom of that decade, the CBN introduced the twenty naira note (N20) in 1977. Characteristic

of this denomination is that it bears the portrait of one of Nigeria’s most vibrant heads of

state, General Murtala Ramat Mohammed (1939-1976). For close to twenty years, the N20

note remained the highest denomination and most dominant in the Nigerian economy. In

1984, the Nigerian military government of Muhammadu Buhari in an attempt to legitimize its

interruption of the democratic process through a military coup d’état directed the CBN to

cause a change in the colours of the Nigerian currency. The exercise was designed to

demonetise the money alleged to have been stolen by Nigerian political leaders (Adeyemi

2006) who at the time had been clamped into the prison cells following the December 31,

1983 military coup d’état by the duo of Buhari and Brigadier Tunde Idiagbon.

In 1991, the economy further experienced some re-designing of the Nigerian notes and

coins. This followed the recommendations of Thomas De La Rue Limited (now De La Rue

Cash Systems Limited) Committee – a firm appointed in 1989 by the CBN to undertake a

comprehensive assessment of the Nigerian currency. In its report, the firm had

recommended the re-designing of the entire currency including N10, N20, N50, N100, N500

notes as well as 10k, 50k, N1, N5, and N10 coins (Ikuseedun 2006). These

recommendations were, however, not fully implemented as the apex bank managed to

introduce only the N50 currency note in 1991. In respect of the coins, the CBN approved the

introduction of a series of 1k, 10k, 25k, 50k and N1 coins Ikuseedun (2006). It is believed

that the monetary reforms of this period, particularly the introduction of the N50 currency

note were carried out in response to increased public and private spending, resulting,

perhaps, from Nigeria’s excess oil revenue of the period (Nnadi 2000). But the re-designing

of the coins was received with uneasy calm by certain sections of the Nigerian society.

Some Nigerians were inclined to believe that the demonetization of the smaller denomination

was meant to depreciate the value of the currency. There were also reported incidents of

people amassing the coins and melting same for ear-rings. As one writer would argue,

“this particular reform heralded the erosion of coins in Nigeria and precipitated its waning

use. Consequently, the N5 note became minimum currency in every transaction” Nnadi

(2000).

The opinion expressed in the foregoing statement could be seen to be the summary of the

general feeling of many Nigerians about the N5 note and the coins. It is generally believed

that until date, the N5 note is used as the minimum currency denomination acceptable in the

Nigerian economy. Over time, coins were gradually phased out of the Nigerian society. The

trend in currency reforms and management in Nigeria continued in 1999 with the introduction

of the N100 banknote. This currency unit bears the portrait of Chief Obafemi Awolowo,

Premier of Western Region of Nigeria in the 1950s, and leader of the Opposition Party at the

Federal level in the 1960s, in the front view. In its back view is a picture of the Zuma Rock.

Again, in November 2000 and April 2001, the CBN issued N200 and N500, notes

respectively. The former bears the portrait of Alhaji Sir Ahmadu Bello, former Premier of the

defunct Northern Region. On the back view of the currency denomination are pictures of

herds of cattle, agricultural products and the Nigerian Coat of Arms. The N500 denomination

bears, in its front view, the portrait of Chief (Dr) Nnamdi Azikiwe, Premier of the defunct

Eastern Region, and first Nigerian President of Nigeria between 1963 and 1966. It bears the

Nigerian Coat of Arms, on the reverse side. It also bears the Naira sign on both sides of the

note.

The latest currency denomination to be introduced in Nigeria is the N1000 currency note.

This currency note was introduced on Wednesday, October 12, 2005, by the Central Bank of

Nigeria. Peculiar to this currency is that it bears, in front view, portraits of the past CBN

governors: Alhaji Aliyu Mai-Bornu (governor, 1963-1969) and Dr. Clement Isong (governor,

1967-1975). There is also a gold foil (kinegram), on the front of the note with the Nigerian

Coat of Arms and the numeral 1000. Also peculiar to this denomination is that it is devoid of

the Naira sign (Kajo 2005; Ozoemena 2005). However, like other post-independent Nigerian

currency notes, the N1000 currency note bears the title CENTRAL BANK OF NIGERIA, on

the top left corner of the front with two tiny lines underlining it. Generally, the country’s bank

of issue has described these peculiar features of the current highest currency as security

measures “to ease recognition of a genuine note” This Day 2005).

Implications of Higher Currency Denominations

On Wednesday, October 12, 2005, the introduction of the four digit banknote was greeted

with mixed feelings. One reason for such was that the loss of a packet of the N1000

currency denomination would mean a loss of the sum of N100, 000 to the individual

concerned and the economy. Herein lays the crux of the matter: that while a currency of high

denomination may, to an extent, be relevant to the economy, it does, no doubt, carry its own

burden. The burden includes that of a possible loss, forgery and inflation.

The last mentioned point may, however, be halted, if the country’s productive base is

capable of sustaining high currency notes. In spite of the risk of a possible loss of high

denominational currency, its introduction may make the Nigerian populace return to the pre-

banking era of the nineteenth century. This is because with the convenience associated with

the handling of high currency denominations, so many Nigerians may resort to keeping large

sums of money at home. This practice may, in turn, have two effects on the economy. First,

it will affect banking culture and general investment patterns adversely. Secondly, the

practice of keeping money at home has the effect of exposing the owner and the money to

the menace of armed bandits.

Besides, what the advocates of the high currency denominations appear to have endorsed

lately is the removal of the kobo unit from the Nigerian payment system. Although, the kobo

is a corresponding unit of the Naira, economic realities on ground have forced that currency

denomination out of existence and relevance. It has been regretted that in an economy that

is largely based on cash transactions, such a currency unit should be driven to the back

burners (Ikuseedun 2006). Consumer goods are, therefore, sold and bought, and

commercial transactions are conducted with the lowest currency denomination in multiples of

the N5 note, as balance would not be available to the buyer for any commodity priced for

less (Boyo 2005). The situation calls for a regret as even in the relatively advanced

economies such as the United Kingdom and the United States of America, the pence and

the cents respectively still complement the pounds and dollars as legal tender (Boyo 2005).

In a sentence, the trend of higher currency denominations in Nigeria over the years has only

testified to the fact that the Naira has continuously depreciated against the values of the

dollars, pounds and other advanced capitalist currencies of the Western hemisphere. The

reader may see the tables below on currency in circulation in Nigeria for a defined period of

time: While table 1 may show a true picture of the currency notes in circulation in the country

between 1996 and 2005, table 2 on coins in circulation paints a doubtful picture. Whilst the

CBN might have issued the quantity of coins concerned, they were hardly in circulation in the

economy. It is noteworthy that after the 1991 experience in which the series of Nigerian

coins were reportedly amassed and used for moulding ear-rings and other ornaments, the

value of the coin currency began to wane in the economy.

