1ANALYSIS OF EXPECTED RISKS INHERENT IN CASHLESS ECONOMY IN NIGERIA SUNDAY C. NWITE Ph.D, ACII, ACIB, IRDI. SENIOR LECTURER DEPARTMENT OF BANKING AND FINANCE EBONYI STATE UNIVERSITY – ABAKALIKI
2 PHONE NO: 080-37743134 E-MAIL: firstname.lastname@example.org ABSTRACTThe analysis of expected risk inherent in cashless economy. Long before now,federal government of Nigeria has made known its desire to operate a cashlesseconomy free of paper money and coins so as to align with the financial systemand model transactions that are changing rapidly all over the world. Also, as aresult of exigency in reducing cost of cash management in the banking industry,the central bank of Nigeria (CBN) in collaboration with the Bankers committee isadopting policies to reduce the high usage of cash, moderate the cost of cashmanagement and encourage the use of electronic payment channels.To achieve inter-operability of local currency point of sales transaction (POS) nocard scheme, foreign or local, shall operate exclusive acquire agreement orcontact in Nigeria with effect from June 1, 2011. Any payment scheme,processor, switching company, service provider or bank that contravenes thispolicy may be suspended for a minimum of one (1) month by the CBN, thispolicy shall apply to both private and public sectors transactions. All financialinstitutions and loans, mortgage and microfinance banks shall complyaccordingly. Compliance with the policy shall be monitored by the banking
3supervision department and the other financial institutions supervisiondepartment of CBN with appropriate sanction applied to earring institutions.KEYWORDSAnalysis of expected risk, cashless economy, risk inherent, financial system,cash management, and hazard.Paper Type: Research Paper INTRODUCTION
4Banks will be more eager to do business and give the businessman in thecountry access to credit. With the age long conventional albatross of collateralsecurity end or is it possible to open the windows of other trendier forms ofaccessing credit in this new regime when most of the money in circulation willobviously be in banks will be a new business haven or will it give room to a newset of business challenges. From the previous of secured credit transactionanything that makes the repayment of money more assured other than thepromise by the borrower qualities as security. While some form of security is asine qua non in a lending transaction, realization. Security is often not costless,this is why a banker may be reluctant to give the access to credit if he has thelinking that the transaction is likely to fail. This reluctance to do business enduresin so far as it entails the borrower money or having power to take control of theproceeds of the transactions channel them to wherever he desires withoutrecourse to the lender. Where this likelihood, the lender is always on his toesand will always access the safety of investment before taken a plunge. He is noteven interested in realizing security at point as this is only a waste resort for himif he cannot help it. In a cashless economy, however, the banker is morecomfortable in a transaction as he is in a better position to enforce suchconditions as domiciling contract where need be. Where there principlesdiscouraging transactions on basis, the economic actors will tend to conform
5more to routing transaction though instruments as it will be more profitable to doso. Business transactions will also rely less on people’s integrity, the economywill move integrated and disclosed accounts will be charged directly with the ownbusiness obligation. Diversion of funds can also be easily checked.CONCEPT OF CASHLESS ECONOMYA cashless society is one where cash (money) is not carried about. As a resultpayment for goods and service are made through electronic means and by theuse of quasi money. In the developed economies broad money goes beyondcurrencies in circulation plus Demands Deposit Plus Time. Deposit(M2=CC+DD+TD) as it is in most developing economies. In a cashless society,broad money involves all these electronics means that facilitate payments forgoods and services.In Nigeria, efforts have been made to make the economy cashless. The moneylaundering prohibition Act (MLPA) of 2004 is a good step the right direction. MostNigerians do not know that the law prohibits payment or collection of cash whenbuying or selling any goods whose value exceeds five hundred thousand naira
6(N500000) and two million naira (2million) doe individuals and corporate bodiesrespectively. More so, the violation of this law attracts the fine not less thanN250,000 or two years imprisonment or but a fine and also imprisonment.HISTORICAL DEVELOPMENT OF CASHLESS ECONOMYLong before now, federal government of Nigeria has made known its desire tooperate a cashless economy free of paper money and coins so as to align withthe financial system and mode of transactions that are changing rapidly all overthe world.Also, as a result will help in reducing cost of cash management in the bankingindustry, the central bank of Nigeria (CBN) in collaboration with the banker’scommittee is adopting policies to reduces the high usage of cash moderate thecost of cash management and encourage the use of electronic paymentchannels.Starting from June 1, 2012, a daily cumulative limit of N150,000 and N1,000.000on free cash withdrawals and budgets by individual and corporate customersrespectively with deposit money banks (DMB) shall be imposed. Individual,corporate organizations that make cash transactions above the limits will becharged a penal fee of N100 thousand and N200/thousand respectively foramounts above the cumulative limits, third party cheques above N150,000 shallnot be eligible for encashment over the counter. If a bank allows third party
