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: [email protected]
ABSTRACT
1
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
2
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.
3
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
4
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.
5
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
6
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;
7
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
8
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.
9
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
10
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.
11
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
12
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
13
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.
14
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.
15
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.
16