By Taiwo Oyedele
In a strict sense, cash is used to describe notes and coins issued by the Central Bank, as distinct from cheques, bank deposits or credit. Let’s call it currency or “Hard Cash”.
In a broader sense, cash is synonymous to money which includes currency and cash equivalents such as deposits in your bank account, money market instruments etc. Let’s call this broader cash excluding currency, “Soft Cash” or “e-Cash”.
For example, if you go to a restaurant to have a meal and you pay your bill using bank notes then you’ve paid in cash (hard cash). On the other hand, if you use a bank card to pay then you’ve paid in Soft Cash (e-Cash).
Why Do We Need Cash?
The major reason people hold physical cash is for transaction motive. That is, for use as a means of exchange for goods and services such as payment for a meal or transportation especially where other forms of payments such as POS and bank transfers are unavailable or unreliable. Hard cash can also be held for non-exchange purposes such as giving a tip or donation.
How Is Cash Created?
Hard cash is created only by the Central Bank. This is currently about N3tn in Nigeria.
Soft cash, known as money supply, other than physical cash, is created by economic activities. When an economy grows, money supply grows and the need for cash (hard & soft). This broad amount of cash is currently about N52tn in Nigeria.
Does Nigeria Have Too Much Cash In Circulation?
To answer this question, let’s compare Nigeria to other countries, developed and emerging economies.
From the above analysis (see image), Nigeria does not have too much cash in circulation both in terms of currency to GDP or per capita compared to many other countries. In fact, Nigeria is one of the most “cashless” economies in the world.
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While there are immense benefits for a country to drive financial inclusion and achieve nearly 100% cashless economy, in reality no economy can be completely cashless, not now and unlikely so in the near future.
Why Then Do People Describe Nigeria As A Cash Economy?
Well, it depends on what you mean by cash. For instance, if you wish to buy a car worth N10m in Nigeria, chances are that you would need to save the money and pay upfront in full to buy the car. This is due to the lack of a functioning credit system.
In many countries you would have access to a vehicle financing scheme enabling you to walk away with the car by paying as low as 5% while the balance may be spread over a few years.
The same applies to mortgages for real properties. In this regard, Nigeria is a cash economy due to the lack of credit. On the other hand, even though you paid for the car in cash, it is not “hard cash”, the vast majority of Nigerians will pay for such high value transaction in e-cash such as a cheque or bank transfer.
It is important to correctly distinguish between Nigeria as a cash economy (due to poor credit system) and Nigeria as a low cash economy in terms of physical cash or currency in circulation.
The ongoing Naira redesign policy and the associated currency scarcity seems to be tackling “hard cash” which based on data is not a problem. What is perhaps a problem is some of the “hard cash” being in the wrong hands including corrupt politicians. Tackling this problem can be achieved in a less disruptive manner given the huge sums of cash usually involved compared to about 98% of Nigerians who have less than N500k in cash (hard & soft) according to the NDIC.
So, a different approach would be to allow individuals and small businesses to freely deposit and withdraw commutative amounts up to N500k from banks and other approved financial agents. Strict conditions can be applied to deposits and withdrawals above this threshold while very large sums, say N20m and above could require dealing directly with the CBN and other relevant agencies including the EFCC and tax authorities.