Trends in Currency Management and Nigeria's Experience
By Shamsuddeen Usman
The Central Bank of Nigeria has the sole right to issue the legal tender currency (bank notes and coin) in the country and to manage the currency in a manner that will ensure the economic growth and development of the country by ensuring the availability of bank notes and coins; ensuring the quality of bank notes and coins in circulation; ensuring that the quantity of bank notes and coins in circulation is in consonance with the level of economic activity, in order not to generate inflationary pressure on the economy; managing public awareness of the security features of the bank notes at every possible opportunity, in order to thwart the activities of counterfeiters; and managing the public confidence and pride in the legal tender currency
Currency management entails all the processes carried out in the issue of bank notes and coins to currency distribution and sorting for disposal purposes. In the most advanced economies of the world most of the activities involved in currency management have been automated, such that they have achieved a very high level of efficiency in printing and minting, distribution and sorting processes. The challenge to the CBN and also the financial institutions in the industry, is to strive for greater use of technology in service delivery to its internal and external clients. The Bank has realised, hence its restructuring and re-engineering exercise, code named Project EAGLES, that:
the adoption, of new technologies in service delivery can alter every aspect of its client relationship;
it needs to be one step ahead of those it seeks to serve;
a growing number of services can only be provided virtually, and
the greatest challenge to the banking system in Nigeria will be to change fast enough to keep pace with new technology and new values. Either we take hold of the future or the future will surely take hold of us.
It must be stated from the onset that activities involved in currency management are basically the same between the advanced and developing economies, that is, the activities of currency issue, currency distribution, currency sorting and disposal are essentially the same. The dividing line between the developed countries and developing economies like Nigeria comes in the areas of use of technology and automation of processes. The advanced economies have been able to attain a
very high level of efficiency and effectiveness in carrying out these functions, given the advanced stage of their economic development. In the remainder of this paper, we will consider in section 2, the global trends in currency management. In section 3 we discuss Nigeria's experience in currency management, while in Section 4 we make some concluding remarks.
The process of currency management is more or less the same the world over. Consequently, my discussion of the global trends in currency management will be directed at cash operations management by the banks, through whom the Central Bank of Nigeria distributes the bank notes and coins that are produced by it. My stance here is hinged on the fact that the activities involved in printing and minting and distribution of bank notes and coins are not the end in themselves, but a means towards having a payments system that is efficient and meets the needs of the public. I will therefore concentrate on the trends in modern cash management by banks in the developed countries, from which we hope to learn one or two lessons, on how to improve on our payments system - that is, by migrating from being a cash - dominated payments system to an electronic-based payments system. There is no doubt that expanding - global markets, rapid technological change, financial interdependency and cyclical economic conditions have all created challenges to managing payments and payment risks. Financial professionals who stay current with technological and economic developments, demonstrate leadership, and maintain superior financial performance as a target, will ensure that payments operations are as efficient and well-controlled as possible.
The global trends in currency management are all shaped towards real-time processes for deal capture, enrichment, payment and settlement instructions and reconciliation. Current technological innovations will enforce real-time treasury and position management in payments processing, requiring a rapid shift away from batch processes and next-day reconciliations in favour of real-time instruction, exception management, reconciliation and problem intervention. Modern cash management by banks is hinged on information reporting capabilities which deliver account and transaction data to customers when and how they need them. They provide customers, therefore, with convenient Internet/Online Access to real-time information for all their cash transactions.
A major aspect of modern currency management service is making cash available through self- service networks. This service is rendered essentially through Automatic Teller Machines (ATMs). With ATMs now the most important single channel for carrying cash between the financial service provider and the consumer, failure to keep ATMs stocked with cash will be seen as a serious failure of customer service. In order to ensure effective use, of ATMs, banks must review currency demand patterns, cash carrier parameters and cost factors to establish the demand levels at each point of the ATM network. This becomes the basis for cost-effective distribution of cash to minimise replenishment, transportation and holding costs.
