ABSTRACT
This
paper examines the impact of cashless policy on banks liquidity, using union
bank as a case study. In Nigeria as in many developing countries, cash is the
main mode of payment thus making the economy heavily cash – based. The policy
was introduced in Nigeria by the Central Bank of Nigeria (CBN) in December 2011
and was kick-started in Lagos in January 2012. The objective of the study is to
determine the influence or effect of a cashless economy on banks liquidity in
Nigeria. It will also proffer solution to the impending challenges that banks
will face in a cashless society. With a review of existing literature on the
concept of cashless economy and its effect bank liquidity. Recommendation on
how to effectively implement the cashless policy in order to encourage any kind
of bank business owners to be part of it were highlighted. It was concluded
that if necessary measure is not put in place and the necessary stakeholders to
the policy carried along with consideration on how the policy may affect them,
the cashless policy will adversely affect bank business and may engineer their
failure.
CHAPTER
ONE
INTRODUCTION
1.1
BACKGROUND TO THE STUDY
Cashless
economy is an economy where transaction can be done without necessarily
carrying physical cash as a mean of exchange of transaction but rather with the
use of credit or debit card payment for goods and services. Omotunde et al
(2013) posits that cashless economy policy initiative of the Central Bank of
Nigeria (CBN) is a move to improve the financial terrain but in the long run
sustainability of the policy will be a function of endorsement and compliance
by end-users which can which can be aimed at reducing bank liquidity risks.
According to Tunde Lemon, the Deputy Governor of CBN, the CBN cash policy
stipulates a daily cumulative limit of N150, 000 and N1, 000, 000 on free cash
withdrawals and lodgements by individual and corporate customers respectively
in the Lagos state since March 30, 2012.
Individuals
and corporate organizations that make cash transactions above the limits will
be charged a service fee for amounts above the cumulative limits. Furthermore,
3rd party cheques above N150, 000 shall not be eligible for encashment
over the counter with effect from January 1, 2012. Value for such cheques shall
be received through the clearing house. All Nigerian banks were expected to
cease cash in transit lodgement services rendered to merchants and customers
from January 1, 2012. Omotunde et al (2013) further clarified that the policy
through the advanced use of information technology facilitates fund transfer,
thereby reducing time wasted in Bank(s). Wizzit, a fast growing mobile banking
company in South Africa has over three hundred thousand customers across South
Africa.
Likewise,
M-PESA was introduced in Kenya as a small value electronic system that is
accessible from ordinary mobile phones. According to them, it has experienced
exceptional growth since its introduction by mobile phone operator (Safaricam)
in Kenya in March, 2007 and has already been adopted by nine million customers,
which is about 40% of Kenya’s adult population. Wizzit and other mobile
financial services including M-PESA in Kenya are helping low income Africans
make financial transaction across long distance with their cell-phones, thereby
reducing their travel cost and eliminating the risks of carrying cash and also
avoiding most banking charges (Akintaro, 2012).
According
to Ajayi (2014), a cashless economy is referred to as an environment in which
money is spent without being physically carried from one place to another.
Nigeria’s quest to migrate from cash to cashless economy has been at the fore
for quite a while.Prior to introducing a cashless policy, prognosis by various
analysts in economics and finance had been made to the fact that it would be
difficult to attain the status of a leading economy by 2020 without entirely
embracing the electronic payment system. Equipped with this awareness, the CBN
which doubles as apex regulator of the banking sector ushered in the cashless
policy to check-mate growing dominance of cash in the banking sector and in
turn, enhance e-payment system in the economy (Alagh & Emeka, 2014).
The
conceptualization of the cashless policy in Nigeria was the fore thought of
CBN. Following the hitherto heavy dependence on cash based economy; the idea
was to migrate to a cashless one through the conduit of the payment system. The
expected immediate benefits of this would be to discourage the citizens and
corporations from manually moving with cash, enhance the proficiency of
Nigeria’s payment system, improve on the service quality being offered to the
banking public, and above all, the Nigeria monetary system would be in line
with international best practices (Adewoye, 2013). The frequent and soaring
practice of the traditional habit of using physical cash in an economy comes
with negative ramifications.
