Nigeria's Fiscal Crisis: 94% of Currency Held Outside Banks - Report

As of March 2024, a staggering 94% of Nigeria's currency in circulation, worth N3.63 trillion, was held outside banks, indicating a growing lack of confidence in the banking system and posing significant risks to the nation's financial stability.

According to the Central Bank of Nigeria's (CBN) latest Money and Statistics data, the amount of physical money (M1) in circulation has skyrocketed compared to the previous year.

Why this matters: This trend has far-reaching implications for Nigeria's economy, as it can lead to reduced credit availability, higher transaction costs, and a slowdown in economic activity. Moreover, it can also undermine the government's efforts to promote a cashless economy and combat crime.

In January 2024, M1 stood at N3.65 trillion, more than double the N1.39 trillion recorded in January 2023. This trend continued throughout the quarter, with March 2024 reaching N3.87 trillion, a 130% increase from the previous year. The CBN has pumped more cash into the system, likely in response to the scarcity issues plaguing 2023. However, the amount held outside banks is growing even faster.

January 2024 saw N3.28 trillion outside the banking system, compared to N792.18 billion just a year prior. By March 2024, this figure had ballooned to a concerning N3.63 trillion, a 150% increase year-on-year. This trend suggests that Nigerians are hoarding cash at a rate exceeding the CBN's efforts to increase circulation.

The hoarding behavior can be traced back to the severe cash scarcity crisis experienced in 2023, caused by the CBN's flawed implementation of a naira redesign policy. The policy, intended to promote a cashless economy and combat crime, resulted in widespread disruption and a loss of trust in banks. Concerns regarding the validity of old notes and difficulties in accessing cash fueled a hoarding mentality that persists today.

The hoarding of vast sums outside the formal banking system poses significant challenges, hindering the smooth circulation of money, impacting liquidity, and weakening the effectiveness of monetary policy. This could lead to higher transaction costs, reduced credit availability, and ultimately, a slowdown in economic activity.

The CBN has acknowledged the issue, citing "high volume withdrawals" from banks and "panic withdrawals" by customers. They have also warned banks and merchants against hoarding cash. However, despite these efforts and the suspension of fees on large cash deposits, Nigerians remain hesitant to return their money to the banking system.

Dr. Adebayo Adams, former Chairman of the Lagos State chapter of the Nigerian Association of Small and Medium Enterprises (NASME), expressed concerns about the impact on small businesses, stating, "This would have a serious impact on small business owners and it would discourage a lot of people from bringing their cash to the bank. So they would prefer doing transactions in cash and they would be handling cash around, and this might increase armed robbery and kidnappers would be asking for cash."

The reinstatement of processing fees on large cash deposits, ranging from 2% to 3%, is expected to further discourage Nigerians from returning their money to banks. Major commercial banks have already lost their trillion-naira market capitalization status on the Nigerian Exchange (NGX) following a sharp drop in their stocks.

To address this issue, the CBN and the government must work together to create a more transparent and reliable financial ecosystem that encourages Nigerians to participate in the formal banking sector. Only then can the nation ensure the smooth functioning of its economy and achieve sustainable growth. As financial analyst Augusto Ayokunle Olubunmi noted, "Since things have gone back to normal, the CBN feels it is imperative to have those charges back and also encourage people to use alternative channels."

Key Takeaways

• 94% of Nigeria's currency in circulation (N3.63 trillion) is held outside banks, indicating a lack of confidence in the banking system.
• This trend can lead to reduced credit availability, higher transaction costs, and a slowdown in economic activity.
• The amount of physical money in circulation has increased by 130% year-on-year, with N3.87 trillion in March 2024.
• The Central Bank of Nigeria's efforts to increase circulation have been outpaced by cash hoarding, with N3.63 trillion held outside banks.
• The government and CBN must work together to create a reliable financial ecosystem to encourage Nigerians to participate in the formal banking sector.