The result of this was its disappearance from circulation. Mr. A.O. Ikuseedun has pointed out

that since the 1991 unfavorable economic fundamentals experienced by the Nigerian

currency, it is pertinent that no review of the coin series was carried out until 2007

(Ikuseedun 2006). On the other hand, the introduction of the higher currency denominations

can be justified based on the fact that it is one of the indices for measuring the level of

growth of the economy in a developing country.

Currency notes in circulation from 1996 to 2005 (Billion pieces)

Year N 5 N 10 N 20 N50 N100 N200 N500 N1000 Total1996 0.29 0.37 2.31 1.48 4.451997 0.30 0.45 3.10 1.52 5.371998 0.26 0.45 3.57 1.89 6.171999 0.31 0.40 4.01 2.36 0.04 7.122000 0.48 0.51 4.10 2.34 0.74 0.13 8.302001 0.44 0.42 2.63 1.53 0.72 0.42 0.22 6.382002 0.45 0.40 1.99 0.95 0.69 0.56 0.37 5.412003 0.53 0.66 1.30 0.46 0.63 0.64 0.51 4.732004 0.54 0.34 1.01 0.17 0.56 0.77 0.60 3.992005 0.51 0.59 0.61 0.31 0.44 0.78 0.74 0.035 4.03

Source: October – December 2006 BULLION, vol.30, No.4, p.43.

Currency/coins in circulation, 1996-2005 (Million pieces)

Year 1K 10K 25K 50K N 1 Total1996 42.4 128.9 182.5 403.6 386.7 1,144.101997 42.1 126.5 176.8 410.7 395.5 1,151.601998 42.3 126.2 175.2 417.0 406.0 1,166.701999 41.1 125.9 174.8 423.2 419.5 1,184.502000 40.9 125.5 173.5 427.9 428.8 1,196.602001 41.0 125.9 173.5 433.8 436.5 1,210.70

2002 40.5 125.6 173.2 435.3 440.5 1,215.102003 40.0 126.0 173.2 436.4 443.4 1,219.002004 40.0 126.00 173.2 437.2 445.4 1,221.802005 40.8 125.8 172.5 437.6 447.2 1,223.90

Source: October – December 2006 BULLION, vol.30, No.4, p.45.

Over time, Nigeria has experienced the introduction and circulation of different units of

currency in response to the prevailing political and economic conditions. For example, by the

1880 Ordinance, which introduced the first set of British coins in the country, the 1- shilling

coin was the highest denomination. In 1913, the 2-shilling coin became the highest

denomination. This was so until 1919, when the 10-shilling coin and £5 note were introduced

into the economy. In each of these cases the currency units introduced were probably

designed to meet the political and economic needs of the period. Following the attainment of

political independence by Nigeria, the level of public and private spending increased

considerably, with the Gross Domestic (Product GDP) rising, too. In 1997, for instance, the

country’s GDP was estimated to be N31, 279 (Oshilim 2000). By the year 2000, the

country’s annual budget had increased to N654 billion, while the minimum wage was N5,

500 (Oshilim 2008). As at 2006, Nigeria’s annual budget was increased to N1.9 trillion (Loho

2006). What these facts mean is that with enough money at the disposal of both

governments and individual Nigerians, the level of commercial transactions increased

considerably. Under the prevailing circumstance of high spending profile (in an economy

where the level of literacy and cheque system is considered low) a resort to high currency

denominations may be reasonable. It is considered reasonable because it may reduce the

man hour that ordinarily would have been spent in the counting of low currency

denominations.

On the other hand, a high currency denomination profile may have the negative effect of

exposing the possessors/handlers of large sums to high incidence of possible loss to armed

bandits. Let us take a hypothetical case of a man with 1000 naira notes wrapped together in

100 units. Let us also assume that the man runs into a gang of armed robbers and loses the

100 pieces to the bandits. On the whole, he would have lost the sum of N100, 000 at a

swoop to the thieves. The overall effect on the economy could be negative as in most cases

such money is hardly re-cycled into the economy for productive purposes. In developing

countries of West Africa, such money is expended on social frivolities such as second

funeral ceremonies, title-taking and ostentatious weddings. These and other social activities

are known to constitute a drain on the investment capacity, and often they lead to vicious

cycles of poverty (Jhingan 2000).

Naira Evaluation

In the last two decades, the Nigerian financial mangers led by the Central Bank of Nigeria

(CBN) and of course guided by the policy of the government of the day, has carried out

some reforms in the management of the local currency: Naira and Kobo. When the

government of General Yakubu Gowon indigenized the currency, from the British pounds

shillings, he introduced what has come to be known as Naira and kobo in 1973. The

currency was greeted with wide acceptance by Nigerians. It automatically became the legal

tender and was high in value with the United States Dollar and the British Pounds.

The story is different as subsequent administrations particularly that of General Ibrahim

Babangida devalued the local currency before some international currencies such as the

dollar and the pounds. The devaluation led the conversion of one naira and fifty kobo notes

to coins in 1991 and pronto, Nigerians as if acting on impulse, rejected the coins. Since that

period, the coins have vanished from the currency design of the country. Ever since that first

attempt to devalue the Nigerian currency before the world’s heavy weights, all has not been

well with our local coins. The Central Bank of Nigeria subsequent governors, abandoned the

idea of re-introducing the coins into the system perhaps because of the long gap after it was

rejected and the policy thrust of government of the day who may or did not see the need to

research into why the coins were being rejected by Nigerians like a leprosy patient. These

metals which huge sums of money were spent in minting them were left in the vault of the

apex bank until the appearance of an economist as the governor of the CBN.

Professor Charles Chukwuma Soludo became the governor of the apex bank and within the

five years of his stay, attempted to re-introduce the coins into the financial system. Again in

spite of the huge sums of money and the widespread publicity urging Nigerians to accept the

metals, they were confined once more to the drawers and vaults of individuals and banks.

Economic experts have noted that the badly depreciated naira led to the introduction of the

N50, N100, N200, N500 and N1, 000 notes in Nigeria in the last 20 years! And with the

event that our highest currency denomination, the N1, 000 banknote, is the equivalent of

only about US$8, it is not inconceivable that we may require a N10, 000 banknote if we wish

to improve portability and facilitate cash transactions with higher value currency

denominations.

As in the case of Ghana, economists stated, it is not difficult to see why primary kobo coins

disappeared from circulation in Nigeria; our 1kobo=US$0.008 i.e. (less than 100th of a cent)!

