The sorry state of lower denomination currencies
It is no longer news that the bulk of lower denomination currencies circulating within our economy are worn-out. The presence of these shabby looking currencies, particularly in a predominantly cash-based economy such as ours, should be a major cause of concern to all stakeholders. The problem of worn-out currencies has long plagued transactions in petty items within our economy.
However, in recent times there has been a noticeable increase in the volume of tattered Naira notes, particularly lower denomination currencies. While this affects all lower denomination currencies in the economy, the N100 note appears to be the worst affected, with a significant quantity of N100 notes in use appearing worn-out.
The circulation of significant quantities of worn-out notes has several detrimental effects which are highlighted in the latter part of this article. It also runs contrary to Nigeria’s ambition to be one of the easiest places to do business in the near future.
The 100 Naira note – a case in point
In the past, 5, 10, 20 and 50 Naira denominations featured prominently among worn-out currencies in circulation in the economy as they were the most commonly used denominations in high volume petty trades. However, in recent times there appears to be a significant surge in the amount of worn-out N100 notes in circulation.
It is my opinion that the increase in these notes circulating in the economy is a reflection of its increased role in facilitating petty trading of some of the country’s commonly traded goods and services. According to the Central Bank, the country has been experiencing double digits food-indexed inflation since June 2015. With food prices rapidly rising, there has been an upward shift in the denominations commonly used to facilitate the trade in petty goods and services, from other lower denominations to higher denominations including the N100 denomination. The reality is that the velocity of the N100 has increased significantly. The knock-on effect is an increased usage of N100 notes.
Why the situation persists
While the increased usage of N100 denomination is a major factor contributing to the increased wearing-out of the N100 notes, it is the alarming failure of a system designed to regulate the quality of notes in circulation that has led to the continued increasing circulation of worn-out currencies.
Why action is necessary
Besides the stain on the country’s image arising from the circulation and continued use of tattered currency notes, there are a number of less subtle consequences of this situation.
Worn-out currency notes may be outrightly rejected as legal tender during exchange for goods or services. The situation where a significant amount of denominations in circulation may be rejected in a transaction calls into question their continued use and acceptability as legal tender. This impedes the exchange of goods and services and may be borne as a loss by currency holders who are unable to spend it.
Another disturbing pattern arising from the growing scarcity of “clean” Naira notes, particularly the N100 notes, is the growth in black market trading of the currency.
Black market traders essentially exchange higher denomination currencies for “clean” lower denomination notes for a fee which is usually deducted at source. The scarcity of clean notes provides an incentive for increasing black market trading. Black market trading has the unfortunate effect of making lower denomination currencies a commodity itself rather than a medium of exchange, promoting hoarding and racketeering.
Scarcity of “clean” Naira notes, particularly the N100 notes, also creates inflationary pressure as sellers and producers tend to round up the prices of goods and services for which acceptable lower denominations may not be readily available. This does not spell well for a country trying to rein in inflation.
A failing currency management system
As with every monetary system, a system exists to regulate the quality of currency notes in the country. Under the current template, the Central Bank of Nigeria has mandated Deposit Money Banks (DMB) to collect worn-out notes from customers at no cost to customers. The banks are expected to remit same to the Central Bank at the rate of N12,000 per box.
However, it is clear that the current system at the very least does not work as it is supposed to. The banks are reluctant to accept them from the customers (or collect to reissue it to another customer) and the Central Bank charges any bank delivering notes for re-issuance a fee.
To be fair, the Central Bank of Nigeria has shown some appreciation of the situation at hand and instituted a number of schemes directed at various stakeholders. On January 2, 2018, the Central Bank opened a three-month window (starting January 2018) for banks to turn-in worn-out 5, 10, 20 and 50 Naira notes (not including the N100 note) at a discounted rate of N1,000 per box. The Central Bank also runs public campaigns encouraging proper use of the Naira and urging users to turn in worn-out Naira currencies to the Bank.
If the success of these schemes were to be measured by the extent to which worn-out denominations are still circulating in the economy, the schemes can largely be adjudged to have failed.
Who is to blame?
There is no shortage of blame about the current situation. The Central Bank has blamed Deposit Money Banks for failing to turn in worn-out notes. Both Banks also blame the manner in which some users handle the Naira for the current situation.
