Not even the most gifted psychic could have outrageously predicted that the Nigerian Naira would widely be traded locally in the year 2023, just like foreign currencies are traded in the country. Some sources quoted that the Naira traded as high as one hundred and fifty per cent (150%) against itself! While trading in the local currency is statutorily prohibited, this occurrence was one of the unintended consequences of the Naira redesign policy introduced by the Federal Government of Nigeria at the end of 2022.
On 23 November 2022, the Nigerian President, Muhammadu Buhari, launched the newly redesigned N200, N500 and N1,000 currency notes. The old currency notes were supposed to cease to be legal tenders from 31 January 2023, providing a three-month window to allow currency deposits and swaps.
According to the Central Bank of Nigeria (CBN), the objectives of this policy were to mop up excess money in circulation, lower inflation, and curtail the activities of bandits and kidnappers in the country, amongst others. As of the beginning of Q4 of 2022, approximately N3.23 trillion was in circulation. However, only N500 billion was within the banking system indicating that about N2.7 trillion was being held outside the system.
In a move that some have argued to be deliberate, the CBN only circulated a limited amount of the new currency notes. This limited supply of new currency notes is noted to have caused severe disruptions for individuals and businesses. Added to this scenario was the inability of digital banking services to handle the spike in online transactions, leading to server breakdowns and customers being unable to access digital banking services.
To mitigate the hardship and challenges experienced by citizens, the Supreme Court recently extended the deadline for the validity of the old currency notes as legal tender to 31 December 2023. The ruling is expected to bring some respite as the CBN has now directed the Banks to begin to disburse the old currency notes to customers.
The economic challenges caused by the currency redesign policy have highlighted one of the key issues facing Nigeria's banking and financial system - the excessive reliance on physical cash for transaction purposes. According to the World Bank's 2021 Global Findex Database report, Nigeria is one of the top seven unbanked countries in the world, with an estimated 40% of the population not having a bank account. It is estimated that micro and small-scale enterprises account for a significant part of the unbanked population with the lowest access to banking and mobile money services and therefore heavily reliant on physical cash for business activities. These enterprises were most impacted by the policy.
The CBN has tried to address the significant reliance on physical cash for business transactions by introducing various initiatives aimed at scaling up financial inclusion and reducing the quantum of physical cash in circulation. These initiatives have included the introduction of withdrawal limits, processing fees for cash withdrawals and deposits exceeding the prescribed threshold, and the introduction of a regulatory framework for mobile payments. Unfortunately, these initiatives have not significantly met the desired objectives of aggressively promoting financial inclusion and a cashless economy.
In a bid to further accelerate progress towards financial inclusion, the CBN in 2020 introduced a regulation to enable the licensing and operations of Payment Service Banks (PSBs) in Nigeria. The PSB framework, modelled after India's payment bank system, is aimed at promoting financial inclusion and improving access to banking services for low-income and rural areas. The PSBs are expected to provide limited small-scale financial services to small businesses such as accepting deposits, savings and remittances but are prohibited from providing certain services like granting loans and advances and accepting foreign currency deposits.
Currently, four subsidiaries of the major mobile network operators (MNOs) in Nigeria and a financial technology company have obtained a PSB license from the CBN and have established PSBs in the country. A PSB is a simplified version of a traditional bank. A subscriber can open a PSB account by downloading the PSB App from the application store, or use their telephone number, or by dialling a designated Unstructured Supplementary Service Data (USSD) code. The subscriber can fund their PSB account by transferring from their traditional bank account, or by payment of cash to a designated PSB agent. Transfer of funds can also be made between two PSB account holders, and from a PSB account to a traditional bank account.
According to the Reserve Bank of India, India's financial inclusion index, based on three parameters: access, usage and equality, improved to 56.4% in 2022 from 43.4% in 2017 with the introduction of payment banks. The payment banks have achieved success by leveraging existing distribution networks and experience in downstream operations to serve customers in rural and underserved areas. Similarly, the Communications Commission of Kenya reported in September 2021 that 63% of Kenya's population was financially included with the aid of the mobile money system- M-Pesa.
Kenya's mobile money system is slightly different from India's payment bank system and Nigeria's PSB. Kenya's M-Pesa is managed and led by Safaricom, the major MNO in Kenya and is accessible exclusively to its own subscribers. India operates a bank-led model while Nigeria adopts a hybrid of the bank-led and MNO-led models. The bank-led model allows financial services to be provided to all mobile phone users with the network that exists within the banks.
Despite all the positive achievements, PSBs are prone to pitfalls like high operational costs and low profitability which may impact their ability to thrive. The PSBs currently have limited sources of income as they are prohibited from offering certain services like lending and insurance services. Additionally, each PSB is expected to have at least 25% physical presence in rural areas, which would require considerable investment in physical and digital infrastructure. In India, three payment banks forfeited their license, and two shut down operations due to high operational expenditure, which was reported to be an astounding 125% of total income, more than four times higher than that of traditional banks.
Evidently, the PSBs have a huge potential to serve as a masterstroke for financial inclusion and a cashless system if the drawbacks highlighted above are properly managed. For instance, the CBN may need to review the current portfolio of permissible activities of the PSBs. An option may be to extend the permissible services to cover services like microloans to customers. India's payment banks from which Nigeria heavily borrows have adopted adjacent revenue-generating activities in addition to their primary activities after years of reporting operational losses.
The PSBs also need to develop strategies around delivering services through economies of scale and increase their efforts to sensitize the public on the existence and benefits of PSBs, especially in rural areas. For instance, some payment banks have achieved profitability through aggressive customer acquisition and transaction revenues. Therefore, with the right management of cost profiles, investment strategies and government regulatory support, there is a potential for the PSBs to thrive commercially and achieve Nigeria's financial inclusion objectives.
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