It is virtually impossible to find a product sold for N1 in Nigeria today. “However, the

downside of such a currency profile is the inherent inflationary push that comes with the

prevalence of high denominations. The N1 and N2 notes are hardly seen any more, and the

N5 and N10 notes, where found, are repulsive to customers because of their dirty, moist and

unhygienic physical condition! Inevitably, manufacturers, traders, petrol pump attendants,

etc, succumbed to the adoption of N5 or N10 denominations as the minimum cost of their

products, and consumer goods and transactions were priced with a minimum value of N10,

as change would not be available for commodities priced for less. The inflationary spiral and

wasted value inherent in this every day, amounts to several millions of naira of transactions

as values are rounded off to the nearest N10. This must be a pointer for the authorities

managing our economy.

The reintroduction of the N1 and N2 and the 50kobo coins by the Central Bank during

Soludo’s tenure was certainly welcomed as it was launched by government of Chief

Olusegun Obasanjo. The development was also given the green light by manufacturers,

traders and consumers alike, and their availability was expected to dampen the upward price

push, which the absence of these denominations brought about. Thus, prices can be

expected to be more competitive and the often forgone change at petrol stations and other

consumer mass markets can now be recovered and the usual erosion related to such

transactions in the past avoided with positive impact on the health disposition of more and

more Nigerians.

The CBN in recognition of the vital role of low denomination coins in ensuring price stability

and competitiveness reissued the N2 note as a coin alongside new issues of 50K and N1

coins. Meanwhile, the older coin denominations of 25kobo, 10kobo and 1kobo were quietly

withdrawn from the system as their infinitely small purchasing power made them useless for

transactions. Source: The Sunday Observer (Emma Okenyi, undated (29/08/2010)

Inflation

Inflation means that the general level of prices is going up. More money will need to be paid

for goods (like a loaf of bread) and services (like getting a haircut at the hairdresser's).

Economists measure inflation regularly to know an economy's state. Inflation changes the

ratio of money towards goods or services; more money is needed to get the same amount of

a good or service, or the same amount of money will get a lower amount of a good or

service. Economists defined certain customer baskets to be able to measure inflation.

Causes of Inflation

When the total money in an economy (the money supply) increases too rapidly, the quality of

the money (the currency value) often decreases. Economists generally think that this money

supply increase (monetary inflation) causes the goods/services price increase (price

inflation) over a longer period. They disagree on causes over a shorter period.

Demand-Pull inflation

The Demand-Pull inflation theory can be said simply as "too much money chasing too few

goods." In other words, if the will of buying goods is growing faster than amount of goods

that have been made, then prices will go up. This most likely happens in economies that are

growing fast.

Cost-Push inflation

The Cost-Push inflation theory says that when the cost of making goods (which are paid by

the company) go up, they have to make prices higher to still make profit out of selling that

very product. The higher costs of making goods can include things like workers' wages,

taxes to be paid to the government or bigger costs of getting raw materials from other

countries. However, Austrian Economists think this is wrong, because if people have to pay

higher prices, this just means they have less to spend on other things.

Causes of Inflation in Nigeria

Specifically, Nigeria is currently experiencing a staggering rate of inflation, well up into the

double digits. Economists have diagnosed the current inflationary trend as both “demand-

pull” inflation in which consumer demand far exceeds the supply of goods and services (that

is, too much money pursuing too few goods) and as “ cost push” inflation in which rising

costs of labor push prices even higher. The general consensus is that both of these forces

are now at work, reinforcing each other in an ever upward spiral of prices. Underlying these

inflationary pressures are decidedly new features of the World Economy, such as the energy

crisis and the general scarcity of essential resources. Thus, the consensus of most scholars

is that the current inflation (with or without recession) is a long- range phenomenon not likely

to recede in the near future. In fact, we may be on the verge of a new society (one in which

inflation is endemic to our way of life); and in a variety of circles, the alarm has been raised

that hyperinflation can lead to the downfall of our democratic society.

However, Central Bank of Nigeria (2007) observed that inflationary pressure remained

largely subdued in 2007 and the single digit target rate was sustained two years in a row. At

six point six percents the year – on – year inflation rate was one point nine percentage point

below the eight point five percent recorded in 2006. Here, the favorable inflationary

development was underpinned by relative good agricultural harvest despite the mild drought

and flooding experienced in certain parts of the country; stability in the prices and supply of

petroleum products; sound macroeconomic policies (such as monetary and fiscal policies)

as well as the substantial appreciation of the naira exchange rate. On the other hand, the

headline inflation why driven largely by the housing, water, electricity, gas and other fuel

components of the consumer price index, which contributed about four point four percentage

points to the observed inflation rate (Nwaobi, 2009).

In the definition of inflation, two key words must be borne in mind. First, is aggregate or

general, which implies that the rise in prices that constitutes inflation must cover the entire

basket of goods in the economy as distinct from an isolated rise in the prices of a single

commodity or group of commodities. The implication here is that changes in the individual

prices or any combination of the prices cannot be considered as the occurrence of inflation.

However, a situation may arise such that a change in an individual price could cause the

other prices to rise. An example is petroleum product prices in Nigeria. This again does not

signal inflation unless the price adjustment in the basket is such that the aggregate price

level is induced to rise. Second, the rise in the aggregate level of prices must be continuous

for inflation to be said to have occurred.

The aggregate price level must show a tendency of a sustained and continuous rise over

different time periods. This must be separated from a situation of a one-off rise in the price

level (http://www.cenbank.org/Out/EduSeries/Seriesinflation.pdf).

Cost of Inflation

Almost everyone thinks inflation is bad. Inflation affects different people in different ways. It

also depends on whether inflation is expected or not. If the inflation rate is equal to what

most people are expecting (anticipated inflation), then we can adjust and the cost is not as

high. For example, banks can change their interest rates and workers can negotiate

contracts that include automatic wage hikes as the price level goes up.

Problems arise when there is unanticipated inflation:

Creditors lose and debtors gain if the lender does not guess inflation correctly. For those who borrow, this is similar to getting an interest-free loan.

Uncertainty about what will happen next makes corporations and consumers less likely to spend. This hurts economic output in the long run.

People living off a fixed-income, such as retirees, see a decline in their purchasing power and, consequently, their standard of living.

The entire economy must absorb repricing costs ("menu costs") as price lists, labels, menus and more have to be updated.

If the inflation rate is greater than that of other countries, domestic products become less competitive.

Nominal interest rate rise because inflation is anticipated

Nigeria Inflation Rate

The inflation rate in Nigeria was last reported at 12.1 percent in January of 2011. This page

includes a chart with historical data for Nigeria's Inflation Rate. Inflation rate refers to a

general rise in prices measured against a standard level of purchasing power. The most well

known measures of Inflation are the CPI which measures consumer prices, and the GDP

deflator, which measures inflation in the whole of the domestic economy.

