The plan by the Central Bank of Nigeria (CBN) to redesign, produce, and circulate new N200, N500, and N1,000 notes could push digital payment adoption in the country to new heights as India experienced after demonetisation in 2016.
The CBN’s plan, which has attracted serious objections even from the Minister of Finance, Zainab Ahmed, and members of the National Assembly, is targeted at controlling currency in circulation as well as curbing counterfeit currency and ransom payments to kidnappers and terrorists.
While those objectives may be valid, experts say a currency design will not totally eliminate the problems. A more practical benefit of a currency redesign is the incentive it provides for more Nigerians to embrace cashless payments.
Like Nigeria, India had similar objectives in 2016, when it abruptly announced a demonetisation project that mandated the withdrawal of the country’s two highest denomination currency notes (Rs 1,000 and Rs 500) from the market. The two denominations were 86 percent of the currency in circulation at the time in terms of value.
The Indian government said the plan would strike a significant blow against corruption and counterfeiting and would kick-start the country’s transition into a digital and cashless world.
The plan mostly backfired. For instance, where the Indian government had expected money hoarders to destroy their stashes rather than declare them, which would deliver a bottom-line bonanza to the country, the hoarders did otherwise. In 2018, the Reserve Bank of India (RBI), the country’s central bank, confirmed that 99.3 percent of the demonetised notes had been returned to the banks. This meant that almost nothing was destroyed.
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“Clearly, assumptions proved to be far from reality,” said analysts at PricewaterhouseCoopers (PwC) in a report.
Unlike the Indian government’s expectations, big tax evaders had not stashed away bundles of cash, but more likely held their money in real estate, gold, and Swiss bank accounts. Those who held cash found a way to take it back into the banking system. Ultimately, the RBI did not receive any windfall. Instead, the RBI incurred a huge cost in printing lower-denomination notes and managing the demonetisation exercise. The government made currency freely available again a year after.
Nevertheless, the entire demonetisation exercise was not a failure, as India’s cashless economy gained. Like Nigeria, India is a largely cash-driven economy. Prime Minister Narendra Modi, in a statement in November 2016, gave an indication of the dominance of cash.
“You may yourself have experienced when buying land or a house that apart from the amount paid by cheque, a large amount is demanded in cash. This creates problems for an honest person in buying property. The misuse of cash has led to an artificial increase in the cost of goods and services like houses, land, higher education, health care, and so on,” Modi said.
The PwC report showed that months after demonetisation, when cash became unavailable, there was a sharp rise in debit and credit card transactions. Indians who had never applied for a credit card before saw the need to do so. But the card operators were unable to print new cards quickly to meet growing demand. This created an opportunity for mobile wallet companies with simpler documentation and Know Your Customer requirements to step in to bridge the gap.
One of the major beneficiaries was Paytm (Pay through mobile), an Indian digital payments company founded in 2010. Following a sharp rise in demand for mobile wallets, Paytm announced in July 2018 that its active users had grown to over 100 million, with gross transactions totalling $50 billion in a year (with an average transaction value of $10). The company went ahead to list on the Indian Stock Exchange on November 18, 2021, after an initial public offering, which was the largest in India at the time. The company also saw a gross merchandise value growth of $110 billion for the fiscal year 2021-22.
There were other big players that entered the market as a result of the growing demand for mobile wallets that also reported strong growth. The country’s unified payment interface system also recorded significant growth, crossing 1 billion transactions in volume by October 2020.
However, PwC acknowledged that the growth in mobile wallets was also aided by the increased penetration of affordable smartphones, the growth of e-commerce, improvements in telecom and payment infrastructure, and the availability of multilingual wallets.
Digital payment adoption is growing in Nigeria mainly because of mobile device penetration and increasing broadband penetration. Experts say it is still less than 10 percent of transactions activities that take place in the country. Like India, millions of Nigerians love to make most transactions in cash, perpetuating the dominance of cash in the country.
In time past experts have called for more action towards pushing more Nigerians to adopt cashless transactions. The number of active bank accounts rose to 133.5 million while accounts that are linked to Bank Verification Number were 51.9 million. This leaves a large number of people outside the banking system. The payment industry in Nigeria mostly revolves around bank accounts.
Ola Brown, founder of Flying Doctors, who said the CBN policy is in line with efforts of curbing inflation, describes the timing of the currency redesign as “ambitious”, given the current state of things in the country. She noted that the United Kingdom, which has also undertaken the demonetisation, gave an extended period for the banks to be able to make sufficiency notes available to people who would be affected.
However, fintech companies with strong payment infrastructure may be on the verge of a windfall should the CBN go ahead with the plans.