On their part, the banks have bemoaned charges imposed by the CBN for the replacement of notes. It has also been suggested that Deposit Money Banks are mindful of the additional administrative and cost burden of indulging in such activity.
The blame by users depends on who you ask, but it appears that a large number of users see the situation as a failure of the Federal Government and its regulatory agency (Central Bank).
Ascertaining who actually bears the blame for the failing regulatory system is a subject of contention. However, only concrete actions taken to rectify the faltering system can save the dire situation of the N100 note.
Call to action
The bone of contention between the Central Bank and Deposit Money Banks appears to be who bears the cost for the sorting, collation and destruction of worn-out Naira notes.
Without recourse to who should bear the blame, the CBN as the apex financial regulatory body is statutorily tasked with ensuring that the monetary system works with a healthy supply of usable lower denomination currencies to facilitate transactions (CBN Act of 1958).
Also, with a net operating income of N446 billion (2014 financial year), the Central Bank appears to have some legroom to foot some additional costs relating to its statutory mandate. Quite surprisingly, the Bank recorded a 43% Y-o-Y7 decrease in currency issue expense during this period.
We have lost the 50kobo, N1 and possibly N5 denominations to inflation; the Central Bank must act swiftly with unwavering determination to ensure that we do not loss the N100 denomination due to the scarcity of trade-acceptable notes.
This article may as well be seen as a call to save petty trading and secure the livelihood of millions of Nigerians who rely on the healthy circulation of usable low denomination naira notes.
About the author: This article was written by Rotimi Akintade, a tax specialist in one of the Country’s leading FMCGs.
Email – [email protected]
Central Banks Digital Currencies (CBDCs) – a Gift or a Curse?
Should we expect a CBN announcement on e-Naira soon?
China recently became the first MAJOR economy to create its Central Bank Digital Currency (CBDC).
Specifically, China’s CBDC has gone from the testing phase to actual implementation. Such that the digital yuan is now ready for use in regular transactions. The expectations are that by the time athletes gather for the upcoming Winter Olympics, visitors to the country can pay for a wide range of goods and services using the Digital Yuan. (Think about using government digital currency to settle Hotel and Restaurant bills, Taxi rides, etc.).
Across the world, Central Banks are racing to implement Central Bank Digital Currency (CBDC). The latest BIS 2021 survey identified that 86% of Central banks are engaged in developing a CBDC.
In this article, we ask the question: What exactly are Central Bank Digital Currencies (CBDCs), and why are so many central banks are working towards their implementation?
What is a Central Bank Digital Currency (CBDC)?
Specifically, CBDCs are legal tenders issued by a country’s central bank which will only ever be available in digital format AND will be acceptable from day one for payments of goods and services once implemented.
Fund settlement will be facilitated by the issuing Central bank who may / may not choose to partner with an approved list of institutional counterparties. The Bank of International Settlements (BIS) has a more technical definition here.
For the avoidance of doubt, CBDCs are neither the same as Electronic Funds Transfers (EFTs) nor are they Cryptocurrencies. Despite many similarities such as contactless settlement between counterparties, key differences are that Central Bank Digital currencies are legal tender AND represent a direct claim on a central bank by end-users.
- So, if you are one of those people who likes to “spray” very crispy notes at Owambe… better be prepared as with digital currency, you will never see any physical notes to “spray”.
Which countries have CBDCs on the horizon?
The latest BIS 2021 survey of 65 central banks identified that 86% of Central Banks are engaged in developing digital currencies. Out of which 60% of central banks have begun research work whilst 14% of central banks are already in the pilot and proof of concept phase.
- Bahamas (Sand Dollar), China (Digital Yuan), and Sweden (e-Krona) are the nations most advanced with implementation.
How will the CBDCs work?
For now, each Central Bank is determining its own scope and CBDC functionality as there is no standard global framework regarding infrastructure requirements and functionality scope (e.g. some central banks simply want to focus on domestic payments whilst others want both domestic and international payments focus).
However, having said that, the underlying workflow will likely be similar across the world, in the sense that workflow will include solutions on distribution and utilization.
- Distribution: Central Banks will create the digital currency and permit a list of commercial banks to access to the central payment network for onward distribution to end customers. Given that CBDCs are digital, the Central Banks will be able to track exactly who is holding how much of their currency and how exactly their currency is being spent.