Outlay of inflation pattern over selected period

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2011 12.10  12.80                    

2010 14.40 15.60 14.80 15.00 12.90 14.10 13.00 13.70 13.60 13.40 12.80 11.80

2009 14.00 14.60 14.40 13.30 13.20 11.20 11.10 11.00 10.40 11.60 12.40 13.90

2008 8.60 8.00 7.80 8.20 9.70 12.00 14.00 12.40 13.00 14.70 14.80 15.10

Source: http://www.tradingeconomics.com/Economics/Inflation-CPI.aspx?symbol=NGN

Nigeria GDP Growth Rate

The Gross Domestic Product (GDP) in Nigeria expanded 7.9 percent in the third quarter of

2010 over the same quarter, previous year. The Nigerian economy is one of the most

developed in Africa. The petroleum industry is the main factor behind growth; it provides

95% of foreign exchange earnings and about 80% of budgetary revenues. Agriculture

accounts for 25% of the GDP and is the major source of income for two-thirds of the

population. Despite vast oil and natural gas resources; more than 50% of Nigerians live in

poverty. Corruption and poor infrastructure are the main obstacles for future development.

Year Mar Jun Sep Dec

2010 7.36 7.69 7.86  

2009 4.50 7.45 7.30 7.67

2008 6.50 6.70 6.13 7.10

What is currency redenomination?

Currency redenomination is the process where a new unit of money replaces the old unit

with a certain ratio. It is achieved by removing zeros from a currency or moving some

decimal points to the left, with the aim of correcting perceived misalignment in the currency

and pricing structure, and enhancing the credibility of the local currency. The outcome would

be as presented in the table below:

Commodity/Service Price in “Old Naira”

Price in “New Naira”

Fuel price per litre N70 70 koboPrice of one bag of garri N2,000 N20Price of a bus drop N20 20 koboHouse rent (e.g. a flat in some parts of Nigeria)

N5000 per month N50 per month

Stock price of a company Assume it is, say: N20 or N80 20 kobo or 80 kobo

Airline ticket for domestic flight N12,500 N125Exchange rate: N to US$ Assume it is say:

N125 Or N130 Or N100 to US$1.

N1.25 = US$1 Or N1.30 = US$1 Or N1 = US$1

Currency redenomination and currency decimalization

Redenomination is not the same as decimalization. In the management of currencies,

decimalization is the process of converting from traditional denominations to a “decimal”

system, usually with two units differing by a factor of 100. For example, Nigeria adopted the

decimal system on 1st January 1973, changing from Pound, Shillings and Pence to Naira

and Kobo. We also changed our system of weights and measures into the decimal system

(i.e. from Ounce and Pounds to grams kilograms; or miles to kilometres; Inches and Feet to

centimetres and Metres). More specifically, the CBN Act (Section 15) prescribes a decimal

system by stating that “The unit of currency in Nigeria shall be the Naira which shall be

divided into one hundred kobo”. The currency is already structured in decimal system. The

policy thrust is a re-denomination. The fact that we are removing two zeroes does not make

it a ‘decimalization policy’. It could have been one, two, or three zeros.

MERITS AND DEMERITS OF HIGHER CURRENCY DENOMINATIONS

The instrument of Money serves universally as a store of value, a means of exchange and a

unit of account, but the issue of currency denomination in each country is a factor of

economic management in response to apparent domestic realities in the areas of liquidity,

inflation and culture.

Our monetary authorities have, however, failed to advance a solid case for the introduction

of such a high denomination at this stage in our economic history especially when older and

more vibrant economies elsewhere maintain a comparatively, much more compact currency

denomination profile. In general terms, a country with an endemic liquidity problem (i.e.

unrestrained cash availability) will ultimately experience an uncomfortably high level of

inflation as productivity will inevitably lag sluggishly behind the propensity for money

creation. In other words, you will have too much money chasing too few goods and one

would require larger sums of money to make dwindling purchases.

In those countries where the banking and savings culture are in infancy, there is a greater

propensity to hold substantial amounts of liquid cash to meet day to day consumer as well as

business transactions. In this regard, people will prefer to hold their money under beds and

in private safes at home and elsewhere. The cash culture will be further encouraged where

the people have become suspicious of the safety of banking institutions for the custody of

their hard earned cash! Large denomination currency notes will be a significant feature in

such economies. Thus a combination of the above factors of high cash ratio, inflation and

cash culture predetermines Nigeria’s large and wide currency denomination profile. On the

other hand, in the UK, United States and most countries in the developed world where

liquidity and inflation are properly managed in a developed banking culture, the largest

currency denomination remains the 100 unit note and primary currencies of coins continue to

be relevant for consumer and business transactions.

MERITS OF LARGE CURRENCY DENOMINATIONS

The obvious and singular merit of large currency denomination is the facilitation of carriage

and movement of large sums of money. The huge amount (not real value) of money

required for day-to-day transactions in an economy such as ours can be consolidated in high

value notes and thus make carriage on one’s person or the movement of larger sums of

cash less cumbersome and obvious. The absence of primary unit coins within the system

also helps to preserve the durability of the pockets of our kids and our men folk while our

women folk can find other more elegant uses for their purses and handbags. However, such

merit will become meaningless if naira coins replace the role of primary currency units i.e.

the kobo.

There could possibly be other more important advantages for deleting primary currency units

and introducing higher denomination notes such as the N1,000 note and the N5 coin, but it

is clear that the CBN has been unable to articulate these; this may probably be because no

other serious merit can be ascribed to the new policy!

DEMERITS OF LARGE DENOMINATIONS

On the other hand, a ready list of disadvantages of the adoption of large currency notes and

the withdrawal of the primary unit of coins rush for recognition! It will be appropriate to

examine just a few of these demerits.

1. The removal of the primary unit of coins from the system means that consumer

goods and transactions have to be conducted with a minimum value of N5, as change would

not be available for commodities priced for less. Though share stocks may be priced for 50k

and N1.00, such currency values will no longer officially exist! In effect, this arrangement

can only increase the general price level and fuel inflation. We may contrast this scenario

with the currency system in developed economies where consumer and other commodities

are still priced with a primary currency denomination of coins (cents and pence) as legal

tender. Indeed, a 50 pence differential can be a significant market advantage in the pricing

of competitive consumer goods in these countries!

One may wonder what would happen at our fuel pumps on the commencement of the new

policy. We would no longer talk of fuel prices in terms of fractions of naira, such as 49.50

per litre for kerosene or petrol as a motorist would only be able to purchase defined

quantities of fuel which would require no spillover of change in return.

In view of the minimum available currency denomination of N5.00, some cynics may argue

that the new policy only seeks to legitimize the obtuse and pump attendant friendly system

that is already in place in our culture.