We must integrate the use of ATMs in our currency management strategy, as is the case in the more advanced countries. We are still far from embracing the use of ATMs in our currency distribution. In comparison, the following table shows the level of ATM usage in some developed economies
In the more advanced economies of the world many innovations in the payments system are taking place. Some of these innovations include:
In Nigeria today, cash is the most popular form of payment for consumers. But clash is the most costly and least profitable payment instrument. The use of cheque as a payment instrument is not a widespread practice, due to a number of reasons, including lack of trust in, and dishonesty on the part of, the issuer of the cheque and the non- enforcement of the Dud Cheques Act, which criminalizes the issuance of dud cheques in Nigeria. The challenge to the Central Bank of Nigeria and the banking industry is how to enhance the use and acceptance of other payment mechanisms in Nigeria. Efforts must be made to enhance the use of cheques, wire payments, debit and credit cards, in order to reduce the over-reliance on cash as the major means of payment. Another disadvantage of using cash is the fact that cash is the least automated payment instrument when compared with other methods of settlement.
A major development in the United States' payments system, which will soon spread to other countries of the world, is what is called "Check Truncation Act", popularly known also as "Check 21". The "Check Truncation Act" is scheduled to take effect in
October, 2004. Check 21 aims at improving the United States' cheque clearing efficiency by making electronic cheque images the legal equivalent of paper cheques for final presentment. The
Act is also aimed at addressing some problems posed by paper cheques, such as the cost of transporting physical cheques to the point of presentment and the associated time delay, which have all added up to the overall cost of processing cheques. For now, however, the electronic cheque images will co-exist with the paper cheques till further notice, but the Check Truncation Act points to the direction of the discontinuance of paper cheques in the future.
A developing trend in currency note issuance towards the use of polymer notes, away from paper notes. The Reserve Bank of Australia has adopted the use of polymer notes in 1989 and has noted the following benefits; polymer notes greatly reduce counterfeiting activity; increased durability of notes and, hence, lower orders for new notes from the note printer; positive public reaction to cleaner and more hygienic notes; environmental gains over the life cycle of the notes; and improved machine processing efficiencies.
There is no doubt that the above benefits are worthy of note. In the future, the Central Bank of Nigeria might have to carry out a cost-benefit analysis, for changing over from paper notes to polymer notes. Relative to paper notes, it has been observed that polymer notes perform better because: polymer notes are, on average, of better quality; polymer notes deposit less ink and dirt on transport belts and sensors; polymer notes create less dust, and polymer notes feed and count better because polymer notes are stiffer, thereby improving machine processing efficiency.
At this juncture, it is appropriate to describe, in a nutshell, how currency deposit, processing and destruction are handled by the Federal Reserve Bank of New York. Each day, the Federal Reserve Bank of New York (FRBNY) processes over 13 million notes deposited by depository institutions. The FRBNY destroys approximately four million unfit currency notes each business day. Most of the resulting shreds are transported to landfills. Each business day, Federal Reserve Banks handle billions of dollars in currency that are deposited by banks. Banks send currency to the Reserve Banks when they have more than enough on hand to satisfy their customers' needs. Depending on daily and seasonal fluctuations, an individual bank may deposit funds at a Federal Reserve Bank several times a week.
The Bureau of Engraving and Printing (BEP) of the U.S. Treasury, in turn, supplies newly printed cash, and the Bureau of the Mint supplies coins, to the Reserve Banks to fill bank orders.
Currency processing is performed at the East Rutherford Operations Centre (EFOC) in New Jersey and the FRBNY's Buffalo Branch. Banks deliver coins and notes by armoured carriers to EROC, a state-of-the-art facility that opened in 1992. The facility, which also processes cheques and serves as one of the Fed's data processing centres, operates under strict controls.