- Utilization: End-users will have a tool (e.g. digital wallets) to help them be aware of their CBDCs balances. Further, these wallets can be presented (i.e. scanned) at participating locations for transaction settlements (think QR codes on a phone app).
In other words, as a CBDC end-user, you only need access to the internet and electricity for spending. Intermediaries such as SWIFT will be bypassed. (You can read more about how the digital yuan will work here).
Why are so many Central Banks rushing into CBDCs?
Firstly, faster cross-border trade settlements / International Trade ambitions:
The widely accepted use of CBDCs will facilitate faster cross-border settlements between participating counterparties. Regardless of your location, there will be less need to convert from local currencies into reserve currencies such as USD, GBP, EUR, and vice versa via financial intermediaries.
Additionally, for a country such as China which has long sought to expand its global reach in international trade, the digital yuan provides mouth-watering opportunities.
- As a simple example, for international trade facilitation, end-users of smartphones built by Chinese-owned phone companies can potentially be enabled to access the Digital-Yuan, and that digital yuan can be spent with Chinese-owned firms across the world. These payment transactions can take place on the People’s Bank of China (PBOC) controlled network and bypass any existing financial intermediary (you can read more about digital yuan opportunities here).
Secondly, from a domestic perspective, CBDCs will be a potential game-changing macro-economic tool.
For countries not interested in global trade dominance, digital currencies offer Central banks an exciting opportunity to transform monetary policies. Specifically with regards to financial relationships and money transmission mechanisms (too much grammar but we have all heard of stimulus and intervention funds!!)
Under the current state, when a Central Bank wants to increase or decrease money going into the hands of consumers, it does so via a range of tools (i.e. alter interest rates, set reserve ratios, buy/sell short-term instruments, etc.). Unfortunately, this current approach has some limitations which include:
- Transmission mechanisms: Despite all the tools available to Central Banks, they ultimately rely on financial intermediaries (i.e. banks). Existing monetary policy tools simply aim to influence commercial banks to increase or decrease the amount of money/funds available for onward lending to end consumers.
- These tools, as well as, associated end-user responses may not often work as fast as Central Banks would like. As an example, most bank customers will tell you that loan application processes can be extremely cumbersome and sometimes subjective.
- Also, think about folks in remote areas who truly need credit for their business expansion but are not financially included or are not able to complete the plethora of loan application forms or are missing IDs for authentication, etc.
- All these limitations create latency challenges for Central Banks looking to influence macroeconomic indicators quickly.
- Monitoring: Under the current approach, it is cumbersome for Central Banks to continually track existing money in circulation and utilization purposes. Think about CBN intervention funds and how difficult it is for the CBN to know exactly how its intervention funds are being spent once the funds are disbursed to applicants.
Fortunately, with digital currencies, given that they leave digital footprints, Economic Surveillance is facilitated (i.e. Central banks can monitor exactly who owns how much and what it is being used for); arguably giving Central Banks an opportunity to better direct funds to parts of the economy requiring support.
Thirdly, Technology advances driving the growth of the Digital Economy and lowering operating cost dynamics.
- The unrelenting growth of the Digital Economy: The use of physical cash continues to decline driven by the exponential growth of contactless services such as e-commerce (Amazon, Alibaba, eBay), contactless interaction (Zoom, Facebook-Portal, Google-Nest), etc.
- Global eCommerce is now projected to be over 25% of total retail sales across the world and the US estimates that Digital Economy accounted for 6.9% of 2017 GDP which made it the seventh (7th) largest component of GDP and still growing.
- Given that no one needs physical cash for transactions in the digital economy, Central banks are warming up to the need to implement CBDCs for transactions in this emerging digital economy.
- Changing unit cost dynamics: From a central bank perspective, there are significant costs incurred for maintaining oversight of existing payments and settlement systems. Furthermore, there are additional costs for creating cash, transporting, storing, and securing existing stock of physical cash. As existing systems become outdated and population growth continues apace, there will be an inflection point for when it will simply be cheaper to create digital currencies to drive financial inclusion. Especially as cloud computing processing capacity continues to expand at a cheaper unit cost.
Are there risks/issues to be concerned about with Digital Currencies?