2. The introduction of large denomination currencies such as the N1, 000 note, may

also work at cross purposes to governments intention of transforming our heavy dependence

on cash transactions. The temptation to keep larger sums of money under the bed at home

and in personal safes will further weaken the banking culture and adversely affect the

development of a savings culture. This would in turn reduce the level of savings and

consequently adversely affect the investment climate in the country!

3. Large currency denominations may also be rightly considered to be a boon to the

criminal minded as cash robberies would be more lucrative and the loot easier to hide! In

other words, the new policy may actually encourage and fuel the crime rate in the country.

4. The illegal exportation of the naira, especially for illicit trans-border trade will be

facilitated with the availability of large naira denominations. The impact of this leakage on

the value of the naira and governments attempt to curb the importation of banned goods will

certainly be against the interest of our industries and our economy.

5. The stake will be higher for the various naira forgery syndicates when the larger naira

denominations are introduced. The impact of such scams on the naira value and the

attendant dislocation on the economy may become an additional burden on an already

pulverized and disoriented populace.

6. The large numerical nominal values of even simple transactions will make general

accounting more cumbersome and unwieldy as most transactions will now be denominated

in thousands and millions of units. This may be daunting prospect for our children and our

largely ‘innumerate’ populace in the rural areas. The additional accounting time and space

required for make daily simple entries and returns in thousands and millions and the

consequent increased administrative costs would be a covert demerit of the introduction of

large currency denominations.

7. The inflationary push attributed to introduction of large currency denominations may

reduce confidence in the naira and detract from its function as a steady store of value, and

this may in turn encourage capital flight to perceived stable currencies.

It will be obvious from the above that the disadvantages to be derived from the introduction

of large currency denomination certainly outweigh the apparent and real advantages of this

policy. In this event, why is the CBN eager to commit financial suicide? The decision is

more worrying when we observe the trend across the border in our sister nation Ghana,

where large denominations have wreaked havoc on the economy. The primary currency unit

of coins (Pesewa) has since become irrelevant for settling transactions in Ghana in the last

30 years. The currency denomination profile in Ghana now includes 1,000, 2,000, 5,000,

10,000, and 20,000 cedi notes; meanwhile, the cedi has depreciated from parity to a current

rate of $1 = 9,000 cedis. (Note that the 20,000 cedi note is equivalent to less than N300; in

other words, you may need to give your child or ward N20,000 every day for transport to and

from school, if our economy treads the path of Ghana. How did Ghana’s currency get to this

sorry state of affairs so quickly, a path to inflation and poverty, which our own monetary

authorities are obviously intent on treading?

LARGE NOTES AND EXCHANGE RATES

The answer is the failure to accept the reality between a rapidly depreciating exchange value

of a currency and the consequent need for more cash for simple daily transactions. In other

words, a rapidly depreciating currency will require higher denominations of currency to avoid

the need to use a wheelbarrow to carry cash for such mundane activities as shopping for

domestic grocery; we recall for instance the relatively ‘high value’ of the N20 note when it

was introduced. You could buy four new car tyres, for example, with the N20 note and feed

a small size family for a week! The exchange rate of naira against the dollar at that time was

about N1 = $1. The introduction of higher denominations of N50, N100, N200 and N500 has

closely followed the history of naira depreciation against the dollar. Nigerians are being

called upon to work harder and produce more with each depreciating value of naira – a clear

road to the pits of slavery for our people. In the event that the ‘hope of the nation’s

economy’, the NEEDS programme has projected further depreciation in the value of the

naira, we may be realistic to expect the introduction of the N2, 000, N5, 000 and possibly

N10, 000 note in the next 5 – 10 years, if our monetary authorities continue to adopt the

current framework of monetary policy which demands that our export earnings in dollars be

first unilaterally converted to naira before sharing the sum to beneficiaries of the federation

pool. This framework will continue to generate increasingly bloated liquidity with the more

dollars we earn and the greater will be the need for larger and larger currency denominations

and the naira in your pocket will give you less and less real value

(http://www.proshareng.com/articles/singleNews.php?id=341).

Payment Systems

Introduction

The payments system plays a very crucial role in any economy, being the channel through

which financial resources flow from one segment of the economy to the other. It, therefore,

represents the major foundation of the modern market economy. Essentially, there are three

pivotal roles for the payments system namely; the Monetary Policy role, the financial stability

role and the overall economic role.

Given the important role that well functioning payment systems has on monetary policy,

financial stability and overall economic activity, the Central Bank of Nigeria has put in place a

set of national payment systems policy objectives as a broad guideline and framework for all

payment systems initiatives. In setting out the objectives of the National Payment Systems

(NPS), the goal is to ensure that the system is available without interruption, meet as far as

possible all users' needs, and operate at minimum risk and reasonable cost.

During the course of the past ten years the Central Bank of Nigeria (CBN), in collaboration

with the Bankers Committee, launched the first major initiative to modernize the payments

system. The starting point was to automate the cheque clearing system and making it a

veritable platform for development of electronic payment channels. Hitherto cheques

processing and computations of the net settlement position of banks were done manually.

The implementation of the new procedures and rules based on MICR technology

revolutionized the cheque clearing system. Consequently, a Centralized Automated Clearing

process was established in Lagos clearing zone, whereby with MICR Reader Sorters,

necessary information on cheques are captured, built into clearing files and electronically

transmitted to the clearing house, from where the net settlement position of participating

banks are automatically computed and also electronically transmitted to the Central bank for

final settlement. The clearing cycle was subsequently reduced from 5 days to 3 days for

local instruments and from 9 days to six days in respect of up-country instruments.

National Payments System (NPS) Objectives

Following the CBN re-engineering and re-structuring processes in 1999, the second phase

of payments system reforms were embarked upon with national payments system objectives

clearly spelt out to include:

Promote efficiency. To be efficient and effective the framework for the payments

system should

I. Be transparent , flexible and reliable II. Ensure integration/interoperability of the sub-systems III. Speed up exchange and settlement of funds and securities

Promote safety: Protecting systemic risks by:

i. Containing credit, legal, liquidity and operational risks. ii. Compliance with international standards and recommendations ( e.g. the ten

core principles for Systemically important Payment Systems) iii. Compliance with national standards and recommendations (e.g. Cheque and

electronic banking standards). Migration to cash-less modes of payment, such as electronic debit/credit instruments,

credit/debit cards, ATM-sharing and Electronic Fund Transfer at Point Of Sales and

Real-Time Gross Settlement System (RTGS).

Transparency: To run the NPS in a transparent manner as one of the factors

militating against widespread usage of the formal payment systems is the concern of

market participants about transparency. Consequently, NPS would spearhead

procedures and technology that perform end-to-end audit-ability, full transaction

reporting to regulatory and reporting authorities. In addition, the NPS would publicly

disclose criteria for participation, in any payments solution, and permit fair and open

access to all interested and qualified parties.