7cheque encashment, it shall be liable to a sanction of 10% of the face value ofthe cheque or N100, 000 which even is higher.Under this policy, banks will cease cash in transit lodgment services rendered tomerchants customers from June, 1, 2012. in this regard, customers couldengage the services of the CBN licensed cash movement to and from theirbanks a mutually agreed terms and conditions.REASONS FOR CASHLESSNESS IN NIGERIAThis policy and the eventual cashless economy will reduce snatching of moneyfrom customers at gun point, on the street and also reduce the incentive forrobbery and employee theft. The nation’s economy will witness less money incirculation as huge of quasi money is expected to be in the vault. There will bereduction in the cost as well as frequency of printing and minting of money by thecentral bank of Nigeria.Recently, CBN stated that it incurs about N34billion to print money annually. Useof electronic money which may be the outcome of the policy, will reduce costassociated with storage, transportation and security of cash.However, the policy will face the challenges of inadequate power supply,shortage or critical technological infrastructures, lack socio-cultural support andabsence of regulatory framework that are required to operate seamless andeffective electronic payment system in the country. As it is today, many people
8have lost confidence in the security of our electronic payment system as ATMsystem is fraught with frauds and irregularities to the detriment of unsuspectingcustomers.It is expected that the policy may lead to “explosion” of mobile financial servicescompanies in Nigeria, therefore creating more employment opportunities for ICTknowledge workers. Potentials of mobile banking in Nigeria. According to theenhancing financial dunovation and access (EFINAC) report, 67 percent ofNigeria’s population is unbanked and 78 percent of the nation’s rural populationis without a bank account, Nigeria’s unbanked population reflects Africa’saverage with only 20percent of African families having bank accounts, the mobilemoney remains the only and most available feasible means to provide massmarket alternative to get more people banked in Nigeria. The internet has only apenetration rate of 6 percent in a population of more than 140 million people butmobile technology is close to 50percent penetration with huge prospects forgrowth. Introduction of mobile financial service companies cash in transit atservicing companies and may affect those staff of the banks that are currentlyinvolved in cash management to either be redeployed to curb banking activitiesor downsized.CASHLESS ECONOMY IN ITS ERA OF POOR INFRASTRUCTUREDEVELOPMENT
9The Nigerian government as a developing nation is characterized by poorinfrastructural development like epileptic electric supply, poor road network inNigeria, no water, poor security and other basic amenities that make lifemeaningful.In Nigeria, where the banks are mostly concentrated in the urban cities and thefew banks that have branch officers are always threatened by high level of theft,because of the level of insecurity in Nigeria.There has been cases where one go to bank to collect or withdraw money and itwill be that there is no network or that the server is not working and all these doconstitute problems to the person who wants to make the withdrawal.In Nigeria as a nation where one can never be sure of power, what will be thefate of somebody who after purchases of some consumables went to collectmoney and the system developed problems.Again, the type of business we do in Nigeria has encourage holding of cashbecause it is difficult to create trust among Nigerians because of the level offraud.Further to this, by the level of insecurity in Nigeria, it is very obvious that onemay pick the money and arm robbers will snatch the same amount in the samespot and they do this by always shooting sporadically in the air, Nigeria by thelevel of our development is not ready for cashless economy.
10THE IMPLICATIONS OF CASHLESS ECONOMY IN NIGERIANECONOMIC DEVELOPMENTNigeria is a developing nation. The type of business done in Nigeria is yet todevelop to the standard we see in advanced countries.Recently, the CBN governor under the leadership of Sanusi Lamido Sanusiannounced the intending introduction of cashless economy where one canwithdraw N150, 000 and corporate body N1 million and any excess of that theperson concerned will pay penalty. The implications of these are;The people who are doing business will be delayed in carrying out their normalbusiness - It is also assumed that fraud will reduce, but it is obvious that ATM even encouraged more fraud. - It will also make people that have gotten some cash to withhold it, because of the fear that it will be difficult t get another one in the bank. - It will also make the people who engage in major transactions not to engage in their normal business. It will indirectly create unemployment for people who engage in business that needs a lot of cash. - The intention of mobilizing fund from the rural dwellers may not be achieved because they may keep the money so that they will not have
11 problems of sourcing for cash from the bank because of the ceiling by the apex bank on the maximum of withdrawal. We are also aware that most of money laundering done in the bank are connivance with bank managers, because of the bad moral hazard in Nigeria, the managers may arranged with the withdrawers and disadvantage other banks, so these has to be revisited for all the participating banks have level playing ground. Assuming that after purchases and there was no network from the cash point or that the server developed problems, what will happen.VARIOUS RISK INHERENT IN CASHLESS ECONOMYThe various risk inherent in a cashless economy may be positive or negative tobanks and customers during the course of business activities and financialtransactions.And as stated by the central bank of Nigeria CBN, the various risk inherent in acashless economy is that the policy will face the challenges of inadequate powersupply, shortage of critical technological infrastructure, lack socio culturalsupport and absence of regulatory framework that are required to operateseamless and effective electricity payment system in the country. As it is todaymany people have lost confidence in the security of an electronic payment
