Currency outside the banking system has in the past 10 years risen by over one hundred percent (100.40%), an indication that Nigerian savers are leaving the banks due to unattractive rates to a higher yielding saving and investment space, thanks to innovation.
Data from the Central Bank of Nigeria (CBN) show that currency outside the banking system increased to N2.5 trillion at the end of December 2020 from N1.2 trillion in December 2011.
BusinessDay findings show that FinTech companies have become a high yielding saving platform and investment heaven for savers as they enjoy rates above the 11.5 percent Monetary Policy Rate (MPR) than 1.5 percent offered by banks.
For instance, uCarbon, a FinTech company that has been providing financial services for over eight years, is offering 15.5 percent for fixed deposit, 13 percent for periodic investment and 11.5 percent for one time investment.
One of the beneficiaries of FinTech services told BusinessDay that his preference for saving with FinTech companies is because of higher interest rates.
He used to enjoy 10 percent rate from Cowrywise, a FinTech company, but it has been reduced to 7% due to prevailing economic challenges.
Read Also: Nigeria’s SEC says fintech will enhance financial inclusion
Between 2014 and 2019, Nigeria’s bustling fintech scene raised more than $600 million in funding attracted 25% ($122 m) of the $491.6m raised by African tech start-ups in 2019 alone—second only to Kenya, which attracted $149 million, according to Nigeria Deposit Insurance Corporation (NDIC).
Nigeria is now home to over 200 fintech standalone companies plus a number of fintech solutions offered by banks and mobile network operators as part of their product portfolio, said Kabir Katata, deputy director, research department, NDIC.
Globally, the largest market for both FinTech credit and big tech credit is China. Big tech companies like Alibaba’s Ant Group, Tencent’s WeBank, Baidu’s Du Xiaoman and ecommerce platform JD.com lent USD 363 billion in 2018 and 516 billion in 2019 (data from People’s Bank of China.
Currency outside the banking system recorded first increase to N1.8 trillion in 2016, when the Africa’s biggest economy entered first recession since the current administration.
On a year-on-year basis, money outside the banking system picked up by 34.35 percent from N1.8 trillion in January 2020.
The development was attributed to low interest rate on savings offered by banks as directed by the regulator.
What this means according to Uju Ogubunka, president Banks Customers Association of Nigeria (BCAN) is that liquidity will be challenged and the capacity of the banks to lend will reduce.
On September 1,2020 the CBN in a circular to all banks directed that the minimum interest rate on savings deposit be reduced to a minimum of 10% of Monetary Policy Committee (MPR), or 1.25%, from the previous minimum of 30% of MPR, or 3.75%.
Currency outside the banking system, on a month-on-month basis grew by 10.59 percent from N2.26 trillion to the current levels, N2.5 trillion as at December 2020.
Ayodeji Ebo, an economist based in Lagos is of the view that there were a lot of withdrawals from banks by customers.
He believes that if the currency outside the banking system continues to rise, it would pose a threat to cashless policy and it would become difficult for the CBN to control. Ebo said the cashless policy of the CBN should be intensified.
The CBN introduced a new policy on cash-based transactions which stipulates a cash handling charge on daily cash withdrawals that exceed N500,000 for Individuals and N3,000,000 for Corporate bodies. The new policy on cash-based transactions (withdrawals) in banks, aims at reducing (not eliminating) the amount of physical cash (coins and notes) circulating in the economy, and encouraging more electronic-based transactions (payments for goods, services, transfers, etc.)
A note by the apec Bank explained that When the CBN changes the level of money supply, it does so through the control of the base money. Base money is made up of currency and coins outside the banking system plus the deposits of banks with the central bank. If the central bank perceives that there is too much money in circulation and prices are rising (or there is potential pressure for prices to rise), it may reduce money supply by reducing the base money.
To reduce the base money, the central bank sells financial securities to banks and the no-bank public so as to reduce the ability of deposit money banks to create new money.
The central bank can reduce the money supply by also raising the cash reserve deposits that banks are required to hold with the central bank. The larger the deposit balances on bank balance sheets, the higher their ability to create more money.
Central bank monetary policy, therefore, targets the growth in those deposit balances so as to control the expansion in money supply which could precipitate price distortions.
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