EFFECT OF CASHLESS POLICY ON THE NIGERIAN ECONOMY

BACKGROUND OF THE STUDY: The recent evolution of technology for financial transactions poses interesting questions for policy makers and financial institutions regarding the suitability of current institutional arrangements and availability of instruments to guarantee financial stability, efficiency and effectiveness of monetary policy. Over the course of history, different forms of payment systems have been in existence. Initially, ‘trade by barter’ was common; however, the problems of barter such as the double coincidence of wants necessitated the introduction of various forms of money (Swartz et al, 2004). Nevertheless, analysts have been predicting the complete demise of study instruments and the emergence of potentially superior substitute for cash or monetary exchanges, that is, ‘cashless society’.

Unlike the barter system which involves the exchange of one good for another, a cashless environment refers to one in which transactions are carried out with minimal exchange of physical cash. It implies that the payment instrument is not physical cash but other instruments such as cheques, electronic transfers, e-payment and so on. The rapid advancement in electronic distribution channels has produced tremendous changes in the financial industry in recent years, with an increasing rate of change in technology, competition among players and consumer needs as argued (Hughes, 2001). Since Nigeria‘s Independence in 1960, there have been different governments, constitutional reforms, change in economic policies and banking reforms, mainly directed at enhancing social welfare and achieving developmental goals but there has been no substantial positive change in Nigeria‘s Human Development Indicators. This also calls to question the effectiveness of the cash-less policy of the Central Bank of Nigeria (CBN). At the end of the 1980s, the use of cash for purchasing consumption goods in the US has constantly declined (Humphrey, 2004). Hence, most LDCs (Less Developed Countries) like Nigeria are on the transition from a pure cash economy to a cash-less ‘one for developmental purposes’. Little wonder why the Central Bank of Nigeria recently introduced a cashless policy. Thus, as part of its regulatory functions, the Central Bank of Nigeria, issued a circular dated April 20, 2011 in which it conveyed to operators and the banking public its decision to introduce a cash less banking policy into the Nigerian financial system with effect from January 1, 2012 using Lagos as the pilot programme that is the policy kick-starts from Lagos and eventually all over the other states in the nation. To enforce the implementation, the Central Bank had, in a circular April last year, declared that “commencing from June 1, 2012, a daily cumulative limit of N150,000 and N1,000,000 on free cash withdrawals and lodgements by individuals and corporate customers respectively with deposits money banks shall be imposed.” Following public outcry, the daily cash withdrawal and deposit limit was raised to N500,000 and from N1,000,000 to N3,000,000 for corporate accounts.

According to CBN, the new cashless policy was introduced for a number of key reasons, including, To drive development and modernization of our payment system in line with Nigeria‘s vision 2020 goal of being amongst the top 20 economies by the year 2020. An efficient and modern payment system is positively correlated with economic development, and is a key enabler for economic growth. To reduce the cost of banking services (including cost of credit) and drive financial inclusion by providing more efficient transaction options and greater reach and to improve the effectiveness of monetary policy in managing inflation and driving economic growth. In addition, the cash policy aims to curb some of the negative consequences associated with the high usage of physical cash in the economy, including: high cost of cash: high risk of using cash, high subsidy, informal economy and inefficiency & corruption (CBN, Website, 2011). Regarding this context, the study seeks examine the cashless economy by exploring its impact on the Nigerian economy.