IMPACT OF THE CENTRAL BANK OF NIGERIA CASHLESS POLICY ON THE DEVELOPMENT OF NIGERIAN BANKING SECTOR

ABSTRACT

The major reasons for the introduction of cashless policy are to drive development and modernization of our payment system in line and to reduce the cost of banking services (including cost of credit) and drive financial inclusion by providing efficient transaction options and financial inclusion and to improve the effectiveness of monetary policy in managing inflation and driving economic growth. The analysis of banking innovations and the response of the public towards them would help determine the hold of the Central Bank of Nigeria (CBN) on the extent to which they have been able to foster financial transactions in money deposit banks across the nation. The study, therefore examined the impact Cashless Policy and the development of Nigerian banks. The study employs the simple random sampling technique to Eighty (80) respondents from Ecobank Nigeria Plc, United Bank of Africa (UBA), Guarantee Trust Bank (GTB) and First Bank Nigeria Plc (FBN) in Nsukka, Enugu State. Data was sourced through a structured questionnaire. Analysis of data was performed with the aid of Mean, Standard Deviation and Chi-square. The result revealed that many respondents either agreed or strongly agreed to the items assessing development of banks, quality of bank’s services and less challenges due to the adoption of cashless policy.

95.0% believed the introduction of cashless policy and its channels have helped improve their banks’ performance. There was positive and significant relationship in the findings of the relationship between the cashless policy and the development of Nigerian bank and the relationship between the cashless policy and improvement in the quality of bank’s services to customers. The above assertion is supported by the fact that the chi-square coefficient was positive and significant at p<.05(p-value 0.000 which is lesser than α=0.05, that is p< 0.05). While that of the identifiable challenges/problems facing the cashless policy adoption in Nigeria resulted in no identifiable problem of the cashless policy as there may be these issues but it is not significant considering a p-value 0.061 which is greater than α=0.05, that is p>

0.05. The study recommended that commercial banks should incorporate financial literacy in their advertising, complemented by incentive programs such as promotions and tailor-made products. The development and implementation of a financial literacy framework by a mandated authority for the co-ordination of strategies for the improvement of the general level of financial literacy in Nsukka.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Banks are the backbone of the economy of any country,they occupy central position in the country’s financial system and are essential agents in the development process. By intermediating between the surplus and deficit savings units within an economy, banks mobilize and facilitate efficient allocation of national savings, thereby increasing the quantum of investments and hence national output. In a developing economy such as Nigeria, financial sector development has been accompanied by structural and institutional changes and the sector generally has long been recognized to play a crucial role in the economic development of the nation.

Monetary Policy is the regulation of the money supply and interest rates by Central Bank in order to control inflation and stabilize currency. The Central Bank of Nigeria (CBN) undertakes monetary policy in order to maintain Nigerian’s external reserve, safeguard the international value of the legal currency, promote and maintain monetary stability. Similarly, it acts as a sound and efficient financial system in Nigeria, as a banker and financial adviser to the Federal Government and as lender of last resort to the banks. Consequently, in pursuance of its functions in compliance with the core mandate, the CBN as a result of change which is a constant factor, has engaged in series of reformations aimed at both making the financial system formidable and enhancing the overall economic performance of Nigeria so as to  place it  on  the  right  path  in  tune  with  global  trends.

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.

Therefore, it 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 (CBN, 2011).

In recent years, Nigeria has been experiencing growth and the condition seems right for launching unto a path of sustained and rapid growth justifying its ranking amongst the 11 countries as identified by Goldman Sachs to have the potential for attaining global competitiveness based on their economic and demographic settings and the foundation for reforms already laid. Constraints to the achievement of Nigeria’s ambition to be among the top 20 economies of the world by year 2020 is the fact that the Nigerian Economy is too heavily cash oriented in transaction of good and services which is not in line with the global trends hence the introduction of cashless policy.

In order to rescue the Nigerian economy from total collapse, the Central Bank of Nigeria in collaboration with the bankers’ committee introduced the cashless policy. The main aim of the introduction of cashless policy was to provide mobile payment services, breakdown the traditional barriers hindering the financial inclusion of millions of Nigerians and bring about low-cost safe and convenient financial services to all across the country.

A cashless economy is an environment where the use of physical cash for any business transaction is minimized. Electronic devices and information technology play an important role in ensuring a successful cashless economy. Without an optimal use of information technology, no country can attain a speedy socio-economic growth and development. Information Technology is one of the major reasons why the United States of America has attained there level of economic development. The future and success of all businesses especially those in the service industry depends on information technology. Also, companies and  banks  compete based  on  the level  of information  technology  each  has.  Information

technology in the banking system is not all about the physical computers present in the banking hall. It entails the database, computerization of customer’s accounts, access to one’s account from any branch, withdrawal of cash from automated teller machine, the use of online services etc. Recently, any bank that has not upgraded in their electronic services is seen as not been competitive with others. Most banks are constantly working on their servers to enable their customer’s swift transactions online.