The answer is yes, whilst there are benefits, there are also some risks and concerns such as the risk of excessive Economic Surveillance, Privacy concerns, ease of implementing, and Negative Interest (aka financial wealth tax).
Economic Surveillance can easily be a double-edged sword especially in the hands of an authoritarian regime, as an increased level of economic oversight can easily lead to financial repression or targeting opponents. However, just like with CCTVs, the risk of misuse cannot be a unilateral reason to discredit the opportunities available with CBDCs. (You can read more about concerns here)
So, what about Nigeria?
The Central Bank of Nigeria (CBN) was not included in the BIS 2021 survey, additionally, the CBN has not formally outlined its position on whether it plans to implement a Central Bank Digital Currency in the future (e-Naira).
However in February 2021, (as part of its explanation of its regulatory directive on Cryptocurrencies), the CBN acknowledged the emerging trend of Central Banks’ ability to issue legal tender digital currencies.
Nairametrics founder, Ugodre mentioned on his Twitter Spaces show “OnTheMoney” that a senior official at the CBN informed him that the Apex bank was seriously considering digital currency and had put together a team to explore its possibilities.
So, should Nigerians expect an e-Naira soon?
Firstly, with regards to innovation, the Nigerian payments landscape continues to evolve rapidly as the CBN drives innovation as part of its National Financial Inclusion Strategy (NFIS). Thus far, this strategy has resulted in the deployment of new products in the Nigerian payments space such as Money Market Operators (MMOs), Payment Solutions Service Providers (PSSPs), Agent/Super Agents, Payment Service Banks (PSBs), etc.
Consequently, having a digital Naira should not be ruled out as an additional tool to drive financial inclusion in Nigeria,
Secondly, based on industry statistics, Nigerians are quick to adopt technology that facilitates convenience at minimal cost to end-users.
- Specifically, CBN payments statistics reports show that the use of cash and ATMs in Nigeria continues to decline rapidly. The latest annual report shows Cash/ATM usage has declined from 18% of transactions in 2015 to 6% of transactions in 2019. In other words, 93% of activity was done electronically (across platforms NIP, REMITA, MMO, etc).
- Furthermore, NCC reports show high penetration rates for mobile technology with over 195 million active mobile phone subscribers (95% penetration) and 150 million internet subscribers (73% penetration rate).
These reports lend credence to the perception that Nigerians are quick adopters of new technology where the technology enhances convenience at minimal cost to end-users.
Consequently, a digital Naira will likely have high adoption rates to the extent that end-users do not expect to incur additional onerous charges.
Finally, from a CBN perspective, we already know that the APEX bank prefers direct interventions as part of its macroeconomic toolkit. Arguably having a digital Naira (e-Naira) allows the CBN to better facilitate direct transmission to target beneficiaries in key sectors, whilst monitoring the use of the funds disbursed, and expedite recovery when funds are due for repayment.
So, should we expect a CBN announcement on e-Naira soon? Your guess is as good as mine.
Why SEC should support democratization of sale of foreign securities
In the spirit of progressive engagement and dialogue, many voices now suggest that the SEC take a fresh look at its latest position.
The directive of the Nigerian Securities and Exchange Commission (SEC), issued 8th of April 2021, has been met with consternation and a straightforward (but hopefully simplistic) interpretation that; “the government is out to stifle innovators, again.”
These perspectives aren’t unfounded, as innovators of all shades have taken a heavy beating lately due to a number of direct government policies or interpretations of these policies – irrespective of how well-intentioned these policies may be. On the contrary, micro-investment platforms deserve a fair shot within Nigeria’s capital market.
This is especially true considering that the recent regulatory fervour coincides with a period where the innovation ecosystem is recording new milestones and gaining traction, solving problems for users in all walks of life, democratizing wealth creation, and creating high-value jobs, all of which Nigeria desperately needs.
In the last six months alone, Nigerian startups have gained the confidence of some of the best investors locally and globally, leading to never-before-seen innovations, acquisitions, and investments into the economy. This promotes interest in the Nigerian innovation ecosystem from foreign market actors and increases its relevance as a high-value job creator. Some now wonder if our regulators want more or less of this positive momentum.