12system as ATM system is fraught with irregularities to the detriment ofunsuspecting customers.It also expected that the policy may lead to the “explosion” of mobile financialcompanies in Nigeria therefore creating more employment opportunities for ICTknowledge workers. It will also stop people for taking money to the bank whilekeeping this money in the house and this will lead to rubbery issues.VARIOUS WAYS OF MANAGING SUCH RISKSIn a cashless economy, the aim is to avoid the risk of holding excess fund andalso to reduce the risks of all these internet scams.But one thing is that if one if running from one risk, he is exposing himself toanother risk that is why it is always said that a man is a bundle of risk. Variousways of managing the risk of cashless economy are;Keeping some cash handy incase of any disappointment of the persons bankthrough network. Again, to have bank accounts with some other banks so that ifone is disappointed in one bank, one can easily go to another bank cash point.Again, one may have various accounts with different children of his to enablehim with draw more than the withdrawal limit.It is also very necessary to have different banks to facilitate multiple withdrawalfrom different banks.
13To the government, armed personnel should always be sent to guide banks andprotect both those depositing and those making withdrawals.THE EXPECTED ROLE OF THE GOVERNMENT IN MANAGINGSUCH RISKSThe banker is eager to finance the expirations of a newly elected legislator,however very much unwilling to finance a new small or medium scale enterprisesbecause the former is more viable. The simple truth is that most banks in Nigeriaare not really financing business enterprises as in their view, the attendant riskaccompanying is still too high. The cash carrying nature of the economy is alsoresponsible for large pool of money in the land the unbalanced incomedistribution in Nigeria is also a serious concern.Conversely in a mixed or cashless economy, a significant if not the entirepercent of the money must be routed through the conventional banking annuals.Hence the picture of the size and nature of the economy is clearer. Governmentpolicies easier to implement. Such international commercial crimes as moneylaundering can be easier to track and possibly ripped in the land, these are justsome of the reasons why the present central bank target of making Nigerianeconomy a cashless by the year 2015.Bank will more eager to do business and give the businessman in the countryaccess to credit. Will the age long conventional albatross of collateral society
14end or is it possible to open the windows of other trendier forms of accessingcredit in this new regime when most of the money in circulation will obviously bein banks? Will it be a new business haven or will it give room to a new set ofbusiness challenges.From the preview of secured credit transaction anything that makes therepayment money more assured other than the promise by the borrowerqualifies as security. While some form of security is a sine qua non in a lendingtransaction, realization security is often not costless. This is why a banker maybe reluctant go give the lead access to credit if he has the linking that thetransaction is likely to fail regardless of low attractive the venture may be.INSURANCE INDUSTRY AS A PUT OPTIONMan by creation is a bundle of risk. Risk is one of the institutions created by God;hence man cannot do without risk. It is because of the risk inherent in man’sactivities that brought about insurance. In the banking industry, staff work there,and it has been noticed and reported in most cases that there has been fraudfrom people using ATM, so to enable this work, the bank, individual need to takedifferent classes and types of insurance policies. For instance, individual who arestaff hold and play with people’s money, hence they have to take up dishonestyinsurance or fidelity insurance policies.
15Again, people may be taken to court by the attitude of the staff. Variously, henceneed to take up legal expenses insurance.Banks also give advise to people and their advise may not be in line with theapproved norms, hence need to take professional indemnity insurance, becausethe person is a staff of the banks and the bank concerned may be heldvicariously liable .Banks also carry cash about from place to the other, so they also need to takeup cash in transit insurance some risks also arises in cash in vault.It has also been noticed that attacked by arm robbers is a big problems to thebanking industry hence need to take theft insurance fire can occur to thebuilding, damaging people’s property, hence need fire insurance, accident,keyman insurance etc.IMPLICATIONS OF EFFECTIVE MANGEMENT OF RISK INHERENTIN CASHLESS ECONOMYMost business transactions in the country are still cash-based which meansbusinessmen would need to withdraw huge sums of money to purchase theirproduct or goods and pay for transportation to Lagos. For instance. the tradersin the hinterland from whom they buy their goods know only one form of paymentthat is except cash would thus be confronted with a bigger dilemma if this policyis eventually implemented as it is in interviews, with newsman, Ade Martins
16Odigie, president national union, banks, insurance and other financial institutionsemployees (NUBIFIA) warned against implementing such monetary policy inNigeria.According to him, current CBN’s management should be called to orderinstance, if you compel an entrepreneur who is transacting a daily business ofbuying and selling for about N400,000 to limited his cash lodgments andwithdrawal to N150,000, it means his operations would be reduced by 60percent. This unimaginable and should not be accepted in any form.Austin Airbornian, a medical equipment supplier also believe that the policywould cause some distortions in the economy in the economy in the short term.According to him, some customers always insist on cash payment before theywould release their goods. How do we make these changes in a short time?Airobamin however stated that CBN ought to have carried out sensitizationprogramme to prepare Nigerians for transition. Not everybody sees it as a wrongpolicy.Ogho Okiti Business Day’s Chief Economic believes that Sanusi is right onmatters limited amount of cash in circulation. Nigeria is one of the only few bigcountries where people move huge amounts of cash around. When cash is notin the banking system means banks cannot lend that cash that simply meansthat the cash is not working for the economy.
