International Journal of Financial Economics Vol. 3, No. 4, 2014, 192-198

Cashless Policy and Economic Growth: Beyond Theories, Empiricism to Realism

Obademi Olalekan Emmanuel 1 Abstract This paper focuses on reforms in the payment system in Nigeria in what is popularly referred to as the cashless policy and the inherent advantages of the policy with a background knowledge and reference to studies on other economies that have embraced the policy. An attempt was made to establish a probable relationship between economic growth and cashless policy via other variables like the doing business index, foreign direct investment that are influenced by the policy. Sequel to the review of the impact of the policy on several economies with conflicting outcomes, the need to ask questions on how the supply and demand for money will be influenced by the policy, what will happen to inflation, how will real sector productivity be enhanced and how will investment inflow be impacted are major issues that must be addressed. Also the problems of infrastructure deficit, ignorance and apathy, insufficient skilled manpower, erratic power supply and insufficient identity management framework must be overcome. Adequate regulatory legislation that will be globally acceptable was also recommended. Keywords: Cashless Policy B26, Economic Growth M22, Doing Business Index E02, Foreign Investment E20 1. Introduction The banking sector is often seen as a critical sector to the wellbeing of any economy due to its intermediation role. According to Hugh (1996) the contribution of the financial sector of which banks are dominant players to development is a function of the quality and quantity of its services and the efficiency with which the services are being provided. The sector is expected to facilitate the flow of financial services that has the capacity to induce a supply-led policy that advances production in the real sector. Consequently, the focus of this paper is on one of the recent happenings in the sector as it concerns the reform of the payment system in what has been termed the cashless policy geared towards moving Nigeria into the class of cashless economies. The issue of interest in this regard is whether reforming the payment system will significantly and positively have an impact on economic growth. By way of introduction, a cashless economy is that in which the payment system is done mainly through many other means apart from cash i.e. though cash will still be in use the payment for goods and services are carried out through electronic means. It simply means an economy where cash as a means of payment is less hence other means of paying for goods and services such as mobile money, internet banking, point of sale payment mode, inter-bank transfers, the use of automated or automatic teller machines and the use of cheques etc becomes dominant. Though many countries in the Western World have adopted cashless policy for so long for example, while making reference to the United States of America, Humphrey (2004) stated that since the 1980s, the use of cash as a means of transaction especially in the purchase of goods has declined. In most developing countries in Africa, this has not been the case. In Nigeria, an attempt was made by the Central Bank of Nigeria at reforming the payment system with a view to turn around the business environment from the 1

Department of Finance University of Lagos Nigeria.

© 2014 Research Academy of Social Sciences http://www.rassweb.com

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International Journal of Financial Economics prevalence of cash to other forms of payment arrangement that are less cumbersome, faster and efficient thereby introducing the cashless policy. The policy took effect in Lagos as a pilot scheme on 1st January, 2012 and was expected to challenge and change the existing dynamics of the business environment. It is needful to state that the CBN saw the cashless policy as imperative for so many reasons hereby stated in my own words among which are: 1. The high cost of managing cash within the banking system as it concern cash movement, printing, sorting, keeping, insurance etc. 2. The cumbersome nature of cash oriented transactions. 3. The high disposition to crime of cash dominated transactions. 4. That the dominance of cash impairs monetary policy targets and this has a direct impact on economic growth. 5. The desire to broaden the options for making payments. 6. To enhance transparency in the payment system and as such make it easier for financial transactions to be tracked. 7. The need to improve Nigeria’s image as a country that performs even the activities of government business in an automated environment. At inception during the pilot stage in Lagos according to the pronouncement of the Central Bank of Nigeria (CBN), cash withdrawal limits for individuals was put at N150,000.00 and N1m for corporate account holders in a day but this was later increased to N500,000.00 and N3m respectively following a review of the policy. Also bank charges for withdrawals on amounts above the set limits was reduced from 10% to 3% for individual account holders and from 20% to 5% for corporate account holders. In respect of the processing fees for cash lodgement, there was a reduction from 10% to 2% for individuals and from 20% to 3% for corporate account holders. Also, third party cheques above N150,000.00 was not to be paid over the counter with effect from 30th March, 2012 as values for such cheques shall be received through the clearing house and banks were to discontinue cash-in-transit lodgement services rendered to merchant customers from the date of the commencement of the policy. Prior to introduction of the cashless policy in Nigeria in year 2012, about 85% of customer transaction activities in Nigeria are cash-related (CBN/NIBSS, 2012). As indicated in Figure A below, cash transactions is the most dominant means of transaction in the Nigerian economy while other modes of payment such as cheque, Point of Sale (POS) Terminals and Web transfers represents only 15% of the whole lot.

Figure A: Transaction Volume Source: CBN, 2011 193

O. O. Emmanuel A further break down of transaction volume below as indicated in Figure B, show that ATM withdrawals account for highest transaction volume. This is closely followed by Over-the-Counter (OTC) withdrawals.

