The amount of currency outside the Nigerian banking system has reached a new all-time high of N3.71 trillion in May 2024.
This is according to data from the monetary and credit statistics of the Central Bank of Nigeria (CBN).
The new high reflects a growing lack of confidence in the banking system or an increased preference for cash transactions.
What is the data saying
- The currency outside banks grew by N104.89 billion in May 2024 compared to the previous month, marking a 3% M-o-M increase.
- This uptick continues the trend seen over the past several months, with figures rising from N3.28 trillion in January 2024 to N3.41 trillion in February, and further to N3.63 trillion in March, before a slight dip to N3.61 trillion in April.
- More striking is the Y-o-Y figure, which shows an increase of N1.53 trillion, representing a 70% rise from May 2023 when it was N2.18 trillion.
93.56% of currency in circulation is outside banks
In May 2024, approximately 93.56% of the total currency in circulation was outside the banking sector. Last year, it was about 86.16% in the same month. The high percentage indicates a significant preference for holding cash outside the banking system.
The cash hoarding behaviour observed in 2024 can be linked to the extensive cash scarcity experienced by Nigerians in 2023. This scarcity was largely a result of the CBN’s flawed implementation of a naira redesign policy, which was part of a broader initiative to transition towards a cashless economy and combat issues like vote-buying and financial crimes.
In 2023, many Nigerians experienced difficulties accessing cash, leading to widespread economic disruption and a loss of trust in the banking system. This loss of trust, combined with the fear that old naira notes would lose their legal tender status, led people to start hoarding cash.
As a response to the acute cash shortages, people’s reluctance to deposit their money in banks grew, fostering a habit of cash hoarding.
This trend continued into 2024, evidenced by the staggering 93.56% of currency in circulation being kept outside of banks by May.
The CBN data further shows that currency in circulation rose by 1.07% from N3.92 trillion in April to N3.97 trillion in May of the same year.
The increase is larger on a year-on-year basis, rising by 56.94%, from N2.53 trillion in May 2023 as demand for cash persists in the Nigerian economy.
What you should know
The continuous increase in currency outside banks can have multiple implications for the Nigerian economy. It suggests a growing preference for cash transactions over electronic payments, possibly due to concerns about banking reliability or the desire for more tangible forms of wealth amid economic uncertainty.
Moreover, this trend could impact inflation rates and the effectiveness of monetary policy, as higher amounts of cash in circulation outside the banking system can reduce the central bank’s control over the money supply.
Nairametrics earlier reported that Nigeria’s money supply (M3) surged to nearly N100 trillion, hitting a new peak of N99.24 trillion in May 2024. There was a month-on-month (M-o-M) increase of 2% from N96.97 trillion the previous month and a year-on-year (Y-o-Y) growth of 78% from N55.69 trillion in the same month of the previous year. Nairametrics further observed that the increase in net domestic assets drove the surge in M3 in May 2024.
This growth comes in the face of the Monetary Policy Committee’s (MPC) stringent measures aimed at controlling inflation.
The increase in money supply and currency in circulation can boost consumer spending, driving demand for goods and services and encouraging further economic activity.
However, a significant increase in money supply also has the potential to fuel inflation. When more money chases the same amount of goods and services, prices tend to rise.
Nigeria, which has been grappling with inflationary pressures (headline inflation is currently at 33.95%), may see a further increase in inflation rates if the growth in money supply is not matched by a corresponding increase in production. This can erode purchasing power and impact the cost of living, particularly for lower-income households.