The Founder/Chairman, Integrated Cash Management Services Limited (ICMS), Mr. Charles Nwodo Jnr, in this interview says despite the increasing focus on alternative payment channels across the world, facts show that the use of cash has been on the increase. He also urges the Central Bank of Nigeria to enforce its guidelines on cash processing and distribution so as to achieve sustainable cost optimisation for banks. Obinna Chima brings the excerpts:
With the increasing adoption of cryptocurrencies; central bank digital currencies globally, whereby in Nigeria we have seen the proposed e-Naira, and also the emphasis on alternative payment channels across the world, what is the future of cash?
There are facts and there are aspirations about the usage of cash. Our aspiration is to create a complementary alterative to the use of cash for transactions; use of cheques, and use of paper-based instruments. That is a very good aspiration not just in the Nigerian economy, but globally. By its very nature, the goal of policy regulators it is to create continuously improve the ease of transactions for citizens and the convenience of transacting between parties within a jurisdiction and internationally, while also keeping an eye on the security issues. So, the world is obviously on an irreversible move towards digital, not just in terms of payment systems, but in terms of medicine. You have tele-medicine, you have tele-law, so it is easy to ask same question about the practice of law and its jurisprudence because if people can get solutions to their legal problems and questions digitally, then what is the utility of law as a practice and medicine also.
If you can go to Google and search for solution by typing in the symptoms and get prescriptions, then why would anybody go to the hospital? So, we can actually stretch this to so many things, including the issue of Artificial Intelligence, which is the mother of them all. So, you can also ask: Is the concept of going to work and human employment, is it finished? This is because if robots are able to do all the tasks that Artificial Intelligence has enabled robots to do today, why do people even bother getting any training or applying for any job? So, I like I said, in terms of aspiration, the Central Bank of Nigeria’s (CBN’s) goal is in line with the global shift to modernisation to a different layer of human civilisation, etc. So, that is the way I can look at it and I welcome it. Now what are the facts? The facts are that, number one: the use of cash is actually increasing year-on-year in the last 10 years and we see no reason to expect a decline in the coming years. Maybe there will be, but the facts, because we belong to a global network, research after research across different economies – the United States, the European Common Market, the United Kingdom, North America including Canada, show an increase in cash usage. And as you can imagine, these countries I listed have advanced digital payment systems. You will even expect that the common sense approach is that maybe there is even no cash in use in these countries.
But like I said, I am talking about statistics published by the Reserve Bank in each of these countries, just tracking the distribution of cash, the velocity of use, the spread, the denominations, the use of coin, and then the rate of attrition in terms of replacement of particular series by the Central Banks in each of these countries. And like I said, the statistics tell a different story. The story is that the use of cash, especially low denomination cash, is increasing. Again, interrogation these statistics, we also try to find out some of the reasons. And some of the reasons are as follows: Number one is the human instinct. Generally, psychologists will tell you that when humans feel unsafe or feel threatened, they tend to seek to hold some cash. So, as you know the world has experienced different upheavals in the last couple of years. From 9/11 to all kinds of religious and cultural extremism to now COVID-19 pandemic across the world. And in many parts of the world, the devastation caused by some of these crisis made it impossible for electronic platforms to operate. In some cases, when networks were down for example, you could not transact from the digital platform.
When the telephone networks were down you could not use mobile payment systems, when internet was down you could use the computer systems. And these are challenges that are real. So, once you have cash in your pocket, nobody will tell you story. You can buy what you want to buy and you can sell what you want to sell. If you want to travel out of Nigeria and you have $5,000 in your pocket, you will find a way out through Benin Republic, through Seme or Togo. So, from experience, humans, not just in Nigeria, but across the world, again this is statistically determined, research has proven that whenever there is tension, there is a tendency for the greater number of people to hold cash and chose to transact in cash. I don’t want to add the issue of illicit flows like corruption, drugs and money laundering etc, all of which we know patronise cash heavily. We know that the more a country is high in the corruption index, the greater the use of cash. And there are many countries that are known to be high in this respect. But even for an ordinary citizens like me in Nigeria that is a country of 200 million people, it is inconceivable that in our life time, the use of cash will reduce, given the realities of the low level of financial inclusion that we have even achieved.
That is because whether you are talking about mobile payment, digital payments or cryptocurrencies, you are looking at the bankable population of Nigerians. And then furthermore, you are looking at population of Nigerians that have access to the digital platforms and have the resource and the knowledge to operate within the digital space. This is a very small fraction of the 200 million Nigerians. Again, what does the trader in Birnin Kebbi and the trader in Abakaliki, and the trader in Yenogoa, and the man who is refining illegal petrol in the Niger Delta, what do they have that they want to transact in, cryptocurrency? No! They want to carry cash. As a store of value in periods of stress, cash is still preferred. And like I said statistics tell us that this trend is going to continue for a long time to the end of our own life time and perhaps the life time of our children.
One of the things we were meant to believe was that the COVID-19 pandemic resulted to increased adoption of digital payment system, but you are saying the contrary, how do we reconcile that?
