TUE. 21 MARCH 2023-theGBJournal | What is the effect of the replacement of bank notes? Given the withdrawal of a significant sum of old Naira bank notes, which we estimate as a reduction of N2.3 trillion (US$5.0bn) over four months, we would expect customers’ accounts with banks – both current accounts and deposit accounts – to swell.
And this being the case, we would expect banks to become more liquid than they were a few months ago. This has happened, with the weight of money driving down 1-year Treasury bill rates. Inter-bank rates have also declined gently.
As we described a few weeks ago, some of this liquidity has been absorbed by a high level of issuance of Federal Government of Nigeria (FGN) bonds, so the government is benefitting by selling more bonds early in the year than it had planned. At the same time, the Central Bank of Nigeria has not seen fit to mop up liquidity through its Cash Reserve Requirement (CRR).
The CRR is the percentage of customer deposits that must be lodged with the CBN, and it is set at 32.5%. CRR deposits do not seem to be much higher today that they were at the end of last year. So, on balance, the withdrawal of bank notes has made the banking system more liquid than it was.
The Nigerian payment system
The other question is about electronic Naira transfers. We conducted a straw poll last week, asking whether people were experiencing problems with inter-bank transfers and just under one third of respondents agreed that they were. A large retailer in Lagos told us that it was experiencing problems with customers’ debit cards and online transactions, though staff thought that things were improving. “I gave the banking system seven marks out of 10 last week,” said one manager, “but the week before I gave it two.” Two weeks ago, plenty of customers could not pay and were returning goods to the shelves.
On 3 March, the Supreme Court ruled that old notes should circulate again, until 31 December 2023, and the CBN instructed banks to enforce this on 14 March. We wonder what logistical challenges the banks now face in reintroducing the same notes which they had taken out of circulation with a deadline of 10 February. At the end of last week, we continued to see queues at ATMs, which shows that problems remain.
Perhaps 10 February was the moment at which Nigeria was to transition to a cashless, or largely cashless, society.
Whoever believed that clearly overestimated the capacity of the electronic inter-bank clearing system. The Nigerian Inter-Bank Settlement System reports that in January 2023 that the scarcity of cash had pushed point of sales transaction to N807.16bn. NIBBS reports that, “This is a 40.69 per cent year-on-year increase from the N573.72bn transactions that was done in January 2022. According to the new data from the Nigeria Inter-Bank Settlement System, total cashless transactions in Nigeria rose by 45.41 per cent y-o-y to N39.58trn in January 2023.”
So, it seems that the system was able to deal with a sharp rise in transactions up until January but by March, and according to our own observations, was facing significant challenges.
What happens next? It seems likely that old Naira notes will be re-introduced into the system over the coming weeks, alleviating queues at ATMs and taking pressure of the inter-bank payment system. And commercial banks will likely invest more in inter-bank payment systems, so we expect the system to improve this year. CBN data shows currency in circulation falling from N3.29 trillion in October to just under N1.0 trillion at the end of February.
In our view it is improbable that cash in circulation will rise to N3.29 trillion again. After all, the overall aim is to reduce the level of cash transactions and route more business through card and online systems. Things will improve, we believe, and there will be new normal.-With Coronation Research
Twitter-@theGBJournal|Facebook-the Government and Business Journal|email:gbj@govbusinessjournal.ng|govandbusinessj@gmail.com