Figure B: Payment Channels Analysis Source: CBN 2011

There is no doubt that the direct cost of cash to the financial system is very high. During the compilation of actual data by the CBN and 17 banks in the FSI data extrapolated for 24 Banks, the information provided in Figure C were gathered. The information gathered indicated that the cost of cash transactions to the financial system was N230 Billion in year 2009. These costs exclude other cost items such as bank cash infrastructure costs and employee costs attributable to cash logistics.

Figure C: Direct Cost of Cash to the Financial System in 2009 Source: CBN, 2011

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International Journal of Financial Economics The projection done in Figure D below further reflects a growth in the cost of cash to the financial system in the year 2012.

Figure D: A 5-Year Projection of the Direct Cost of Cash to the Financial System (2008-2012) Source: CBN, 2011

The obvious from this is that this trend is not sustainable and efforts should be made to reverse it 2. Payment System and Economic Growth There is the popular view that there is a causal link between the payment system and economic growth. According to Nwude (2012) the payment system plays a very crucial role in any economy being the channel through which financial resources flow from one segment of the economy to the other and therefore represents the major foundation of the modern market economy. An efficient payment system guarantees speedy and efficient transaction. Efficiency as a cost concept then presupposes that banks will have more money to lend to the real sector and the interest rate is expected to be lower than what it has been hitherto consequent upon the adoption of cashless transaction means. If the above assertion is true, it can then be conveniently argued that the difference in economic growth rate between countries and even among states within the same country can be linked to how efficient the payment system is hence countries are rated on the Doing Business Index (DBI) with a special consideration to the ease of starting a business, ease of getting credit, ease of trading across borders as well as ease of paying taxes which are directly linked to the payment system and unfortunately Nigeria has been ranking low on this index for a long time. Precisely, as at year 2012, Nigeria ranked 131 out of 185 countries in the DBI ranking and the outlook in year 2013 is not likely to change as posited by the World Bank. Business organizations especially in private businesses are the drivers of growth in most free economies that have experienced enviable growth. In most developed nations, goods and services are paid for through non-cash platforms such as Point of Sale devices, automatic teller machines, electronic transfer etc. The flow of foreign direct investment (FDI) is influenced by the perception of foreign investors based on DBI and since there is a link between FDI and economic growth while FDI is influenced by DBI to which the payment system is a major consideration, then an empirical causality can be investigated and established. 195

O. O. Emmanuel A simple model as: ECG =f(FDI)......................................................(1) FDI = f(DBI).......................................................(2) ECG= f(DBI(FDI)..................................................(3) In addition, it will sound logical that financial inclusion that can translate into inclusive growth through efficient payment for agricultural inputs by rural dwellers and prompt delivery of inputs can scale up the productivity of the agricultural sector through the adoption of the cashless policy even as it is hoped that the delivery of production credit can be enhanced even as hitherto that form of credit has been a major challenge for farmers. Another, possibility is that in the light of the global competition for capital, capital flow into countries that can help fill the resource or investment-savings gap will tend towards economies with efficient payment systems. If all the advantages derivable from a cashless policy as stated above subsist in an economy, it can then be said that adopting the policy is advantageous. It is however important to say that these aforementioned position are assumptions and which may not always fall through hence there is the need to gradually move away from absolute theorism, absolute empiricism to moderate realism as there have been conflicting results of the impact of the adoption of cashless policy in different countries. Few studies have been carried out on the implication of a cashless payment system on economic growth especially in emerging economies. A study by Zandi and Singh (2010) on the impact of electronic payment on economic growth reported on Moody’s Economy.com affirmed that a shift from paper to electronic payment by the use of credit and debit cards stimulate economic growth by looking at the impact of increased card transaction on consumption in fifty-one countries over a period of six years. Also the study of Humphprey and Berger (1990) attempted an estimate of private and social costs of different payment instruments i.e. cash, cheques, point of sale, credit cards, money orders, automated clearing house, automatic teller machines, wire transfers, travellers cheques and found that from a social cost perspective, cash is the cheapest payment instrument followed by automated clearing house and then automatic teller machine. However, from a private perspective, cheques as a means of payment was the cheapest, followed by cash, automated clearing house and then point of sale. Gresvik and Owre (2002) in their study on the cost implication of cashless banking in Norway found that payment cards used for withdrawals at ATMs cost far more due to the cost of replenishment, maintenance and security while the use of cheques for cash withdrawals was three times more than cash withdrawals at ATMs. Another study by Granwe, Buyst and Rinaldi (2000) on the cost of payment card in Belgium and Iceland which took into consideration the fact that Iceland has a very low cash usage as against Belgium with high cash usage, the study took a look at cash production and distribution costs incurred by their Central Bank and the subsequent revenue realised through interest forgone on cash circulation as well as the cost incurred by companies, banks, card holders and merchants. They concluded that a card based system is really more efficient than a cash-based system. Based on their study, the reason adduced for this are that diseconomies of scale in cash supply rises as cards displace cash while economies of scale improve for cards. Also they said the displacement caused a lowering of cash usage for smaller transactions because smaller transactions must cover the fixed cost of the cash system. With recourse to the aforementioned findings, it is clear that the results are conflicting but the issue now is what must we do to harness the benefits of the cashless policy? 3. Benefiting From the Cashless Policy: Beyond Assumptions to Reality It is incontrovertible that the Central Bank Management Team mean well for the country but the issue is that efforts at maximising the potential benefits of a cashless economy must be taken beyond the realm of sentiments and paper work to reality even in the light of results of some studies that does affirm a positive 196

