Digital Payments Surge In Nigeria As Cash Policy Brings Chaos

February 15, 2023
New limits on cash withdrawals have accelerated Nigeria’s shift towards digital payments, but government attempts to replace high-value banknotes have led to riots and a standoff between the central bank and Supreme Court.

New limits on cash withdrawals have accelerated Nigeria’s shift towards digital payments, but government attempts to replace high-value banknotes have led to riots and a standoff between the central bank and Supreme Court.

New data from the Nigeria Inter-Bank Settlement System (NIBSS) shows that the use of digital payments in Nigeria increased 45 percent in January 2023 to 638m digital transactions, compared to the same period last year.

NIBSS data also shows that the value of electronic point of sale (POS) payments rose 40 percent during the same period, while the transaction value across the country’s real-time payments service Nigeria Instant Payments (NIP) also rose 45 percent.

The shift away from cash and towards digital payments recording in January 2023, has further been accelerated by the Central Bank of Nigeria (CBN) announcement in December 2022 of new limits on cash withdrawals.

As of January 9, individuals can withdraw no more than N500,000 ($1,085) in cash per week, and businesses can withdraw no more than N5m ($10,850) in cash per week.

In “compelling circumstances” withdrawals can exceed these limits, but are subject to a 3 percent processing fee for individuals and a 5 percent fee for businesses.

Moreover, withdrawals above the limit require several forms of enhanced customer due diligence and a letter of approval from a managing director or CEO of the bank or financial institution authorising the withdrawal.

In its circular outlining the new rules, the CBN makes clear that the cash withdrawal caps are designed to increase the use of digital payments, as per the Nigeria Payment System Vision 2025.

“Customers should be encouraged to use alternative channels (internet banking, mobile banking apps, unstructured supplementary service data, cards/POS, eNaira, etc.) to conduct their banking transactions,” said the CBN, addressing commercial bank staff directly.

Initially, the CBN proposed that the limits be set at N100,000 ($217) per week for individuals and N500,000 ($1,085) per week for businesses, but the caps were raised due public opposition.

Out with the old, in with the new

The introduction of the new cash withdrawal limits is further complicated by the phasing out of several high-denomination Naira banknotes, which is taking place simultaneously. This policy is known as the "Naira Redesign".

Ahead of a January 31 deadline, the CBN asked Nigerians to take their “old series” N1,000 ($2.17), N500 ($1.09) and N200 ($0.43) notes to a bank or mobile money operator and swap them for their newly designed replacements or smaller denominations.

Under this programme, each person is allowed to swap up to N10,000 of old series notes without any know-your-customer (KYC) checks.

However, above this threshold non-bank customers must undergo KYC and must open a bank account at the branch where they wish to make the swap.

The CBN has said the Naira Redesign will help to increase financial inclusion, and will lead to more Nigerians opening bank accounts, using digital financial services and contributing to tax revenues.

The CBN also said the move is necessary to curb counterfeiting and to re-introduce hoarded cash back into the financial system.

But so far the Naira Redesign, combined with the disruption caused by the new cash withdrawal limits, has led to cash shortages and long queues at banks and ATMs throughout the country.

Lawmakers step in

On January 24, the Nigerian House of Representatives sent a letter to the CBN asking it to extend the deadline for the swap programme by six months.

The House noted that the withdrawal of the notes will have “harsh consequences” for rural Nigerians who do not have access to a bank in their local community.

On January 29, the CBN announced a compromise, and agreed to extend the swap deadline from January 31 to February 10.

But on February 4, the CBN said there will be no further deadline extensions and asked Nigerians to remain “calm and patient” while the Naira Redesign takes place.

“We call on all Nigerians to be calm, law-abiding and considerate of their fellow citizens (particularly the vulnerable and weak) in the conduct of their affairs as we execute this policy of national significance,” said CBN Governor Godwin Emefiele.

Four days later, on February 8, the CBN’s decision was overruled by Nigeria’s Supreme Court, which suspended the CBN’s deadline pending a future hearing.

The Federal Government said it will honour the Supreme Court’s decision but, at the time of writing, the CBN is insisting that the February 10 deadline be honoured, according to local media.

Nonetheless, merchants and consumers are reportedly still using the old series Naira notes as if they were still legal tender.

As one merchant told Business Day, a local news outlet: “The Supreme Court has asked the CBN not to ban the use of the old Naira notes and its ruling supersedes that of CBN.

“I will continue to collect the old Naira notes until the Supreme Court says otherwise.”

Cash withdrawal chaos

In a statement published last week, NIBBS acknowledged that the CBN’s cash interventions have provoked a backlash among the public, including riots and attacks on banks in some areas.

Last week, Nigeria’s Premium Times reported that “virtually all” banks in Abeokuta, capital of Ogun State, were forced to close due to widespread attacks, and one person was shot by police.

ATMs were also attacked as cash shortages worsened, contributing to even longer queues.

Also last week, BBC News reported that an attack on a bank in Warri, a city in Delta State, had led bank staff having to flee the premises by scaling over the outer walls of the bank.

The situation is further complicated by Nigeria’s upcoming presidential and National Assembly elections, which take place on February 25, and threats from at least 13 out of 18 parties, according to Premium Times, to boycott the election should the swap deadline be extended.

Amid the turbulence, it is worth recalling India’s experience of demonetisation in 2016, when all INR500 ($6) and INR1,000 ($12) banknotes were recalled, amounting to 86 percent of the cash in circulation at the time.

Though similar unrest unfolded in India, the policy eventually proved to be a catalyst for the Unified Payments Interface (UPI), which had launched earlier in 2016, alongside other digital payment methods.

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