Public Acceptance and Confidence. The NPS would initiate channels for effective

information dissemination, customer convenience orientation and total quality

delivery. In particular, the NPS would work towards widespread use of payment

solutions for government payments, in many areas. The NPS would ensure that the

legal and institutional arrangement is favorable to the achievement of its goals, and

where such is not the case, appropriate regulations and review of guidelines would

be undertaken from time to time in response to developments as the payment

systems evolve.

Integration with the financial infrastructure: In order to achieve the full benefit of well

functioning payment systems, financial value should be able to flow from one market

to the other in a seamless manner. Therefore, the NPS would be a major driver of

changes in the financial markets, and would encourage collaboration and

cooperation. As Nigeria moves towards a common monetary zone with five other

West African countries, the reform of the existing payments process for compatibility,

standardization and cross-border settlement becomes an imperative.

The role of Central Bank in National Payment System

There are six major responsibilities of the Bank that were derived from the Act establishing

the CBN as amended. They include:

i. Act as Banker to banks and provide the smooth operation of payments, clearing and settlement systems.

ii. Act as Banker and adviser to, and as fiscal agent of the Government. iii. Issue currency notes and coins iv. License and supervise authorized dealers. (except stock brokers that are licensed by

Securities and Exchange Commission and supervised by Nigerian stock Exchange) v. Formulate and implement foreign exchange reserves vi. Hold and manage its foreign exchange reserves.

CBN objectives

Based on its broad responsibilities, the overall objective of the CBN is to ensure that risk

control procedures are put in place, through operation of;

i. Clear rules and procedures ii. Technology standard iii. Legal standard

The objective of the CBN in the payments system is therefore classified into three main

areas:

i. Exchange of value:

Accessibility: Access by individuals and businesses to appropriate mechanism in all parts of Nigeria

The cost of providing payments services would be Reasonable so that cost does not become a barrier to access.

Efficient Payment mechanisms to protect consumers as well improve popularity and usage.

ii. Payments and settlement finality:

CBN would ensure that payments and settlements are executed with finality and irrevocability.

Settlement procedures that operate on the principles of DVP and PVP would be encouraged.

iii. Oversight objective:

Providing a secure and efficient payments system that meets the needs of the economy and international standards.

Addressing the risks that jeopardize the efficiency of the payment systems, and manage, reduce and contain them.

Ensuring that fraud prevention and detection methods are in place and that fraud occurrences are low

Ensuring that a sound legal framework exists. Overseeing creation of national payment standards, and ensuring that the

requisite infrastructures are in place. Serve as lender of last resort in situations of liquidity problems.

The role of the CBN in National Payment Systems (General responsibilities)

The Bank is empowered by the CBN Act to formulate and implement monetary policy, to

achieve and maintain stability in the general level of prices and make regulations for the

proper functioning of a stable market. It is also charged with responsibility to oversee the

operations of deposit monetary banks, financial institutions.

i. Provision of Settlement and Operations Accounts

Provides settlement and operations accounts for Deposit Money Banks to facilitate inter- bank settlement and other obligations

maintain accounts for financial institutions keeps accounts for government facilitates the clearing house operations lender of last resort

ii. The risk reduction measures.

Settlement arrangement for cheque clearing, where by only settlement banks are allowed to maintain settlement accounts with the Bank, provided they meet the minimum requirements of N15 billion in treasury bills and FGN bonds. The non-settlement banks maintain settlement accounts with their respective settlement banks in line with the agency agreement. However, they maintain operations accounts with the CBN for treasury and foreign exchange operations as well as to meet their statutory cash reserve requirements.

All settlement accounts must be funded otherwise holdings in government securities/the clearing collateral would be rediscounted to fund the account.

Responsibility of the Nigeria Deposit Insurance Corporation (NDIC)

The corporation is saddled with the responsibility of ensuring all deposit liabilities of banks in

order to protect the depositors against bank failure and enhance public confidence in the

banking system. It essentially complements the supervisory function of the CBN. The core

responsibilities include:

Insuring deposit liabilities of licensed banks and such financial institutions operating in Nigeria, so as to engender confidence in the Nigerian banking system.

Giving assistance in the interest of depositors, in case of imminent or actual financial difficulties of banks particularly where suspension of payments is threatened; and avoiding damage to public confidence in the banking system.

Guaranteeing payments to depositors, in case of imminent or actual suspension of payments by actual insured banks or financial institutions up to the maximum amount as provided for in the Act.

Assisting monetary authorities in the formation and implementation of banking policies so as to ensure sound banking practice and fair competition among banks in the country.

Undertakes the liquidation of failed insured banks when so appointed by the CBN

Modes Used in Nigeria

There are various payment instruments in the Nigerian payment landscape which enables

the holder/user to effect payments. These are made up of cash and non-cash media. Over

the years, cash has continued to be dominant in Nigeria despite the growing use of other

payment channels.

After cash, cheque is the most widely used payment mode. In 2004, cheques represented

86.32% (in volume terms) of all non-cash retail payments with payment cards and

Automated Teller Machines (ATMs) accounting for 6.5% and 6.23% respectively. The Inter-

Bank transfers also constitute a major channel of payments in Nigeria. Also banks'

customers make transfers among themselves through the Bank via the Nigeria Inter-Bank

Settlement System (NIBSS) Electronic Funds Transfer (NEFT).

A breakdown of the contribution of the various payments instruments in 2004 revealed that

in volume terms:

Cheques:  - 86.32% Cards:  - 6.50% ATMs  - 6.27% Inter-bank fund transfers:  - 0.90%

Value terms

Inter-bank fund transfers:  - 63.88% Cheques:  - 35.91% Cards:  - 0.20% ATMs:  - 0.01%

Components of the Nigerian Payments System

1. Retail payments, consisting cash, cheques, cards, ATMs/POS networks and other

forms of ACH payments.

2. Large Value Payments that is largely inter-bank payments.

3. Securities clearing and settlement, comprising Government and private securities

and stocks.

Cash payments

Cash is the most common form of payment media in Nigeria. More than 20% of the total

monetary liabilities of the CBN are in currency outside the banking system (COB). Money

outside the banks cannot be subject to regulatory and operational procedures, and the ability

of monetary policy to achieve set objectives in the presence of sizeable COB is therefore

limited. By promoting the use of the formal payment systems, the ability to execute and

manage monetary policy is enhanced.

Non-cash payments.

1. Cheques

Cheque remains the most dominant payment mode accounting for 76.30% of the

volume of non-cash payment in the country. While the average monthly volume and

value of cheque transactions in 2005 stood at 1,221,954 and N1, 159.62 billion, the

clearing cycle for local and up-country remains 3 and 6 days respectively. Notable

initiatives towards the increased usage of cheques transactions witnessed over the

years include the commencement of Nigeria Automated Clearing System (NACS) in

2002, introduction of two clearing sessions in Lagos clearing zone, introduction of

cheque standard and cheque printers accreditation scheme. These have contributed

to the tremendous increase in the cheque usage over the years.  