17The second thing is if Sanusi is right on first principle what are the things hewants to correct? But there are underlying principles; there is the issue ofefficiency, there issue of corruption and issue of waste or mismanagement.Okiti, however admitted that the policy is not sufficient for the implementation ofnew measure. For instance, he wants CBN as a matter of urgency to commenceother means of payment outside cash.PROBLEMS OF RISK MANAGEMENT IN CASHLESS ECONOMYThere are always two sides to a coin, to cashless economy. It will not beachieved in Nigeria and it will cause the following problems. 1. It will disturb business transactions in Nigeria. 2. It will frustrate business men from paying for their transactions incase of power failures. 3. There are poor infrastructural development in Nigeria, which we all know 4. Banks are concentrated in the urban cities and the level of insecurity in Nigeria is at a very rate. How can we improve our security over night. 5. Theft is very high in Nigeria and the level of the cashless economy work in Nigeria with those in the village. 6. If there is big organizations that engages in millions of business, it will be difficult for them.
18 7. It will create even more unemployment in Nigeria because most of the work will be done by machine. 8. It will encourage more hoarding of fund.PROSPECTS OF RISK MANAGEMENT IN CASHLESS ECONOMYThe prospects of risks management in a cashless economy is as follows: 1. More funds will be in the bank to use in transacting any business. 2. The major functions of bank will come back as fund mobilization 3. Nigerian can always know the money in the economy and control inflation 4. It will reduce theft and arm robbery which is very prevalent today in Nigerian economy. 5. It will help the government to plan because they can understand the general financial situation of the public. 6. All these politicians that steal our money will be exposed, if well managed. 7. It will even encourage the operation of due process among the people in power.
19 8. It will reduce capital flight in Nigeria which have paralyzed our economy and improved that of foreign countries. 9. It will place Nigeria in the world globally that has embraced cashless economy. All these are on one side. CONCLUSIONIts important to note that the nation is not very ripe for a stringent analysis ofexpected risk inherent in a cashless economy. As Nigerian economy isdominated by informal sector where use of banking services is highly limited. Asurvey by Gallop (A Notable research firm in US) revealed that about 38 percentof Nigerians have bank account while about 62 percent of Nigerian have norelationship with the banking industry.Another report by EFINA research company stated that as at the year 2010, only25.4 million Nigerians representing 30 percent adult population as members ofinformal sector may find the policy cumbersome at the beginning.Definitely, there will be decline or operating exposes per customer in the financesector. In the long run, there will be less traffic in the banking hall when manyNigerians would have adopted culture of e-transaction or keeping cash at home.By and large, human habits and socio cultural attachments to the traditional useof money in Africa may also be another hurdle that may be faced by the policyamongst many Nigerian. I wish to urge central bank of Nigeria (CBN) to
20encourage and intensify awareness among citizens especially amongst theinformal sector of the economy and put in place necessary measures to makethe dream for cash economy a success hence it is difficult for cashless economyto work now in Nigeria. RECOMMENDATIONRisk is also said to be the sugar and salt of life so since risk is inherent in allhuman activities and finance attracts more risk than others. It is recommendedthat 1. Banks should embrace various insurance policies. 2. Insurance companies also should educate banks on the importance of their policies. 3. Individuals and corporate organizations should also embrace insurance business and their services mostly in his era of cashless economy. 4. Security is the business of all, both the government, individual should do everything possible to provide adequate security in Nigeria. 5. Banks should also be made to have security to guide the customers that are doing such transactions 6. There should be adequate provision of infrastructures to facilitate cashless economy.
217. Enough training and education on people about the economy should be gradual to enable people understand and get acquainted with the practiced of cashless economy before making it compulsory.8. Adequate security provision in the rural areas and also providing infrastructures will be encouraged, with no more banks branching in the rural areas.