Yes, indirectly, it strengthened the justification for the use of cash. Like I said, many people found themselves stranded. In the United States and United Kingdom for example, there were many people who were trapped in apartments during the lockdown and they could not transact, they did not have access to any other means of settlement. So, from experience, what they did was to go and withdraw as much cash as they needed for a period of time. Of course, we can also say that there was also a corresponding, but parallel in the recourse to digital payments. But my argument is that one reinforced the other. But that doesn’t mean that one grew at the expense of the other. I don’t believe that the expansion in the use of digital or alternative payments systems was at the expense of cash. Like I said, statistics tell a different story and we deal with statistics. Statistically the reduction in currency in circulation can only be accounted for by the scaling down of economic activities generally, if we refer to the CBN data. And as soon as economic activities picked up again, the cash in circulation witnessed an increase.
But the CBN has always made us to understand that the cost of handing cash, that is cost of managing and processing cash is expensive, hence the need to shift to digital payment systems?
Like I said, in terms of aspiration, it is an aspiration that is well founded and I support it and will encourage the CBN to intensify the move in that direction. At the same time also, the cost of handling cash is still expensive. If you look at the line item expenditures of the central bank, you will find that the central bank still spends a lot to process and handle cash for the banking industry. And given the fact these banks are private concerns, the truth is that it is subsidy that is undeserved. The CBN can devote those resources to doing so many other things for the needy sections of the economy. The commercial banks that are privately owned should be able to fend for themselves, which is exactly what happens in other countries of the world. But in Nigeria the CBN spends a lot.
So, the CBN move to other alternatives to cash payment systems, as commendable as it is, it does not speak to the issue. The issue is why should they even feel obligated to subsidise privately-owned banks to the extent that they do in the economy? If you ask them (CBN), they will say they don’t want the financial system to collapse even though we know that many of the Nigerian banks are strong enough. If the central bank today says from the next three months it is not going to subsidise any bank and that the banks should find a way to distribute and process their cash according to the standards in its guidelines, the banks would comply. And if the central bank says if they don’t comply it would withdraw their licences, I am telling you, in a few days, all Nigerian banks will implement currency processing standards that will reflect those CBN guidelines. It is because the central bank has not mustered the political will and just treating the old issue with levity. That is why the banks are enjoying the subsidy in terms of cash management, just like the petroleum product operators are enjoying subsidy in Nigeria. So, everybody is being subsidised to the detriment to the ordinary people like you and I.
Can you tell us about ICMS and the role it plays in the cash management value chain?
Well, we are licenced by the central bank to provide the service of the distribution of cash and the processing of cash on behalf of commercial banks and on behalf of the central bank to a large extent. Our mandate is to play the role which I just described as being currently played substantially by the Central Bank of Nigeria. So we have a very uncomfortable situation where the central bank is our competitor and is also our regulator. And that is not good for the viability of our business, it is also not good for the Nigerian economy because there are various standards that the central banks themselves have laid out in terms of policies, in terms of guideline to protect the naira and safeguard the value of the naira which are being flouted with impunity by the banking industry. And at the end of the day, like I said, it is our economy that suffers. And there are various ways in which our economy suffers. For example, part of our process involves detecting, eliminating and passing unto the central bank counterfeit notes. It also involves detecting, collating and passing on to the CBN unfit notes, which as you know in Nigeria, the currency is one of the dirtiest and most unfit of most currencies in the world.
Why is that so?
There are fitness levels that the central bank has defined in guidelines to the commercial banks. There are fitness levels that the central bank has invited the citizens to report. Like if you go to a bank and the banks pays you money that does not meet certain fitness level, you should call a certain number in the central bank and report. But I doubt that the average citizen is even aware of this. And because, again the central bank has not been enforcing the guidelines, the banks operate with impunity and they continue to recycle unfit notes. And recycling unfit notes give room for criminal elements to inject counterfeit into the economy. Because they know that the banks do not process the notes to detect counterfeit. The only thing the banks do is limited, they use mercury to look at money. That is why central bank licenced specialist entities like the ICMS to be able to play this role for the benefit of the economy. And to the extent that our hand has not been strengthened by the central bank, you have this situation where these particular gaps exist in the cash management value chain.
The other thing is also the transmission of cash. There are parts of Nigeria where ATMs don’t exist, even where the ATMs exist, people queue up from morning till afternoon for hours just to withdraw money from ATMs. This does not have to be the case. That is exactly what a processing company like us are licenced to do if we had the appropriate support from the central bank and the banking industry. That is because it is the excess cash that end up in vaults of banks that should be feeding these ATMs and ensuring that not only are ATMs filled with cash at all times, but that even the deployment of ATM is more widespread that it presently is. If the central bank would be kind enough to look at this issue more seriously and give it the serious attention it deserves, even the goal of financial inclusion will materialise.