After receiving clearance from' FRBNY security, armoured carriers deliver currency to EROC's Paying and Receiving Division and place it in a glass-enclosed anteroom under the eyes of Federal Reserve staff and EROC's video surveillance system. After the armoured carrier's personnel leave the anteroom, paying and receiving tellers enter to verify the contents of the delivery and issue a receipt. The tellers perform a two-step process. First, they check the integrity of the currency containers, which hold ten 1,000-note bundles and are equipped with seals that change appearance if tampered with. The tellers then scan the bar-coded identification numbers of each container and its seal into EROC's sophisticated computer system, known as the Cash Processing Management System (CPMS). Because an armoured carrier delivery may include deposits from several banks, the CPMS not only counts the number of containers, but also associates each container with its depositing bank.
The currency is then transported by automated guiding vehicles (AGVs) to EROC's automated currency vault, where it is retrieved on a "first-in, first-out" basis by storage and retrieval vehicles (SRVs). The "people-less" vault, which functions entirely through computers' is believed to be the largest currency vault in the world. The vault has a volume of one million cubic feet, is three stories high and has 5,400 compartments. The AGVs, the automated vault, the SRVs, and the CPMS automate all movement and tracking of currency. These integrated technologies minimise the handling of currency by EROC employees and create an audit trail of all currency movement from initial receipt through final disposition.
EROC employees in the currency verification department use high-speed currency processing machines to verify the deposits. AGVs deliver the deposits from the automated vault to currency verification processing rooms, where the currency is fed into the high-speed processing machines. The machines count each note-at an average rate of 70,000 notes per hour and confirm its denomination, fitness and authencity, and then automatically bundle fit notes into packages. The fit notes eventually make their way back into circulation when banks order currency from the Fed. In 2000, 15 machines operating 20 hours a day, four days a week, processed about 13 million notes per day with a dollar value of $321 million. All unfit notes are directed automatically to one end of the high-speed currency processor, where stainless steel blades crosscut the notes into confetti-like shreds and the shreds are sent by vacuum tube to a disposal area one floor below.
The above narration, which has been taken from the website (www.newyorkfed.orfq) of the Federal Reserve Bank of New York, serves to demonstrate the extent to which currency management has been automated in the world. The choice of the New York Federal Reserve Bank is because it is the biggest Fed in the US, as well as in the world. While the various activities carried out by the Fed in currency management are similar to what obtains at the Central Bank of Nigeria, we cannot compare to it in anyway on the level of automation achieved, as in the case of the Federal Reserve Bank of New York. This leads us naturally to our submission below.
There is no doubt that the current trends in global currency management point to the supremacy of technology and automation in the management process, as the new economy becomes the dominant force in business throughout the world. If we are to achieve success in the new economy in the area of currency management, then we must undertake the following:
Reaching Out to the Customers:- The banks must go out to where their customers are; not only physically, but also by offering their services over the internet. The banks must continuously improve on their internet banking services in order to access a bigger- market and a wider pool of customers. Internet banking services will reduce the paper work involved in currency management, as well as the physical handling of cash.
Improving Efficiency: If we are to be successful in the emerging new economy, we need to control our costs and maximise our efficiency. There is more competition out there and we have to be efficient in order to make us survive. We have to embark on cash management practices that will cutdown on paper work and make our money work more for us and,
Technology:- There is no doubt that technology is the cutting edge of modern currency management. We have to invest in new technology and make continuous improvements in our operation. With technology inputs we can keep abreast of the market by studying new trends, market forecasts and industry issues.
The Central Bank of Nigeria (CBN or the Bank) has the sole right to issue bank notes and coins in the country, and it has been performing this function since July 1, 1959 when the first currency notes and coins were issued. Prior to 1959, the West African Currency Board was responsible for issuing currency notes in Nigeria (1912 - 1959). Although the CBN has the authority to issue bank notes and mint coins, the approval of the government must be sought prior to the introduction and circulation of new designs of bank notes and coins. The government decides on the denominations that should be introduced or removed from circulation, based on recommendations from the bank. The bank manages the quality of bank notes in circulation. The used bank notes issued by the branches of the bank must be capable of being mechanically handled by cash receiving and/or dispensing machines.
Dr. Shamsuddeen Usman, CBN Deputy Governor, Operations, delivered this speech at the national seminar on cash handling, automation and management.
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