In most advanced economies such as America, the UK, Europe, and parts of Asia, the usage of paper currency in business transactions is often viewed with surprise. When it does occur, it is typically in smaller quantities compared to developing economies, where transacting large amounts in paper currency remains common practice.
Conducting business with paper currency as opposed to digital currency has significant disadvantages, such as being prone to theft and highly susceptible to financial fraud. Additionally, paper currency can be easily destroyed and is vulnerable to inflationary pressures that diminish the investment purchasing power of domestic currencies.
“Other challenges include the high cost of minting new currency, skyrocketing handling charges, and security threats to the holder.”
Paper currency is also highly flammable, posing a great risk to the environment and human safety. Other challenges include the high cost of minting new currency, skyrocketing handling charges, and security threats to the holder. Furthermore, it lacks the portability and convenience of digital currency.
Financial fraud: A menace
Financial fraud has become a pervasive issue, affecting individuals, organizations, workplaces, and professional associations. It is an ill wind that benefits no one and leaves widespread damage in its wake. Recently, a massive financial fraud was reported at one of Nigeria’s banking institutions, with a grievous impact on its financial stability.
Definition of financial fraud
The Oxford Advanced Learner’s Dictionary defines financial fraud as “wrongful or criminal deception intended to result in financial or personal gain.” Ayozie (2016) describes it as a deliberate deception carried out to obtain unfair or unlawful financial benefits. Financial fraud involves criminal motives to gain illegal monetary advantages and can manifest as fraudulent financial reporting or misappropriation of financial assets.
Read also: Addressing the alarming surge in financial fraud in Nigeria
Financial fraud risk factors
Risk factors for financial fraud include events, conditions, or circumstances that incentivize or provide opportunities for fraudulent activities. Common scenarios include:
-Weak or non-existent internal control systems.
-Absence of internal audit functions.
-Poor working conditions.
-High turnover of key account staff.
-Inadequate working capital due to declining profitability.
-Dominance of management by one person or a small group.
-Transactions involving related parties.
Impact of financial fraud
The consequences of financial fraud are disastrous, affecting individuals, organizations, and society. The negative implications include financial losses, emotional and psychological stress, eroded public trust, and damaged reputations.
Measures to curb financial fraud
To mitigate financial fraud and money laundering, financial practitioners advocate measures such as the NOCLAR principle (Non-Compliance with Laws and Regulations), whistleblowing policies, forensic audits, and the introduction of digital currency platforms.
Digital currency: A remedy
Digital currency is an electronic form of fiat currency used to pay for goods and services by individuals and organizations with digital wallets. In Nigeria, the digital currency platform, referred to as the e-Naira, was introduced on October 25, 2021, to complement physical currency. Digital currency encompasses cryptocurrencies, e-currency, and digital tokens.
The role of the government
The Federal Government of Nigeria (FGN), through the Central Bank of Nigeria (CBN), recently announced plans to release e-Naira version 2.0, touting it as a faster and cheaper payment system. The CBN highlighted its potential to reduce financial fraud and fraudulent activities, as stated in its publication, “Monetary, Credit, Foreign Trade, and Exchange Policy Guidelines for Fiscal Years 2024–2025.”
Applications
Digital currency can be used for various purposes, including purchasing airtime, paying utility bills, facilitating peer-to-peer transactions, organizational transfers, and international trade.
Challenges
Despite its benefits, digital currency faces challenges such as regulatory compliance issues, susceptibility to scams, unstable pricing, network fluctuations, human resistance to innovation, and the need for specialized IT platforms.
Benefits
Digital currency offers numerous advantages, including:
-Ease of accessibility and faster transactions.
-Reduced handling and transaction costs.
-Enhanced payment efficiency and financial inclusion.
-Reduced risk of theft and fraud.
-Promoted financial stability and transparency.
-Environmental benefits by reducing reliance on physical currency.
Digital currency has the potential to act as a buffer for the growing digital economy and serve as an effective tool in curbing financial fraud. With proper implementation and adaptation, it can drive financial transparency, efficiency, and stability, paving the way for a more secure and inclusive financial system.
Kingsley Ndubueze Ayozie, KJW, MSc (Finance) Lagos, MBA, BSc, ACSI (UK), FCTI, FCAFinance Enthusiast and Chartered Accountant, writes from Lagos
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