As you know very well, the agency banking initiative that the central bank launched through the use of point of sale (PoS), now makes the thing even more compelling. That is because many of these agents at very dispersed location, are having to transact in large volumes of cash. So, it is easy if the central system that compels banks and other players to operate according to certain fitness levels, if those guidelines and those standards are not rigidly enforced, in no time Nigeria may become a playground for counterfeit currency smugglers. Keep in mind that there are various powerful interest across different parts of the world that just deal in the counterfeiting of currencies. That is their business, just like you have smugglers of wildlife, traffickers of human beings, people who sell human organs, there are people whose business it is to counterfeit currencies of different countries and they look at institutional weaknesses.
Once they detect such institutional weaknesses, they capitalise on it. And we don’t want Nigeria to become a destination because once that happens, firstly, it would affect the integrity of the Nigerian currency. Secondly, other countries with more advanced and secure financial system may take steps to protect themselves or perhaps ring-fence themselves against the naira. And that will create some sort of isolation mentality against our economy. Whereas more than ever before, we need to be integrated into the global financial system. But if we don’t take some of these actions, the world will treat us like lepers or with great suspicion and nobody wants you to infiltrate their economy with weaknesses that you are unwilling to deal with in your own system. That is why different countries before they allow you to transact with them on a bilateral level, they insists that you meet certain conditions. What I am talking about in terms of how you manage local currency and the entire value chain of cash is an important requirement for countries to operate with credibility in the global financial system.
But have you raised some of these concerns with the CBN?
Yes we have in the past and their explanation is always that we the operators don’t have capacity and that if they go ahead and enforce the guidelines, the financial system will collapse. With due respect this is not logical if you look at how the central bank responds whenever there is a Wonder Bank. Whenever a Wonder Bank is detected, the central bank goes after them with all the full weight of the law and make sure that they protect the citizen. So, if you have licensed entities to provide certain services that will safeguard the quality and integrity of the Nigerian currency, why would you be unable or unwilling to enforce your own guidelines that supports the activities of those entities? So, the banks see that the central bank does not have any interest in enforcing those guidelines, they just say there is no need to spend money on this because central bank is not able to enforce it. So, the impunity the banks exhibit is because they see that the central bank over the years has for some reasons not been enforcing the guidelines. There is not a single country that is developed, I am talking about countries like South Africa, maybe United Arab Emirates, Turkey, UK, US or Canada, where you find the central bank distributing cash on behalf of banks or processing cash on behalf of banks. For what? They simple layout the guidelines and say this is what we want to so. What the central banks do in modern economy is simple to issue new notes and to destroy unfit notes.
What is your take on the recently released GDP figures and what advice do you have for the policymakers on how to enhance economic growth?
I am not an economist, but I am a student of expansionary economic planning. If you look around the world today, every country is introducing one kind of bold economic resuscitation programme or the other. And the whole objective is to inject as much resources into key sectors of the economy as possible, in the knowledge that the more funds that they invest in big capital projects, the more jobs that will be created. That is because one of the greatest victims of the economic component of the COVID-19 pandemic, is job losses on a global unprecedented level. And economist will tell you the connection between employment, cost of living and even positive GDP growth. GDP growth does not just drop, it is not an abstract figure. It is a bottom-up reflection of the various economic activities within a jurisdiction.
So, if there is some kind of government engineered active economic stimulus, for example, in the form of a massive infrastructure renewal project that the federal government is targeting to build road. I think the GDP growth you have seen is the direct reflection of the government’s investment in infrastructure through the various foreign loans that they have secured – the Chinese loans, for railways and airports expansion; the Sukuk bonds that they are using to build roads; the various interventions in various infrastructure renewal projects across the length and breadth of Nigeria. I can guarantee that the GDP growth is traceable to the ripple effects of this kind of intervention by government. And so for me, the idea is to set even higher goals for ourselves. Now they have mapped out the second phase of the railway modernisation projects – I think the one linking Port Harcourt and Maiduguri through the South-east states. And government should bold about its highway concessioning project plan, but it should be transparent.
We don’t want some of these transactions to be enmeshed in a kind of credibility challenges that attended the power sector privatisation exercise, which you can see the outcome. You have seen how the Discos are gasping for breath, because the fundamentals were not present in the first place. We simply transferred inefficiency from government to private sectors that were lacking in capacity. So, I think government is on track in terms of its focus on infrastructure renewal and expansion of the infrastructure space for purposes of enabling private sector investment. That is because if the infrastructure issues are dealt with, private investments, by even Nigerians will come. And I think that for the first time in very many, many years in our country there is some kind of strategic attention being paid to key sectors of the economy like agriculture and infrastructure. You are talking about roads connecting roads from the farms to the market, then you are talking of space like storage facilities, transportation and distribution facilities, export processing opportunities for Nigerian raw materials to make farming economically attractive so that people can invest in agriculture on a massive scale. Once we can do this, create jobs for young people, through this kind of government strategic investment in key sectors of the economy, not only will we have consistent and progressive GDP growth, we will also give hope to the millions and army of young people that appears to have given up of the Nigerian dream for themselves. And that is the real problem we have, that unemployment is a time bomb that is waiting to blow up in our faces if we don’t take this kind of steps.
