Will Cashless Economy Work?
1/23/2012 12:53:00 AM -
There are fresh concerns over how the introduction of cashless economy and other policies by the Central Bank of Nigeria in the year gone by will drive business in 2012
At the dawn of January 1, 2012, the pilot scheme of mobile money, one of the financial services introduced by the Central Bank of Nigeria, CBN to achieve a cashless economy took off in Lagos, the commercial nerve centre of the country. It was projected to be the biggest economic issue of the day but the withdrawal of fuel subsidy on that same day by the federal government took the shine off the policy. Other financial services under this payment platform are consumer accounts information and updates, alerts, which have been in existence but not widely subscribed to by account holders. Payment of bills, person-to-person transactions and remittances in different forms also form part of the cashless economy drive. With the introduction of the mobile payment, Nigeria is only keying into a fast evolving global payment system. The mobile money platform is a technology driven payment system that will open up several other business opportunities in the economy.
Essentially, mobile money payment system allows users make payments with their GSM phones. It is a savings and transfer system that turns GSM phones into a savings account platform, allowing the owner save money in it and from which withdrawals or transfers could be made. Under the payment system, customers could do their normal basic financial transactions on a daily basis by making payments for goods and services or by engaging in person-to-person transfer directly on their GSM phones. For instance, the system also allows for payment to be made through a mobile phone after purchases have been made at a grocery store. The shop owner in turn, receives instant payment electronically. Through the system, users can also pay utility bills, school fees, hotel bookings, and house rents, among other transactions, using a mobile phone device. One important thing about mobile money is the fact that it thrives on agency network, thereby taking traditional banking and its cumbersome processes in the cities to the streets in sub-urban areas where accredited mobile money agents also operate.
The regulatory framework for mobile payment services released by the CBN imposes some restrictions on the volume of transactions a customer can do in a day. For the unbanked, for instance, who requires only his name and phone number to carry out transactions, the maximum limit of N3,000 and daily limit of N30,000 are stipulated. The semi-unbanked has a maximum transaction limit of N10,000 and daily limit of N100,000. However, in line with the CBN's Know Your Customer, KYC policy, the customer would be required to present his phone number, name, photograph and biometrics. The third level, which requires the customer to have a full bank account, allows a maximum transaction limit of N100,000 and daily limit of N1,000,000. For the customer to be able to access his mobile money account there is a personal identification numbers, PIN, that his mobile money operator requires him to enter just like the ATM card.
Among other things, the cashless policy will save the banking system the cost of printing, distributing and handling large volume of cash. It is estimated that over 70 per cent of cash in circulation in the Nigerian economy exists outside the formal banking system. 'This has cost implications for the economy,' says Bunmi Adeyemi, an economist based in New Jersey, United States, US. Said she, 'physical cash has life span; it gets destroyed easily. This means government spends a lot of money replacing cash with new ones. If cash is not in the formal system, it can't be used for lending, but if you know an aggregate, that is, how much money is available to kick-start the economy, it makes lending and production easier.'
The cost of fund is also said to be high because the amount in circulation is not captured in a synthesised manner. Part of the reason the CBN is introducing the policy is to reduce the cost of funds by making sure that a significant amount of the capital around is captured in the formal system. With this, Adeyemi says when the law of demand and supply sets in, there will be enough cash to lend to individuals, corporate bodies as well as small and medium enterprises. If the apex bank gets the cashless policy right, therefore it will be a major driving force for business in 2012. This should be of interest to business owners. The cashless policy is also believed to be a step towards curbing money laundering in the financial system.
Expectedly, at the take-off of the scheme, it was very obvious that it had many challenges to contend with. On the eve of the take off, the CBN had announced that all charges associated with the emerging payment system be suspended till the end of the first quarter of the year. That was primarily aimed at creating time for potential users of the payment system to gain better understanding of how it works. Even after the pilot scheme had taken off, most of the banks are yet to meet customers' demand on the new payment systems. For instance, there are reports of some banks being overwhelmed by demands for ATM cards. Amos Emmanuel, chairman, Programos Software Group, identified lack of awareness and education, poor infrastructure, and insecurity in the cyberspace as issues that must be addressed to achieve penetration in the adoption of the cashless policy. He observed that the low level of awareness and education on the payment system are responsible for the pilot scheme being limited to Lagos. Although the licensing and establishment of payment agencies will create jobs and new business opportunities, the hurdles before the cashless policy have raised concerns over how it is going to work.
The cashless economy drive is just one of the many policies of the CBN that will shape business in 2012. By the estimation of Lamido Sanusi, governor, CBN, all Nigerian banks have been fully capitalised and they are now fairly stable. This judgement, which some financial experts are reluctant to accept due to the controversies surrounding the banking sector reform stems from the thinking that the apex bank did not allow any of the troubled banks to go down.
Towards the middle of last year, the CBN gave three options to the eight troubled banks, to sign recapitalisation agreements with prospective investors before the end of September or to be recapitalised by the state owned Asset Management Corporation of Nigeria, AMCON. In the alternative they were to face liquidation. On August 5, 2011, two months to the recapitalisation deadline, the banking industry and the economy received a major shock. The CBN in collaboration with AMCON and the Nigeria Deposit Insurance Corporation announced government takeover of three banks that were in the race for recapitalisation. Following their nationalisation, Afribank became Mainstreet Bank; Spring Bank became Enterprise Bank while Bank PHB became Keystone Bank. That was a major setback for some stakeholders in the banks including investors who were prospecting in the banks. Regardless of the fact that discussions over recapitalisation of the banks were at different stages, the CBN still went ahead to withdraw the licences of the banks, citing inability on their part to meet the recapitalisation deadline.
