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Benefits and Negatives of CBN Withdrawal Limit



Central Bank

On Tuesday, December 6, 2022, the Central Bank of Nigeria (CBN) issued a new directive to banks and other financial institutions to reduce cash transactions in the country. According to the letter he sent to banks, the new order will reduce withdrawals at ATMs and point-of-sale terminals to ₦20,000 ($27) per day.

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The news has provoked various reactions from Nigerians. While some expressed their discontent, citing the need for more cash transactions as the country lacks digital penetration, others feel that limiting cash transactions will help the dying currency.

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While CBN

While CBN says the reason for the new directive is to further its cashless policy, here are some pros and cons it may have on the country’s financial ecosystem.

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Benefits of the directive Reduced risk of money laundering

Cash transactions are largely more difficult to trace than online transactions. While there are ways to make online transactions untraceable, cash is still the preferred mode of transaction for most criminals.

Crime and Anti-Money Laundering

According to a 2018 article titled Cash, Crime and Anti-Money Laundering by C. King et al., cash is the primary means of transaction in money laundering/terrorist financing reports.

However, online transactions, such as the use of cryptocurrency, online auctions, and proxy servers, are difficult to track.

But in Nigeria

But in Nigeria, where most transactions take place in cash, it is plausible that most money laundering activities take place offline.

With anti-money laundering activities implemented by financial regulators, financial institutions will flag large or suspicious deposits. Clamping down on cash transactions means that large sums of cash won’t leave banks from legitimate accounts for illegitimate offline transactions.

Mobile Banking

If you need more naira to make a transaction

1. Write a check
2. Transfer
3. Mobile Banking

The point is that these options are trackable.

Why do you need N100m cash that cannot be traced?

Do what ?

— Kalu Aja (@FinPlanKaluAja1) December 6, 2022 Potential for small businesses to go digital

World Play Global Payments Report

Small businesses account for 96% of the number of businesses in Nigeria and according to the World Play Global Payments Report 2020, cash is used for 91% of store purchases in Nigeria.

As a Nigerian, these numbers are the reality for small businesses in the country. The directive to reduce cash transactions could force businesses to adopt digital payments, allowing them to easily track daily sales and manage inventories.

Digital payments for small businesses could also reduce the time spent on data entry and invoice processing. It also provides the business with readily available financial records on its loan applications.

According to Statista, more than 60% of small businesses in Kenya use mobile money for transactions. This, in turn, increased the Kenyan financial market and positively affected loan disbursement and repayment.

Improve financial inclusion for underserved communities

Financial inclusion evangelism in Nigeria has lasted for many years. Fintechs and many other financial institutions have been created to solve this problem, but many Nigerians remain unbanked.

World Bank

According to the World Bank, Nigeria is one of seven countries that make up half of the 1.7 billion unbanked people worldwide.

The new CBN directive could force financial institutions and regulators to step up economic inclusion efforts, as unbanked citizens will be required to transact digitally.

Nigerian Payment Services Banks

This could also give Nigerian Payment Services Banks (PSBs) (MTN (Momo PSB), Airtel (SmartCash PSB), Globacom (Moneymaster PSB and 9mobile (9PSB)) some leverage to incentivize more Nigerians to resort to money. mobile.

While we have seen the value of mobile money transactions increase over the years (₦1.1 trillion to ₦5.1 trillion between 2017 and 2019), it still has a long way to go as 63% of transactions in Nigeria are made in cash. .

the bad side

While the new directive could bode well for tackling illicit transactions and improving the payments ecosystem, it could also have some adverse effects.

Potential inconvenience for individuals and organizations with large cash transaction needs

These PoS

Cash is the biggest asset for people who operate point-of-sale (PoS) terminals and organizations like Moniepoint that facilitate these transactions. These PoS agents, like everyone else, get their cash from banks, and the cash withdrawal limit automatically makes it difficult for them to serve customers.

This inconvenience also extends to people like artisans who accept cash for their services with the new policy, those who do not have bank accounts or even bank verification numbers (BVNs) may find it difficult to receive payments.

Of the 109 million adults in Nigeria, 56 million have BVN. This leaves 53 million Nigerian adults without access to digital payment systems when little cash is available.

Nigerian National Bureau of Statistics

According to the Nigerian National Bureau of Statistics (NBS), 34.4 million of the 39.6 million micro, small and medium-sized enterprises in Nigeria are informal. Another NBS report has also shown that only 22% of the 34.4 million informal businesses use the Internet on a daily basis.

Limited infrastructure to support digital payments

While CBN

While CBN indicated that its most recent policy is to further push its cashless policy, the country still needs the proper infrastructure to support digital transactions. Apart from the fact that Nigerians pay more for data, internet connectivity failure is a well-known phenomenon in the country.

Other digital payment infrastructures such as USSD are also known to fail frequently. On the other hand, no internet connection or mobile phones are needed to complete cash payments.

As stated above, cash transactions are fast and instant; a digital equivalent of this would be contactless payments which are not yet common in the Nigerian payments ecosystem.

Business Day

According to a Business Day article on November 1, 2022, CBN recently added contactless payment as a new payment option for the financial sector. While the new payment option is innovative, it’s rarely used in the space.

Creation of a black market for naira

There has been speculation online that the limit placed on cash withdrawals by CBN will lead to the creation of a black market for naira.

According to Twitter user @MikaelCBernard, “By imposing limits, you create space for speculation, leading to a black market and hoarding. This policy will not leave us cashless, it would only lead to black markets.”

The Cbn should not have lowered the withdrawal limits. They might have charged fees for cash withdrawals.

By imposing limits, it creates space for speculation, leading to a black market and hoarding.

This policy will not leave us cashless, it would only lead to black markets.

— Mikael.zina (CryptoRabbi) (@MikaelCBernard) December 7, 2022

Another user, @excel_nonso, said: “It will create a black market and hardship for ordinary people. The elites will still elude it anyway.”

CBN’s cash withdrawal limit is overwhelming and has no place in a free market society. You can’t tell me what I do with the money I legitimately earned.

It will create a black market and hardship for the common people. The elites will still circumvent it anyway

— Chinonso (@excel_nonso) December 6, 2022

In Nigeria, bans and restrictions have sometimes created the opposite effect than intended. The country’s rice ban is one example of how restrictions have led bad actors to create a high-margin black market.

According to the media research company, Dataphyte, 2 million metric tons of rice are smuggled into the country annually.

With rice consumption rates higher than its local production rate, the illegal importation of rice into the country could continue for a while. The same scenario could also play out with the current limit imposed on cash withdrawals.

Limited digital payment infrastructure could cause Nigerians to seek cash in non-designated financial markets.

House of Representatives

Note: The Nigerian House of Representatives has summoned CBN Governor Godwin Emefiele, to explain the importance of the new cash withdrawal policy.

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