2. Payment Cards:

Payment Cards were introduced into Nigeria some years ago but suffered low

acceptability at the initial stage due to a number of factors which included amongst

others: lack of shared network, epileptic services, limited ATM and Point of Sales (POS)

Terminals and high cost of operations. The Central Bank of Nigeria in an attempt to

promote the use of cards for making secured payments in Nigeria, issued the guidelines

on e-banking in Nigeria in 2003. This has encouraged e-payment initiatives such as the

establishment of switching companies that facilitate interconnectivity, introduction of

shared ATMs and the establishment of Independent Service Operators (ISO) for massive

deployment of ATMs and POS, which gave rise to significant growth in the use of

payment cards.

Types of Payment Cards

Debit Cards: This enables holder access to his bank account online. It is commonly

used in Nigeria at POS terminals (for payment of goods or services) and at ATMs for

cash withdrawal and account balance enquiry. Examples of different brand of debit cards

in use in Nigeria include the MasterCard Maestro, Visa V-Pay, Interswitch enabled cards

(including Quickcash brand of the ATM Consortium Limited) and the various proprietary

ATM Cards issued by various banks.

Credit Cards: This type of card enables holders to make purchases and/or withdraw

cash up to a prearrange ceiling, based on the line of credit granted to him. It is the least

used of all the available payment cards in Nigeria, due to the stringent conditions and

collaterals attached to it. Like other payment cards, it is also used on POS and ATM at

the accredited outlets. To deepen the credit card business in Nigeria, arrangement are

at the advance stage to establish a credible credit bureau that would manage information

on credit customers.

ATM Cards: Debit and Credit cards could be used by the cardholders on ATM for cash

withdrawal or account balance enquiry without having to visit a bank. In Nigeria, there

are over 530 ATMs belonging to some Nigerian banks and Independent Service

Operators (ISO). The volume and value of ATM transactions for 2005 stood at 3, 489,

843 and N17.31 billion, while that of POS stood at 1,063,915 and N41.93 billion

respectively.

Dollar Denominated debit/credit cards: It is noteworthy that both debit and credit

cards are being issued in local and foreign currency under the platform of Nigerian

Switching Companies using the network of MasterCard and Visa International. This has

brought international e-commerce to the comfort of homes in Nigeria. Cardholders can

stay in Nigeria to participate in auction across the globe, shop and make payment in over

210 countries in the world. With this, Nigerians traveling abroad do not necessarily need

travelers' cheque. The volume and value of dollar denominated card transactions has

been on the increase, reflecting the potentials of cards market in Nigeria.  

3. Switching Companies

Before a switch can operate in Nigeria, the existing regulations require that it should

obtain the prior approval of the CBN. There are currently two major transactions

switching companies, namely Cards Technology Limited (which switches all MasterCard

International and local related transactions) and InterSwitch Limited which switches

transactions done with a host of domestic cards including the QuickCash brand of ATM

cards, as well as those of the member banks of the Interswitch consortium. Valucard

Nigeria Plc has recently obtained approval to serve as switching company for all

transactions done with Visa International. The transaction switching companies facilitates

online ATM transaction processing, online POS transactions processing and e-purse

transactions processing. In doing that, they interconnect parties to card scheme

operators' network, document transactions and generate reports to member banks

including transactions settlement reports, keep and check "hot card" list amongst other

activities.

Approved Switch/Card Scheme Operators

Valucard Nigeria Plc was approved to serve as a card scheme operator on

February 18, 1998 while approval was given to them on December 14, 2005

to serve as a switching company.

Smartpay was granted the CBN approval to operate an electronic purse

scheme on November 1, 1999.

Card Technology Limited was licensed by the CBN on April 7, 2004 as the

first switching and transaction processing company with five member banks.

Interswitch as transaction switching companies was approved on April 24,

2004 and currently has 21 participating banks out of the 25 banks and 9

Independent Service Operators (ISO).

ATM Consortium Limited was established on November 8, 2004 to deploy

shared ATMs in the country. It currently has over 10 banks in their consortium

and had successfully deployed over 100 ATMs in the country.  

4. Electronic Funds Transfer

Electronic Fund Transfers are used in transferring value between banks on behalf of

customers. The Nigerian Third Party Transfer (NIBSS Fast Fund) was launched in 1999

to provide same day third-party transfers to individual and Corporate Organizations with

minimum amount transferable as N100, 000.00. The NIBSS Electronic Funds Transfer

(NEFT) was also introduced in 2004. NEFT operates GIRO payments for retail transfers

of banks customers.  

International Payments (SWIFT): In Nigeria, international money transfers are

largely through Telegraphic All the twenty five licensed banks are members of

SWITF and therefore on the SWIFT network.  

5.4.2 Mobile and Internet Banking Services: Mobile phones and Internet are

increasingly being used for financial services in Nigeria. Deposit Money

Banks are enabling their customers to conduct some banking services such

as account inquiry and funds transfer using these media

(http://cenbank.org/Paymentsystem/evolution.asp)

Currency Management

Issue System

Naira notes and coins are printed/minted by the Nigerian Security Printing and Minting Plc

(NSPM) Plc and other overseas printing/minting companies and issued by the Central Bank

of Nigeria (CBN). At the currency printing works of the NSPM Plc, quality is meticulously

controlled throughout every process of currency production. This guarantees that every note

issued meets the required standard. The CBN maintains an office called Mint Inspectorate in

the premises of the NSPM Plc to maintain security and quality of Naira notes and coins.

Currency is issued to deposit money banks through the branches of the CBN, and old notes

retrieved through the same channel. Currency deposited in the CBN by the banks are

processed and sorted to fit and unfit notes in line with the clean note policy. The clean notes

are re-issued while the dirty notes are destroyed (http://cenbank.org/Currency/issuesys.asp).