In what some economic experts saw as hurriedly done, acquisition deals for the remaining five banks were concluded in no distant time. For instance, Ecobank Transnational Incorporated acquired substantial stake in Oceanic Bank. Following the signing of a recapitalisation agreement, about 40 per cent of Oceanic Bank's equity valued at N55 billion was allotted to the sub-regional bank. About 49.80 per cent of its shares went to the state-owned Asset Management Corporation of Nigeria, AMCON in exchange for the N290.15 billion-rescue package the bank received from the corporation.
Similarly, Access Bank took over Intercontinental Bank in a N53 billion deal, offering its existing shareholders 10 per cent holding in the new bank that is yet to emerge. Access Bank took over Intercontinental through a special purpose vehicle, which holds 75 per cent equity in the authorised share capital of the bank. The remaining 15 per cent of the equity of the new bank will also be held by AMCON. In another acquisition deal, African Capital Alliance Consortium emerged core investor in Union Bank. The acquisition of FinBank by First City Monument Bank, FCMB, and the acquisition of Equitorial Trust Bank by Sterling Bank were also concluded. All the acquired banks were at the time of acquisition, being run by interim managements appointed by the CBN, following the ignominious sack of top executives of the troubled banks in 2009.
With the realignment of the banks, new challenges are expected in the banking and other sectors of the economy in 2012. Experts estimate that there will be restructuring of existing loan portfolios as separate entities become one. The banks will also come up with new credit policies. Generally, the banks are going to restructure their operations to suit the projections of the regulators. The focus will be low risk transactions even as highly capitalised as they are said to be. Expectations are high that the banks are in a better position to lend to the real sector. If that happens, there would be a gradual turn around and revival of industries especially in the manufacturing sector. Job losses and closure of companies characterised the banking sector crisis and its reform. Many enterprises got stuck in the web of credit crunch that began in 2008 as they could no longer access credit from the banks.
Other financial policies that will shape business in 2012 include the review of the universal banking model by the CBN. Under the new structure, banks are now required to have a holding structure to accommodate all its subsidiaries or divest from them and focus on core banking operations. For the banks that have divested from their subsidiaries the scope of their businesses will now be limited to banking. The subsidiaries, which include insurance companies, stock broking firms, registrars, real estate companies, and other companies that render other services will now run under new ownership structures where the banks have divested from them. This will also create new business partnerships and opportunities.
Although the changes will bring new opportunities, they will also create new challenges. For Tobi Oluwole, a stockbroker, some of these steps taken by the CBN will scare investors because they do not know what will happen next. He forecasts that 2012 will be turbulent especially for investors in the Nigerian capital market. According to him, the investment climate will remain unfavourable for both foreign and local investors as the occasional inconsistent policies made by the CBN on the banking system and investors are likely to affect investments.
'The reviewed universal banking policy which forced some banks to sell their subsidiaries will affect the market. It is the banks that have the biggest and most reliable of the registrars in the market and they have been doing well though not perfect over the years. Shareholders can tell you what they go through in the hands of the registrars. If such companies are sold to other firms who are not familiar with the terrain, how will they survive? The regulators say the registrars will have less work to do now that the Securities and Exchange Commission has introduced the electronic means of transaction for share certificates, bonus, dividend and others. But they fail to understand that it is only about 20 per cent of investors that have subscribed to the new platform'. There are still long queues at the registrars' offices. The new owners will need to place better structures on ground before they can render quality services.
Conversely, Albert Okumagba, chief executive officer, CEO, BGL, a financial consultancy firm, says the economy will benefit from the banking sector reforms in many ways. For instance, he says the merger of Ecobank Nigeria and Oceanic Bank would create one of Africa's largest financial institutions, with the combined entity offering unique value and opportunities for both institutions and prospects for growth for shareholders. Okumagba also pointed out that the merger would establish the enlarged Ecobank Nigeria as a top-tier bank in the country with an established retail franchise, and a top five position in Nigeria by assets, loans, deposits and branch network. For instance, the enlarged Ecobank Nigeria is expected to have a balance sheet size in excess of N1.32 trillion upon consolidation, thereby enhancing its ability to finance larger transactions particularly in the upstream oil and gas sector and the burgeoning infrastructure sector. Similarly, the Access Bank takeover of Intercontinental Bank is expected to improve the overall competitiveness of the enlarged Access Bank Group. With the combinations, Okumagba believes that Nigerian banks are now better positioned to compete with banks in other parts of Africa.
But for the controversy surrounding it, the non-interest banking introduced by the CBN in 2011 and other non-interest financing instruments for which some operators in the capital market have been licensed will also affect the direction of business in the New Year. Investors who understand the intricacies are likely to put their money in these areas. However, while there is optimism in some quarters, most investors are likely to tread cautiously as more unsettling policies could still come from the apex bank in 2012.
Additional report by Chikodi Okereocha and Abiola Odutola