Opportunities for microfinance banks in CBN’s Naira redesign 

A few days ago, the CBN governor, Godwin Emefiele, announced redesigning some Naira denominations. More specifically N200, N500 and N1000. The Naira is Nigeria’s currency, launched in 1973 by Alhaji Shehu Shagari as minister of finance. Apart from the ones penned for redesign, other denominations of Naira in circulation include N5, N10, N20, N50 and N100. The last time it was redesigned was in 1984 under the military government of Major General Muhammadu Buhari, who also happens to be the current civilian president of Nigeria. 

Currency redesign is standard practice by the central banks of countries worldwide for the following purposes: 1. Reduction in inflation; 2. Curb currency counterfeiting; and 3. Manage excess cash in circulation. For instance, the law allows for a regular Dollar redesign in the United States. In Nigeria, the law provides for every five to eight years.

The Nigerian economy has witnessed high inflation, high-interest rate, a decrease in money in the banking system, and increased cash transactions. The governor mentioned that about 80 percent of the cash in circulation is not within the banking system, giving rise to illiquidity and making it difficult for planning. Moreover, over the years, we have seen cash in banks gradually reduce, making it unavailable for proper planning through the activities of bandits, Boko Haram, herdsmen and unknown gunmen, through kidnapping for ransom, usually paid in cash.

As the CBN tackles the menace and tries to jolt the economy to liquidity, many have hailed it, describing the policy as a master stroke. However, following the dissenting voice from the ministry of finance, others have criticized the governor for being insensitive to the policy’s consequences and requested the CBN to scrap the idea. 

The argument has been around the cost of printing, especially when we continue to borrow. Nigeria used about 118 percent of its revenue to service debt as of half year 2022 against a target of 65 percent. Critics feel that the CBN should not plunge the nation any further. 

The capacity of the banking system to handle a total 80 percent cash shortfall and its impact on the value of the Naira, as many people may attempt to procure dollars instead of bringing cash to the bank has been of concern to critics too. In addition, some fear that the general election is too close, which can misconstrue the CBN’s good intentions. Others are concerned with the duration, which may cause unnecessary panic and tension, especially among our illiterate citizens. 

The fear of converting cash to foreign currency or other forms of an asset has become rife as the financial crime agencies have asserted that they will do their jobs as stipulated in extant laws. For instance, financial institutions must notify NFIU of the names of individuals and companies who deposit N1 million and N10 million and above, respectively. The activation of this law has made the fears palpable as this may see unnecessarily large deposits of cash questioned by security agencies. In addition, the cost of printing provision in the 2022 appropriation is of concern whether it will be extra-budgetary. 

The CBN guideline directs all commercial banks to extend their working hours and days during the implementation of this policy from now till January 31, 2023. It also demands that the commercial banks waive the existing cost of depositing cash. 

There is, however, an observation that the CBN omitted microfinance banks in the strategy to deliver on the policy. With over 900 licensed microfinance banks spread across the country, there is no better time to put them to use than now. In 2020, when the CBN extended palliatives to the public under the Target Credit Facility (TCF), it missed the opportunity to leverage the network, closeness to the unbanked and operational flexibility. As a core agent of financial inclusion, which currently stands at 45 percent (World Bank) and 65 percent (CBN) against a target of 95 percent(CBN target) by 2024, the CBN, could prove critics wrong with regards to the ability of the banking system to handle the expected upsurge by engaging the microfinance banks.

Following the recent capitalization and regulatory oversight by the CBN, NDIC and FRCN, the microfinance banks are well-equipped to play a significant role in implementing this policy. Moreover, through a comprehensive and inclusive guideline that recognizes the functions required for microfinance banks to play, the CBN may have doused one of the critics’ concerns. 

The microfinance banks’ involvement could help push the message to the grassroots, thereby reducing the attendant cost of publicity that the CBN may incur. Moreover, it is capable of quenching the tension and panic that will characterize the implementation as poor and illiterate citizens may be more comfortable dealing with financial institutions they are close to and trust. 

The use of microfinance banks can eliminate possible brokers or intermediaries that may arise from the need for a few individuals to make quick money at the expense of unsuspecting citizens. Apart from the contributions above, microfinance banks can increase liquidity, financial inclusion rate, confidence in the banking system, trust in the government and a vote of confidence for the apex bank.

The argument that citizens will suffer untold hardship, stay in endless queues in banks, have access to a limited new currency, and families going hungry, amongst others, can readily be addressed by the introduction of electronic banking, which was not available in 1984. Unlike the last exercise, multiple channels for a transaction now exist for seamless banking. Moreover, the presence of the e-naira introduced by the CBN and other approved payment platforms will guarantee access to funds. Coincidentally, with the continuous expansion of agency banking and the fact that most Microfinance Banks have digitalised their operations to facilitate transactions and bring banking closer to the people, there may be no need to insist on cash after this exercise.

Active participation in the Naira redesign policy by microfinance banks can improve their liquidity, deeper penetration and account opening. Improved quality service, expanded revenue lines, increased revenue, and enhanced visibility forms part of the possible incentive. There is also a possibility of improved confidence from customers. In addition, it can eliminate potential regulatory distrust and promote greater reliance and dependence.

The Naira redesign policy is welcome and should be allowed to thrive despite initial signals that may make it look impracticable and impoverishing. But as they say in “Naija” parlance and the lyrics of a Grammy award-winning Nigerian musician, “las, las everybody go chop breakfast”.

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