During the period when Nigeria was fully cash-based system, the operation of the system was significantly high cost to the Nigerian Economy. The Central Bank of Nigeria estimated that cash distribution costs account 60% overheads in the banking sector while cash management operations required up to 80% of the industry’s infrastructure base and staff strength (CBN, 2012). Also, the cost of transferring, processing and storing huge amount of cash borne by the financial system was valued at N114.5 billion in 2009 which latter rose to N192 billion by the end of 2012. Again, heavy cash users (i.e. those with transaction value above N150, 000) account for only 10% of transaction volume but 71% of the transaction value. It appears therefore, that implicit cash holding costs for the minority class of cash users are being subsidized by the majority (Nweke, 2012)

A cash handling charge of 3% and 5% is to be charged on daily withdrawals which exceed N500, 000 and N3, 000,000 for individuals and corporate bodies respectively and 2% for individual and 3% for corporate, on deposits which exceeds the daily limit. The microfinance banks, government revenue generation accounts, embassies and primary mortgage institutions were exempted from these charges. The major reasons for the introduction of cashless policy were (1) To drive development and modernization of our payment system in line with Nigeria’s vision 2020 goals of being amongst the 20 economics by the year 2020 (ii) To reduce the cost of banking services (including cost of credit) and drive financial inclusion by

providing more efficient transaction options and greater reach (iii) To improve the effectiveness of monetary policy in managing inflation and driving economic growth (CBN Bulletin, 2011)

The cashless policy does not mean a total elimination of cash-based system, it is aimed at the reduction of the volume of cash in circulation in the economy. It therefore combines the electronic payment system and cash-based system. The major reasons for the introduction of cashless policy are to drive development and modernization of our payment system in line with Nigeria’s vision 2020 goal of being amongst the top 20 economies by the year 2020, to reduce the cost of banking services (including cost of credit) and drive financial inclusion by providing efficient transaction options and greater reach and to improve the effectiveness of monetary policy in managing inflation and driving economic growth (CBN, 2011).

There are a lot of electronic channels made available which can be conveniently used in recent years. These channels make transacting business swift and easy. At the comfort of one’s home one can send money across the country without visiting the bank. This is one of the benefits of the cashless policy. These channels include web transfers, Point of Sale, Automated teller machine, USSD code etc. some of these channels had been in existence before the official introduction of this policy in 2012.

The cashless policy was initiated by the Central Bank of Nigeria led by the then governor, Sanusi Lamido. It kick started in Lagos in the year 2011 with the aim of achieving an environment where most of the transactions in the banking sector are carried out with cheques and electronic payments in line with the global trend and Nigerian’s ambition to be among the top 20 economies of the world by year 2020. Cashless policy aims at curbing some of the negative consequences associated with the high usage of physical cash in Nigerian Economy which included high cost of cash, high subsidy, inefficiency and corruption etc.

With the introduction of the cashless policy, a cash handling charge was also introduced with a cash handling charge for withdrawals that exceed N500, 000 and N3, 000,000 on a daily basis for individuals and corporate bodies respectively. The cashless policy came with the contents that only CIT (Cash in Transit) licensed companies is allowed to provide cash pick up services (any bank that does otherwise will be sanctioned) and 3rd  party cheques over N150, 000 should not be paid over the counter but should be paid directly into the account. The CBN cashless policy kick started in Lagos on 30th March 2011, it took effect in Anambra, Rivers, Kano, Ogun, Abia and the Federal Capital Territory (FCT) on the 1st of October 2013. It was later spread through other states and fully implemented in all the parts of the Nation on

1st of July 2014.

The cashless policy does not imply the total elimination of cash in the economy, it’s aimed at drastic reduction of cash usage and adopting the electronic means of transactions. There are several electronic means in which one can make payments in the banking system and  these  include;  POS  machines,  Automated  Teller  Machines,  issuance  of  cheques, electronic transfers etc.(Ogbuji, C.N et al)

The introduction of cashless policy has brought about tremendous reduction of queues in the banking hall, swift consummation of business transaction, great economic development, reduction in the risk of carrying physical cash to mention but a few

1.2 Statement of the Problem

The use of physical cash instrument as medium of exchange in business transactions has motivated inefficiency of the monetary authorities and also created various issues that are detrimental to both individual and corporate account holders, cash transactions include: time wasted in counting and verifying cash lodgment and withdrawals which in turn affects the

money deposit banks and other financial institutions and the government through the CBN. As more payment systems have been introduced, pundits have been predicting the emergence of ‘cash less society’. Today, we still pay with cash and checks, but several other payment instruments, such as credit and debit cards, are widely used. The use of paper money is more declining, but at a rather slow pace. As it were, Nigeria is a country heavily dominated by cash and there are some factors that negatively affect the choice of cash over non-cash instruments, some of these include time spent in counting and verifying cash, susceptibility to loss, time spent in the banking halls, amongst others (Nnanwobu et al, 2011).

