The botched implementation of the Central Bank of Nigeria’s (CBN) demonetisation policy has eroded the trust and confidence that many customers have in the country’s banking system.
Analysts say although the distrust could be temporary, it could slow Nigeria’s financial inclusion drive towards increasing the inclusion rate to 95 percent in 2024 from 64 percent in 2020.
“The confidence of people in the banking system has been affected because when they get cash now, it does not make sense for them go to deposit it back to the banks when they are not guaranteed that they will get it immediately,” Muda Yusuf, chief executive officer of Centre for the Promotion of Private Enterprise, said.
He said this could lead to more money staying outside the banking system but in a short term till confidence is restored. “The only way to restore it is for the CBN to saturate the banks with surplus cash so that people will have the confidence to be able to bring it back to the banks.”
Moses Ojo, a Lagos-based economic analyst, added that if the level of liquidity meets the needs of the people, especially the vulnerable ones, market women and artisans, the confidence that has been impaired would be restored over time into the financial system.
“By the time the apex bank pumps enough money into the system and there is no withdrawal limit, the confidence will be restored and gradually people may now want to keep their money in the banks and be integrated back into the system,” he said.
Since the beginning of the year, Nigerians have been buffeted by a chronic shortage of cash occasioned by the naira redesign policy and the withdrawal limits.
Bank customers who needed cash to pay for transport fares, and other urgent needs could not find money to withdraw from the Automated Teller Machines (ATMs) and over the counter, while a few ATMs that were dispensing cash were crowded.
Some banks’ ATMs only dispense N1,000 per transaction, with N35 charges for other banks’ ATM cards. Point of Sales operators charge N1,000-N2,000 to dispense N10,000-N20,000.
These developments pushed Nigerians to resort to unconventional measures to secure cash such as sleeping at the ATM terminals, running half-naked in banking halls, fighting bank officials, protesting and destroying properties at the banks.
The Nigerian Economic Summit Group said in a recent report that the CBN’s naira redesign policy could generate distrust in the country’s financial system if the naira crisis lingers.
“With nearly 40 percent of the adult population being excluded from the financial system, the challenges emanating from the cash crunch following the redesign will amplify the trust deficit in the financial system,” it said.
It added that many more people will resort to stacking up cash. “This will be against the cashless policy agenda of the CBN and will defeat the essence of the policy.”
Data from the CBN show that the currency in circulation dropped to the lowest level in 14 years and five months to N982.1 billion in February 2023 from N1.39 trillion in the previous month.
Last month, President Muhammadu Buhari approved the continued use of the old N200 note as legal tender till April 10 in a bid to reduce the hardships of the people.
However, some state governments sued the Federal Government over the naira redesign policy, and the Supreme Court, in its ruling on March 3, extended the legal tender status of the old N200, N500, and N1,000 notes to December 31, 2023.
Ten days later, the CBN ordered commercial banks to comply with the court verdict by dispensing the old notes to their customers.
Tunde Nejo, a cab driver, told BusinessDay that even though the CBN had extended the deadline, he is still keeping his money at home because “I don’t trust them to keep to the deadline”.
“I have withdrawn all my money from the bank because I cannot go through the stress of getting cash again,” he added.
Stephen, a Lagos-based banker, said there have been more withdrawals than deposits over the last few days.
“There has been more cash going out than coming in because people have been denied cash for so long. So, a lot of them will go and withdraw as much as they can so that they can have access to their cash,” he said.
Babatunde Akin-Moses, chief executive officer and co-founder at Sycamore, said the distrust will be temporary because electronic payments have not been too reliable with the banks, combined with the cash squeeze. “That said the trust in alternative fintech platforms has certainly increased as transactions have been going through on those platforms.”
In 2012, Nigeria developed its first financial inclusion strategy with the target of bringing up to 80 percent of its population into the financial system by 2020, according to Enhancing Financial Innovation and Access, a financial sector development organisation.
Read also: Why bank transfers buckled under naira scarcity pressure
The country failed to meet the target as financial inclusion grew to 64.1 percent in 2020 from 63.2 percent in 2018. Although the inclusion rate dropped marginally from 36.8 percent in 2018 to 35.9 percent in 2020, the excluded adult population of 38.1 million in 2020 was higher than the 36.6 million in 2018, meaning 1.5 million adults fell into the exclusion circle in the last two years to 2020.
The World Bank’s 2021 global findex report also showed that Nigeria’s banked population increased by 15.6 percentage points to 45.3 percent. This implies that almost 56 percent of Nigerians are unbanked.
Accessibility and cost are the low-hanging fruits that must be addressed to get close to the target or a step closer than a step backward, said Temitope Omosuyi, investment strategy manager at Afrinvest Limited.
“People must be able to access financial institutions or their services easily. In rural areas, it is more difficult to get ATMs around compared to urban cities. So this must be improved on,” he said.
On the cost of transaction, Omosuyi said the CBN and banks should work aggressively and consciously with their agents to reduce cost of transactions so as to drive financial inclusion.“Apart from reducing cost of transactions, reducing the time it takes for transactions to be executed is also paramount.”
Abiola Gbemisola, a consumer goods analyst at FBNQuest added that the CBN should increase its sensitisation efforts by showing people the benefits of banking, especially for those that are not captured in the system and also provide loans that are targeted at the masses.
“For the mobile money companies, this is an opportunity for the CBN to support their growth by relaxing some of the rules placed on them so that they can thrive better,” he said.