This
practice usually leads to increased cost of cash, somewhat elevated risk, high
subsidy, promotion of inefficient and corrupt practices, and results to
informal economy (CBN, 2011). For example, according to Osazevbaru an Yomere
(2015) the cost of printing new notes to replace the ones that are torn or worn
out due to frequent handling continue to be high. Osazevbaru an Yomere quoted
the CBN at putting the direct cost of cash to the Nigerian financial system as
at 2009 at N114.5 billion. The introduced policies are therefore aimed at
curbing some of these ills which results from the high rate of using physical
cash. One should not mistake a cashless economy to the complete absence of
cash.
It
should clearly be understood as an economic structure or setting whereby goods
and services bought or sold is paid for by the use of, or through electric
media. Despite the usefulness of the proposed cashless policy, there are still
some problems of a cashless society such as unstable electronic value of money
which has become even more volatile especially given the fact that people will
be conducting businesses imaginary money. For instance, the government has been
able to monitor purchases, spending habits and corresponding patronage. The
implication is that under this new system, the government will have a total control
of our transaction and therefore exposing the privacy of individuals
(Siyanbola, 2013).
Technology
Acceptance Model (TAM) and Diffusion of Innovation (DOI) theory has been one of
the models that have been developed to provide a better understanding of the
usage and adoption of information technology. In spite of the stated
implication of the cashless policy the introduction of cashless policy in
Nigeria has a strong influence on the development of payment system; it
involves commitment of huge amount of financial resources on computer
technology, telecommunication facilities and constant electricity. It has
equally generally been asserted that cash-less economy is likely to have led to
increased convenience, more service option, reduced risk of cash related
crimes, cheaper access to banking services, and credit to customers and
corporate organizations will benefit by way of faster access to capital, reduce
revenue leakages as well as cash handling cost.
A
Study by Osazevbaru and Yomere (2015) found banks’ income higher in cashless
setting than in cash based arrangement thus highlighting the immense benefits
of cash-less policy offers to the banking sector. Ochei, Achugamonu, Areghan
and Edwin (2015) revealed that the rate of fraud and unemployment in Nigeria
would increase as a result of cashless economy. Abubakar, Gatawa, and
Birnin-Kebbi, (2013); Onyedimekwu, and Oruan, (2013); Alao, and Sorinola,
(2015) suggest that cashless policy has negative effect on the performance of
commercial banks in Nigeria. The deference in findings and conclusions of these
researchers in respect of its positive and negative effect implies that there
is inconsistency and gap in literature which calls for more study and
contribution on the debate.
The
motivation for this study stems from the fact that apart from the conflicting
results, most of these studies are theoretical, and very few use secondary data
encompassing many cashless policy variables in their models. Secondly, the
presumed benefits of cashless policy are enormous and require a thorough
empirical examination employing a more robust method. However, this study
filled the gap that arises from inconsistency in the previous empirical
findings by the incorporation of automated teller machine, point of sale,
mobile banking and internet banking, all in one model to determine the actual
effect of cashless policy on the performance of Deposit money Banks in Nigeria.
Banks
play a central role in all modern financial systems. To perform it effectively,
banks must be safe and be perceived as such. The single most important
assurance is for the economic value of a bank’s assets to be worth
significantly more than the liabilities that it owes. The difference represents
a cushion of “capital” that is available to cover losses of any kind. However,
the recent financial crisis underlined the importance of a second type of
buffer, the “liquidity” that banks have to cover unexpected cash outflows. A
bank can be solvent, holding assets exceeding its liabilities on an economic
and accounting basis, and still die a sudden death if its depositors and other
funders lose confidence in the institution.
