How Banks Can Reduce Cash Processing Cost, Boost Financial Inclusion With CBN eNaira Initiative

In October last year, Nigeria became the first African country to introduce a digital currency, following the launch of the Central Bank of Nigeria eNaira initiative by President Muhammadu Buhari. With the launch, Nigeria joined the Bahamas and the Eastern Caribbean Central Bank to become the first jurisdictions in the world to roll out national digital currencies.

A digital currency is a means of payment or money that exists in a purely electronic form. Central bank digital currencies are issued and regulated by the nation’s monetary authority, or central bank, and backed by the government. They are different from existing electronic central bank money, which is provided by central banks but can only be used by banks and selected financial institutions.

When financial institutions pay each other, they pay in reserves from accounts held with a central bank. Before central bank digital currencies, the only way consumers could use money that is a direct liability of a central bank was with physical cash. Existing digital retail payment from customers deposit account in banks are based on money that is the liability of the institution providing the account, not a central bank.

A central bank digital currency is a direct liability on that central bank and it is available to all households and businesses giving them access to electronic central bank money. It can be transferred or exchanged using technologies such as blockchain. Blockchain is a system of storing records of transactions across a network of computers.

When it was introduced last year, the CBN said that the digital currency, eNaira will be the digital form of the Naira and will be used just like cash. Specifically, the eNaira was projected to enhance financial inclusion, support poverty reduction, enable direct welfare disbursement to citizens, support a resilient payments ecosystem, improve availability and usability of central bank money, facilitate diaspora remittances, reduce the cost of processing cash, and reduce cost and improve efficiency of cross-border payment among others.

The introduction of the CBN eNaira is also aimed at enabling peer-to-peer payments, cutting out ‘middle men’ or the use of intermediaries, such as financial institutions.

Unlike the offline payment channels like agent networks, USSD, cards and near field communication technology, the eNaira is expected to give access to financial services to underserved and unbanked segments of the population.

Already, some of the banks in Nigeria are developing cold feet as a result of their inability to make huge revenue from the eNaira project.

This is because with the onboarding of an account to the eNaira wallet, making transaction through that channel would become the cheapest any bank customers could get from the banking system.

With almost no bank charges attached to the eNaira wallet, banks are currently deploying strategies to frustrate its acceptability. Experts say that innovative products and services built on the eNaira wallet would also enhance the participation of Nigerians in the digital economy and promote further development of a burgeoning Fintech ecosystem.

To achieve these set out objectives, they contend that the project must adopt a phased- approach with the first phase focusing on banked users.

As of December 2021, Nigeria had 122.3 million active bank customers. Compared to 2016, the number of bank customers have increased by over 60 million. The country has more than 200 million inhabitants, and the adult population is made up of more than half of the inhabitants as of 2021.

A Fellow of the Institute of Chartered Accountants of Nigeria, Mr. Afeez Balogun, told THE WHISTLER that a digital currency would allow the CBN to go above commercial banks and bring millions of financially excluded citizens into the real economy. In addition, he contend that the eNaira could allow the central bank to know precisely what is going on in the Nigerian economy.

“It’s difficult to understand which regions have the highest levels of economic activity when it’s cash. That can have profound implications for tax collection, as well as the effective implementation of monetary policy. Directly controlling the flow and the technical apparatus behind a digitized currency, would grant the Nigerian government many new levers to improve the efficiency of both,” Balogun added.

The second phase of the eNaira policy objective borders around financial inclusion. About 38.1 million of the country’s 106 million (18 years and above) adults or 36 per cent of Nigerian adults remain completely financially excluded. This is a shortfall by 16 percentage points from the desired target of a 20 percent exclusion rate.

About 64 per cent of the country’s adult population are financially included and the CBN hopes to use the eNaira initiative to increase the number before 2025.

In addition, the eNaira platform possesses an innovation layer for products and services to be built with the aim of enhancing participation in the digital economy and promoting further development of a burgeoning Fintech ecosystem.

The CBN Governor, Mr. Godwin Emefiele said since the launch of the initiative, the eNaira has reached 840,000 downloads, with about 270,000 active wallets comprising over 252,000 consumer wallets and 17,000 merchant wallets.