This latest notice from the SEC warned Capital Market Operators (CMOs) to desist from selling securities not quoted or registered, as only registered securities in Nigeria can be issued, sold, or offered for sale. Ostensibly, the directive requires CMOs registered with the SEC to offer only securities listed on any exchange in Nigeria to the public.
The challenge here is that High Net worth Nigerians (HNIs) have always had access to foreign securities offered or acquired through registered CMOs for the apparent benefit of the upside available in markets such as the United States. This should be democratized to allow Nigerians with smaller incomes to have access to valuable global stocks within fair rules, and this is what the likes of Trove, Chaka, Bamboo, and Risevest have done. In fact, this democratization should be applauded as one of the outputs of a thriving innovation ecosystem that provides practical
palliatives for the stifling inflation and erosion of value we have all experienced as Nigerians.
After all, what is suitable for Dangote should also be good for Musa, who earns NGN50,000.00, and thanks to any of the apps mentioned above, can today invest in shares of Dangote sugar while also adding a quarter of a Google stock to his portfolio every month. This “magic” of innovation is a poverty alleviator that should be encouraged and nurtured while ensuring that the public is protected from any harmful financial practices.
It is important to acknowledge at this point that the SEC has been a positively progressive regulator, generally engaging its public fairly. The issuance of the guidelines for crowdfunding and accommodation of FinTechs within the capital market was encompassing and engaged stakeholders of all hues. This should be commended. The SEC’s position classifying crypto as an asset class is also fair, refreshing, and proactive. We need more of this and not less.
At a time when we are exploring how the Nigerian capital markets can become a viable option for listing tech startups, this latest body language of the SEC, and the Nigerian government as a whole can be further misinterpreted.
In the spirit of progressive engagement and dialogue, many voices now suggest that the SEC take a fresh look at its latest position, as these innovations are widespread, publicly accepted, and valuable. Furthermore, these innovations support some of the registered and regulated CMOs by offering white-label solutions that are accelerating the ability of these legacy CMOs to better serve their HNI customer base, with local and foreign securities. The emergence of these innovative micro-investing platforms has triggered investments into local Nigerian securities in multiple folds. The volumes these innovative platforms channel into Nigerian stocks are arguably the most significant development in Nigeria’s capital market in a decade.
By virtue of the existence of these innovators, their combined strength has introduced over 150,000 new market participants who are primarily millennials: a majority of whom purchased their first set of stocks through these platforms. Before now, they had no active interaction with the capital market. These new entrants are now trading in excess of NGN10,000,000,000 (Ten Billion Naira) monthly through these apps. Note that a good chunk of the highlighted trade volume is routed through local CMOs to purchase Nigerian securities on the Nigerian Stock Exchange(NSE). Long term, these innovations would also serve as a channel to offer Nigerian guarantees to a global audience which would be a massive positive for the economy.
The quest for diversification of portfolios to include foreign securities can only be good overall. It underscores the global trend in cross-border trade in securities as disintermediated by technology and the need to enhance portfolios’ value globally.
Rather than curbing the practice of offering Nigerian and international stocks in a basket, this micro-investing trend should be allowed to flourish within reasonable regulatory frameworks. These platforms make investments attractive, easier, and affordable. Micro investing will curb the menace of pyramid and Ponzi schemes while introducing a new generation into Nigeria’s securities market in parallel with their appetite for global securities. Regardless of what we decide, the world has gotten smaller, and information that enables people to easily seek the best economic outcomes is readily available. While other nations gain from micro-investing, shouldn’t our people do too?
The ultimate beneficiary of increased wealth for Nigerians is the Nigerian economy. Rather than shutting Nigerians off from the rest of the world, we should be accelerating global access for our millions of people; hence this is the time for dialogue, not shutdowns.
Kola Aina is the Founding Partner at Ventures Platform and writes from Lagos, Nigeria.
Nairametrics | Company Earnings
Access our Live Feed portal for the latest company earnings as they drop.
- CSCS Plc posts profit after tax of N6.93 billion in FY 2020
- BUA Cement Plc announces Board Meeting
- Infinity Trust Mortgage Bank Plc records a 60% increase in profit after tax in Q1 2021.
- Tantalizers Plc reports a loss after tax of N422.05 million in FY 2020.
- NASD Plc announces admission of newly demutualized NGX shares.