In
banking, liquidity is the ability to meet obligations when they come due
without incurring unacceptable losses (Odior & Banuso, 2012). Managing
liquidity is a daily process requiring bankers to monitor and project cash
flows to ensure adequate liquidity is maintained. Maintaining a balance between
short-term assets and short-term liabilities is critical. For an individual
bank, clients’ deposits are its primary liabilities (in the sense that the bank
is meant to give back all client deposits on demand), whereas reserves and
loans are its primary assets (in the sense that these loans are owed to the
bank, not by the bank).
The
investment portfolio represents a smaller portion of assets, and serves as the
primary source of liquidity. Investment securities can be liquidated to satisfy
deposit withdrawals and increased loan demand. Banks have several additional
options for generating liquidity, such as selling loans, borrowing from other
banks, borrowing from a central bank, such as the US Federal Reserve bank, and
raising additional capital. In a worst-case scenario, depositors may demand
their funds when the bank is unable to generate adequate cash without incurring
substantial financial losses. In severe cases, this may result in a bank run.
Most banks are subject to legally mandated requirements intended to help avoid
a liquidity crisis.
1.2
STATEMENT OF THE PROBLEM
Banks
can generally maintain as much liquidity as desired because bank deposits are
insured by governments in most developed countries. A lack of liquidity can be
remedied by raising deposit rates and effectively marketing deposit products.
However, an important measure of a bank’s value and success is the cost of
liquidity. A bank can attract significant liquid funds. Lower costs generate
stronger profits, more stability, and more confidence among depositors,
investors, and regulators. This is the first research that is examining the
relationship between the cashless policy and bank liquidity in Nigeria.
1.3
OBJECTIVES OF THE STUDY
The
following are the objectives of this study:
1.
To examine the impact of cashless policy on banks liquidity, using union bank
as case.
2.
To examine the effect of cashless policy on the Nigerian economy.
3.
To find out the challenges confronting cashless policy in Nigeria.
1.4
RESEARCH QUESTIONS
i.
What is the impact of cashless policy on banks liquidity?
ii.
What is the effect of cashless policy on the Nigerian economy?
iii.
What are the challenges confronting cashless policy in Nigeria?
1.6
SIGNIFICANCE OF THE STUDY
The
following are the significance of this study:
The
outcome of this study will educate the bankers and other stakeholders in the
management of banks on the relationship between cashless policy and bank
liquidity.
This
research will be a contribution to the body of literature in the area of the
effect of personality trait on student’s academic performance, thereby constituting
the empirical literature for future research in the subject area.
1.7
SCOPE/LIMITATIONS OF THE STUDY
This
study will cover the relationship between cashless policy and bank liquidity.
1.8LIMITATION OF STUDY
Financial
constraint– Insufficient fund tends to impede the efficiency of the
researcher in sourcing for the relevant materials, literature or information
and in the process of data collection (internet, questionnaire and interview).
Time
constraint– The researcher will simultaneously engage
in this study with other academic work. This consequently will cut down on the
time devoted for the research work.
1.9 Definition of Terms
Cashless policy:
aims to curb some of the negative consequences associated with the high usage
of physical cash in the economy,
including high cost of cash, high risk of using cash, high subsidy,
informal economy,
inefficiency and corruption (CBN,2011).
Liquidity:
the availability of liquid assets to a market or company.
Liquidity management:Liquidity management is a
concept broadly describing a company’s ability to meet financial obligations
through cash flow1, funding activities, and capital management. Liquidity management can be
challenging as it is impacted by revenue and cost generating activities,
capital and dividend plans, and tax strategies.
Bank liquidity: Liquidity in banking refers to the ability of
a bank to meet its
financial obligations as they come due. It can come from direct cash holdings
in currency or on account at the Federal Reserve or other central bank. More frequently, it comes from
acquiring securities that can be sold quickly with minimal loss.