Cash outside banks and the economy
In high banking circles, the ineffective monetary policy of the Central Bank of Nigeria, banks' shallow financial intermediation, high lending rates among some other shortcomings of the banking sector and by extension the poor economy are being imputed to the high level of cash in the informal sector.
At separate meetings of the Money Market Association of Nigeria (MMAN) held on April 6, the Chartered Institute of Bankers of Nigeria (CIBN) held on June 23, and the Bankers' Committee held on July 6, 2004, the actual volume of cash involved was put at N450 billion, N385 billion and N400 billion respectively. While the entire money supply at any given time cannot be within the banking system, MMAN had estimated then that the proportion of CBN's monetary liabilities outside the banks stood at the high level of 20 per cent as against less than 10 per cent in the UK and USA.
Some reasons may be cited for this situation. One, only a small proportion of the existing 3,300 bank branches and 800 community banks are located in rural and semi-urban areas where the majority of the population lives. Thus, excepting those living in the vicinity of such rural financial outposts, the potential or average rural bank customer has to traverse long distances at high transport costs and other risks. Most rural dwellers practise subsistence agriculture or are engaged in occupations that fetch relatively meagre returns. As a result, a small saver in a bank might end up with net loss for all his troubles. For such people, therefore, the rural bank offers little attraction and any extra cash not immediately required is consigned to the recesses of the home.
Two, in the urban and commercial centres which enjoy good access to banks, ingrained habit and preference for cash-based payment system make it necessary to retain large sums of cash outside the banks. Incidents of bank distress and fake cheques as well as delays and various charges associated with banking transactions have helped erode confidence of the banking public in the non-cash payment alternatives currently available in the banks.
Three, because of widespread insecurity even the wealthy who avidly patronise banking services, seem to observe an unwritten law of keeping large sums at the ready with which to buy their safety whenever the need arises. And four, the rotten fruits of official heists and corruption are usually held in private vaults for a while before being fed piecemeal into the system.
Now the first three cases are rational economic behaviour and fall within the precautionary and transactions motives for holding money. Along with the odious though firmly-rooted fourth case, they impact by contracting and reducing the velocity of money in circulation. Money so kept should pose no insurmountable problems to monetary authorities, who in the short run need only take due notice of the level of fairly idle cash while taking steps to reduce its relative size in the long run.
However, MMAN perceived the impact as a contributory factor to shallow financial intermediation. Nonetheless, the point to note is that the effect is not dissimilar to, but actually reinforces, CBN's policy of mopping- up naira to contain excess liquidity. In fact, worse assault on beneficial financial intermediation comes from disbursing forex revenue in naira borrowed from the banking system which is effectively substituted deficit financing. Monthly release of revenue immediately sets off excess liquidity and reflexive mopping-up which, while being acceptable to MMAN for spinning hefty unearned income for banks, crowds out the real sector.
A fifth factor which helps sustain the high volume of cash outside banks owes its luxuriance to CBN's lax, abuse-suffused forex-dispensing Dutch Auction System and measures for inward money transfer. Forex that is traceable to the official forex pool is made readily available in the informal currency black market. As the CIBN conference was apprised, herein truly lies multiple danger to the economy as the prevailing conditions lend themselves to easy perpetration of money laundering, capital flight, treasury looting and smuggling of contraband to the peril of domestic production. Instead of adopting practicable preventive policies, why does government create conditions for malpractice to fester only to turn around to set up ineffectual institutions to apprehend a few culprits
It is clear from the foregoing that the CBN Governor's assertion before the Bankers' Committee that the key reason for the N400 billion of currency outside the banking system was because some banks had spurned low savers and hankered after high net-worth agents for deposits was incorrect. Also unrealistic was the presumption that there existed massive grassroots savings which would swamp the proposed mega-banks thereby facilitating low lending rates that would help revive the productive sector. Therefore, currency outside the banking system is neither the cause nor the potential solution to our economic problems.
Strangely, at the time the CBN is rummaging up grassroots idle cash as a stable source of funds that would underpin industrial loans at low interest rates, about N18 billion of the fund for Small and Medium Industries Equity Investment Scheme cannot be profitably invested amidst high unemployment, idle industrial capacity, and a deluge of imports. Stranger still, government funds are being withdrawn from banks ostensibly in order both to fight inflation as well as control rising demand for forex and to drive home the volatile nature of public funds possibly as dry run for the era when crude oil prices and OPEC quota might collapse. Are governments expected to stoke economic fires Much stranger still, a stunning budget surplus is being tucked away for the rainy day while the 2004 budget embodying a deficit of up to two per cent of GDP (the effective rate is about 20 per cent which accounts for the high inflation) is being implemented as initially proposed.
Irrespective of what those in authority choose to believe, the many incongruities stem from the erroneous disbursement of public forex revenue in naira, which is equivalent to substituted deficit financing. Funds being withdrawn from the banks, where they are made up of converted forex revenue, would only eliminate banked deficit funds. When withdrawn funds are eventually collected from the CBN and spent, they would then properly qualify as deficit expenditure in a budget-surplus year. The economic difficulties will persist.
However, by disbursing government forex revenue in dollar certificates to be sold for naira in the open market, the CBN would have taken the first step towards deepening financial intermediation by ensuring that export earnings are injected into the system. That would allow the economy to grow in ambiences where inflation would be minimal should it occur at all.