A cash-based economy is one which is characterized by the psychology to physically hold and touch cash a culture informed by ignorance, illiteracy, and lack of security consciousness and appreciation of the merit of digital payment (Ovia, 2002). Cash, as a payment system, attracts lots of negative consequences such as high cost of handling cash, risks of using cash and keeping them in houses which eventually lead to high rate robbery, financial loss in the case of fire and flooding incidents. High cash usage results in lots of money outside the formal economy, thus limiting the effectiveness of monetary policy in managing inflation and encouraging economic growth. Also high cash usage enables corruption, leakages, money laundering, counterfeiting, mis-management, mutilation and depreciation in value if not invested. Some or most of these factors are one which exists in the Nigerian economy today thus creating gap for this current study.

In Nigeria today, infrastructure is a major problem that hinders the money deposit banks from attaining full potential in terms of certain policy implementations and its impact on financial transactions in the banking industry. The infrastructure in Nigeria over the years hasnot been reputable and thus has given way to ineffectiveness to the sincerity in financial transactions in the banks. The level of technology in the nation is rather poor and increasing at

a   slow   pace   and   as   such   hasn’t   given   room   for   major   development   and   policy implementations that may have risen. The technology available for carrying out banking transactions are not as effective as they ought to be therefore leaving people with no other choice than to keep cash in their houses in order to avoid having to spend lots of time in the banking halls due to low servers, interrupted power supply, bad internet services.

Illiteracy and the low level of education of people does nothing else than leave people in the  dark  and  therefore  results  into  the  inability  of  the  people  to  understand  when developments are being put into place. Many people do not see the need to keep their money in the banks or invest them due to the lack of understanding they have and also insufficient publicity and awareness measures are what have being in existence which if dealt with would at least reduce the lack of understanding of many and make them see viable reasons why they should keep their money in the banks and invest them other than keep them in their houses as a route to the safety of many lives and better growth of the economy and as such increase the standard of living. This of course, is the motivation behind this study.

As a matter of fact, the demand for money is being taken in terms of demand deposits in banks and liquid assets outside the banks that is the average willingness of people to either hold money in cash or keep it as demand deposits in the banks effects the activities of commercial banks in controlling the amount of money in circulation, which in turn determines the hold of the CBN on the economy in terms of monetary policy implementations. The analysis of banking innovations and the response of the public towards them would help determine the hold of the Central Bank of Nigeria (CBN) on the extent to which they have been able to foster financial transactions in money deposit banks across the nation.

The  advent  of  electronic  commerce  has  allowed  space  for  multiple  instruments  in company transactions, although they are not all fully used. The new policy taken is such that it has been made to impact the economy as a whole and to make complete use of all these instruments, including financial and fiscal policies, and in turn will maximize the e-commerce development effort.

1.3 Research Question

1.   What is the relationship between the cashless policy and the development of Nigerian

Bank?

2.   What is the relationship between the cashless policy and improvement in the quality of

bank’s services to customers?

3.   What are the identifiable challenges/problems facing the cashless policy adoption in

Nigeria?

1.4 Objectives of the Study

The broad objective of this study is to establish the relationship between the Central Bank of Nigeria  recently  introduced  policy  called  the  Cashless  Policy  and  the  development  of Nigerian banks. This specific objective is further broken down into the following

a.   To ascertain the relationship between the cashless policy and the development of

Nigerian Bank.

b.   To ascertain the relationship between the cashless policy and improvement in the

quality of bank’s services to customers.

c.   To ascertain the identifiable challenges/problems facing the cashless policy adoption in Nigeria.

1.5 Statement of Hypothesis

H01: There is no significant relationship between the cashless policy and the development of

Nigerian Bank.

H02: There is no significant relationship between the cashless policy and improvement in the

quality of bank’s services to customers.

H03:  There  is  no  identifiable  challenge/problem  facing  the  cashless  policy  adoption  in

Nigeria.

1.6 Scope of the Study

This study examined CBN cashless policy by exploring its impact on the Nigerian economy. Since cashless policy is a recent economic policy with no previous data and more so, the study seeks the opinion of the people by examining the impact analysis of the policy. Basically, for this study, both primary and secondary sources of data was used in carrying out this research. For the primary data, a survey would be carried out within the Nsukka Local government of Enugu state metropolis, while the secondary data focuses on every available from the Central Bank of Nigeria (CBN) within reach and various paper publications.

1.7 Significance of the Study

This study will be very much significant to the government, stakeholders, policy makers, and private investors; this is because an improved banking sector is necessary for the achievement of macroeconomic objectives. We can also put that improved macroeconomic environment makes for a viable and productive economy.

The study will in no small measure be of help to the government, and monetary authority to  come  up  with  appropriate  fiscal  and  monetary  measures  that  will  help  tackle  the

macroeconomic instabilities orchestrated by weakened financial institution development and revive the banking sector.

This study will also add to the existing stock of knowledge by capturing some gray areas in the topic under investigation. It will serve as a guide to fellow researchers that may pick interest in the topic or related ones. It will also stand as a reference point, and provide insight for further investigation. Furthermore, the study will equally be helpful also to the interested general public who wish to get familiar with the topic and its dynamics in Nigeria. It will educate them on the impact of cashless policy on development of Nigeria bank.

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