International Journal of Financial Economics relationship between the operation of a cashless policy and economic growth as earlier stated. Odior and Banuso (2012) posited that though cashless banking leads to cost savings in the financial sector, it does not necessarily translate to real sector growth. If the policy will be of benefit to the economy, the question we should be asking are: a. How will the supply and demand for money be influenced by the policy. b. What will happen to inflation? c. How will the policy help in scaling up national productivity with emphasis on the performance of the real sector? d. How well will the policy advance the desire to attract more foreign direct investment?. It makes some sense to say that inflation may be reduced in the short-run through this policy from the background of the understanding of the likely reduction in the velocity of money and not necessarily money stock. As such the approach of inflation-targeting to address price movements can be more workable in the short-run. It is a short-run issue because achieving relative price stability in any economy has to do more with expanding output or production and not merely indirectly through the control of the supply of money through open market operations and other means. As it concern the potential of the policy to enhance foreign direct investment, adequate legislation that can be accepted globally has to be in place while credit and debit cards issued by institutions within Nigeria must be such that can be used for transactions in other parts of the world without inhibition. 4.0 How To Make The Cashless Policy Work Successfully In Nigeria. The Central Bank of Nigeria on the 1st of January announced the postponement of the planned introduction of the cashless policy to other parts of the country. This decision is not unconnected with the challenges faced by the policy at the pilot stage, it then means that for the policy to be fully operational and workable the identified problems must be solved. There is no gainsaying that some of these problems include: a. Ignorance, illiteracy and apathy: majority of Nigerians are still ignorant of what benefits the policy will be to the economy and to them in particular having been used to cash dominated system of transaction. Consequently, necessary advocacy has to be done on a national scale by the CBN and other business organizations b. Insufficient financial infrastructure: till date even in Lagos the penetration of ATM, mobile banking, POS, internet banking is still considerably low. The unavailability of POS and ATM machines in several locations where they are needed is still a major problem. c. Problem of erratic power supply: in many parts of Nigeria including the Lagos, power supply is still erratic despite the marginal increase in national power generation. The obvious is that a cashless policy which basically is an advance form of electronic payment system cannot thrive where electricity supply is inconsistent. d. Inadequate identity management framework: for the policy to be successful, the issue of security as it concern identity management is germane so as to forestall electronic fraud that can undermine the whole idea. e. Insufficient skilled manpower to drive the process: hitherto, the number of people that can use the different electronic facilities without third party assistance is still few even within financial institutions and business establishments. 4. Conclusion and Recommendation There is ample evidence on the potential benefits of the cashless policy to economic growth from both institutional and individual perspectives as it concern the ease and cost of access to financial services, 197

O. O. Emmanuel expansion of output, enhancement of international trade but for such benefits to become actual deliverables, the challenges earlier discussed must be addressed while regulatory authorities must also pay attention to the activities of service providers to forestall spurious charges that have bedevilled the Nigerian banking sector in recent years. Considering the recent pronouncement of the Central Bank on the adoption of the policy nationally, it is recommended that the policy should be fine-tuned and proper sensitization done in both urban and rural areas to get the Nigerian people to embrace and adopt the policy in practical terms in the daily operations. References Central Bank of Nigeria Website “New Cash Policy Presentation For The Interactive Engagement With Stakeholders on Cashless Lagos” www.cbn.gov.ng November (2011) Central Bank of Nigeria “Further Clarifications on Cash-Less Lagos”

www. cenbank.org/cashless (2012)

P. De Grauwe, ,E. Buyst, and L. Rinaldi, “The Costs of Cash and Cards Compared: The Case of Iceland and Belgium” (2000) O. Gresvik, and G. Owre, “Banks Costs and Income in the Payment Systems in 2001” Norges Bank Economic Bulletin. (2002) E. Hugh, (1996) Banking Regulation, Its Purpose, Implementation and Effects: Public Affairs Department, Federal Reserve Bank of Kansas City, USA. (1996) D.B Humphrey, and A.N Berger, “Market Failure and Resource Use: Economic Incentives to Use Different Payment Systems” New York, Monograph Series in Finance and Economics (1990) D.B Humphrey “Replacement of Cash by Cards in U.S Consumer Payments. Journal of Economics and Business, 56, 211-225 (2004) Nigeria Inter-Bank Settlement Scheme Report (2012) E.C. Nwude, “Benefits, Challenges and Prospects of a Cashless Economy” The Nigerian Banker. JanuaryMarch, 2012 pp5-10 E.S. Odior, and F.B Banuso “Cashless Banking in Nigeria: Challenges, Benefits and Policy Implications” European Scientific Journal Vol 8 No 12 (2012) M. Zandi, and V. Singh “The Impact of Electronic Payments on Economic Growth” Moody’s Analytics, March (2010)

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