In addition, he stated that the volume and value of transactions on the platform have been remarkable, reaching above 200,000 and N4bn, respectively.

Emefiele noted that while the successes achieved so far including the global recognition of the CBN eNaira initiative, it must be acknowledged that the journey is iterative and therefore, requires cutting-edge innovation to sustain the vision and achieve the set-out policy objectives.

According to him, the eNaira was also developed to provide Nigerians with a cheap, safe and trusted means of payment.

He said, “Unlike the offline payments’ channels like agent networks, USSD, wearables, cards, and near field communication technology, the eNaira would give access to financial services to underserved and unbanked segments of the population.

“Innovative products and services built on the eNaira would enhance Nigerians’ participation in the digital economy and promote further development of a burgeoning Fintech ecosystem.

“To achieve these set-out objectives, the project adopted a phased- approach with the first phase focusing on banked users, while the policy objective of the second phase borders around financial inclusion.

“In addition, the eNaira platform possesses an innovation layer for products and services to be built with the aim of enhancing Nigerians’ participation in the digital economy and promoting further development of a burgeoning Fintech ecosystem.”

The CBN Deputy Governor, Economic Policy Directorate, Dr Kingsley Obiora said the increase in electronic banking transaction has made the apex bank to reduce the minting of the Naira.

The CBN spent the sum of N58.6bn to print 2.52 billion units of notes valued at N1.1trn in 2020. The currency printing cost, however, indicated a significant decrease year-on-year as it spent N75.5bn and N64.04bn in 2019 and 2018 respectively for the same purpose.

Obiora said that many major economies of the world have started reducing the use of cash as a form of business transactions, noting that in South Korea, 77 per cent of the people no longer use cash to conduct transactions, while 30 per cent of the population in Philippines don’t use cash as a medium of exchange.

In a bid to reduce the use of cash, the CBN had in September 2019 issued a circular that it would begin to charge transaction fees from bank customers making cash deposits and withdrawals.

Based on the circular, the charges will attract three per cent processing fees for withdrawals and two per cent processing fees for lodgments of amounts above N500,000 for individual accounts.

The CBN also stated that for corporate accounts, the Deposits Money Banks would charge five per cent processing fees for withdrawals and three per cent processing fee for lodgments of amounts above N3,000,000.

The CBN’s effort to discourage the use of cash as a medium of exchange has led to an explosion in electronic businesses as data from the apex bank revealed that the value of e-business had grown from N393bn in 2014 to about N2.4trn currently.

Obiora said, “In south Korea, 77 per cent no longer use cash to do payment, while in the Philippines it is 30 per cent. In Nigeria too, we are also seeing the same decline in the use of cash, the minting of currencies in the CBN has been reducing in the last couple of years.

“So, alongside this reduction in the use of cash has also been an explosion in electronic business and e-business and we have seen the value of e-business grow from N393bn in 2014 to about N2.4trn now.

“And so, if you look at this movement, you will realize that the central banks in the world are responding to yearnings of citizens which is why citizens in 96 per cent of Central banks in the world are either working on digital currencies or they have done so already.”

Speaking on how secure the eNaira wallet is, Andrew Nevin, Partner and Chief Economist, PricewaterhouseCoopers said that Nigerians who trust crypto-currencies that have no conventional market fundamentals should not worry about the security of the eNaira issued by the CBN.

Reacting to how prone the blockchain is to fraudsters, the PWC chief economist said, the technology on which the eNaira is built is solid and safe.

Nevin said, “The system is very secure. But I think the thing that is really interesting here is that Nigerians are leaders in using crypto assets and crypto- currencies which of course you are not sure of what the value is. What has happened particularly among young Nigerians is that they understand how this sort of technology works.

“I think Nigerians are going to find it very easy to use the eNaira. It is the same technology like the crypto asset but not some dubious asset we are not sure of the value, but is for the legal tender, for the Naira.”

He said the underline technologies are very solid and theft risk free.

“You can go online right now and you can look at every transaction that has ever been done in bitcoin, back to the beginning. Literarily, hundreds of thousands of crypto assets use the same underlying technology, no one has ever cracked Bitcoins. No one has ever cracked Ethereum. So, from the key point, I think it is very solid,” he added.