Summary of Payments System Achievements in Nigeria - 1993-2007

1. Retail Payments

Electronic Card Transactions The volume and value of electronic card transactions stood at 17,721,658 and N148.72 billion as at December 31, 2007 representing increases of 36% and 72% over the figures of 13,029,583 and N86.22 billion recorded in 2006 respectively. The growth in the volume of transactions could be attributed to a number of factors which included the introduction of new products such as Naira credit cards, growing connectivity of point of sales terminals via GPRS, and increased public awareness. Available data on various e-payment channels for 2007 indicated that Automated Teller Machine was the most patronized channel accounting for over 88% of the total e-payment transactions while mobile payments was the least in value terms. See the detailed breakdown below:

Payment Channels Volume (%) Value (%)ATM 88.77 88.46WEB 5.10 7.14POS 2.38 4.33MOBILE 3.75 0.07  100% 100%

2. Wholesale Payments

The Real Time Gross Settlement System (RTGS) commenced operations on December 18, 2006. The CBN named its RTGS CBN Inter-Bank Funds Transfer System (CIFTS) which had all the twenty four deposit money banks as direct participants. The system facilitates effective implementation of monetary policy. Types of transactions handled by CIFTS include interbank funds transfers, third party funds transfers, and net settlement from clearings. During the year 2007, activities in the interbank transfer recorded a significant growth as the volume of transfers among participants of the CBN Inter-Bank Funds Transfer System (CIFTS) increased by 56.01 per cent from 92,908 to 143,854 transfers. The value of transfers also shot up by 121.87 per cent from N29, 164.98 billion to N64, 709.57 billion.

Summary of Nigerian Payments System Achievements 1993-2007

Implementation of MICR 1993 Establishment of NIBSS 1994 Setting up of Technical Committee on Automation and appointment of consultant for NACS

1996-1997

 Full implementation and live operation of NACS 2002 Reduction of the clearing cycle to T+3 and T+5 for local and upcountry instrument respectively

2002

Guidelines on e-banking 2003 Establishment of switching companies and Interoperability of /shared ATM/POS

2004

New Settlement Framework (for Cheque Clearing) 2004 Cheque Stanadard and Cheque Printer accreditation Scheme 2006 Reconstituted National Payments System Committee and set up technical sub-committee

2005

Live run of CBN Inter-bank Funds Transfer System (CIFTS) 2006

Further reduction of the clearing cycle to T+3 for upcountry instrument while that of local instrument remain at T+2

2007

Development of Payments System Vision 2020 2007 Inauguration of Payments System Work Group for The implementation of the Payments System Vision 2020

2007

 Payments Infrastructure and Strategy Committee (PISC) For coordinating the activities of the work group

2007

Harmonization of clearing cycles (upcountry and local) at T+2 (Three working days)

2008

Data On Electronics Payments Transactions For 2003-2007

ATMS and POS Terminals 2003 2004 2005 2006 2007

Number of ATMs in Nigeria

Number of machines 101 352 532 1,426 3,676

Volume of transactions 240,192 1,207,576 3,489,845 12,138,109 15,731,630

Value of transactions (in millions of Naira)

1,206.00 4,344.57 17,315.00 63,238.87 131,562.67

Offline POS Terminals          Volume of transactions 887 1,055,653 1,063,915 557,508  Value of transactions (in millions of Naira)

49,621.00 61,279.50 41,334.43 19,302.18  

Online POS Terminals          Volume of transactions       71,063 421,946Value of transactions (in millions of Naira)

      559.23 6,442.07

Web Payments          Volume of transactions       440,733 665,015Value of transactions (in millions of Naira)

      97.51 95,551.79

Mobile Payments          Volume of transactions       222,210 903,067Value of transactions (in millions of Naira)

      3,023.19 10,622.63

http://cenbank.org/Paymentsystem/achievements.aspChapter three

Methodology

Introduction

This chapter shall concern itself with the conceptual framework of the study. It includes the research design, framework of sourced data, data gathering and data analysis techniques.

Research design

Research simply put, is an activity concerned primarily with the question and analysis of information related to the identification and solution of problems.

The research design used in this work is both a correlation design and contrast design. The correlation design sought to establish the existence and degree of correlation between our data. Data is sought directly from secondary sources (authority in National Financial: CBN),

some data was also sourced from previous research works and journals related to this work. The contrast design sought to establish a cost benefit analysis between alternative given certain assumptions.

The relational tendencies showed by the variables measured would be indication of the correctness the hypothetical phenomenon presented. An attempt would be made to establish a theory on this premise as well as an argument in favor of the variant contrast to the obtainable with respect to the contrasting research design.

Area of Study

The area under study is referred to as the economic environment of the Nigerian State. The study concentrates on the economic consequences of the introduction of higher currency denominations in Nigeria. A degree of measurement is sought for these consequences using inflationary trends in Nigeria after seeking to establish if any relationship exist between certain corresponding data.

Sample and Sampling Technique

The variables under study are the Currency in Circulation (CIC) as independent variable and the Inflation Rate as the dependent variable. The CIC is taken to show some degree of correlation to the highest single available currency denomination. This correlation is a postulation on the basis of the facts which the Central Bank of Nigeria gave as one of the reasons for the introduction of higher currency banknotes in the Nation. The apex body said that a growth in economic activities and transaction necessitate these introductions. Also in view of more flexible and convenient payment modalities in our highly cash based economy were amongst their stated reasons. In this regard data sought and used was sought on a non-probabilistic basis applying a judgment sampling technique.

Method of Data Collection

The major sources of data used for this research work secondary sources of data. The data sources include review of works and material from text books, journals, Central Bank of Nigeria website and past project work that are related to the topic in question.

3.7 Method of Data Analysis

Consequently, the data would be estimated using ordinary least square method (LSM). The statistical techniques involved in this research work for data analysis are t – statistical technique and Spearman’s Rank Correlation Coefficient (ρ) which is coefficient of determination.

ρ = coefficient of determination used to test the overall proportional change in dependent variable (y) that is associated with the explanatory and unexplained variable. R2 can be computed using

ρ = 1 - 6∑

i=1

n

d i2

n(n2−1)

First, we must find the value of the termd i2. To do so we use the following steps reflected in

below.

1. Sort the data by the first column (X i). Create a new column xi and assign it the ranked values 1, 2, 3 ...n.

2. Next, sort the data by the second column (Yi). Create a fourth column yi and similarly assign it the ranked values 1, 2, 3 ...n.

3. Create a fifth column di to hold the differences between the two rank columns (xi and yi).

4. Create one final column d i2 to hold the value of column di squared.

t- Statistical is used to test the individual significance of each parameter in the model with a 5% significance level. It can be computed using the formula

t = ρ∗√ n−21− ρ2

Where

t = ratio using t distribution

However, to arrive at the judgment of the computed and table value of t – Statistical, the need for hypothesis formulation becomes imperative.

H0: a =0 null hypothesis

H1: a ≠ 0 alternative hypothesis

The analysis of the hypothesis will form the basis of our conclusion to either reject or accept whether there is positive or negative relationship between currency in circulation and inflation.

Regression analysis

If we establish that there is some relationship between currency in circulation and inflation, the next step is that of estimating or predicting the expected value of inflation based upon observed volumes of currency in circulation. In simple linear regression, one assumes and tries to estimate a theoretical relationship between the variable of the firm using the following

y = a + bx

Where

y = dependent variables in the study which is the inflation rate

x = independent variables in this study which is the currency in circulation

a = the intercept on y axis

b = the coefficient of x or the slope