Nigeria’s e-Naira: An analyst’s perspective

In a previous article, I had argued that the proposed digital currency named e-Naira by the Federal government of Nigeria through the Central Bank of Nigeria is not cryptocurrency. This was on the backdrop of the misconception by the larger populace that the FG was introducing e-Naira as an alternative to the crypto that was banned earlier in the year. I had detailed the difference between both and advised the CBN to respect and keep its sanctity as the banker of the last resort.

Rightly so, the recently released guideline by the CBN now gives a measure of understanding to the operation of the e-Naira. The guideline clearly shows that the e-naira is not an alternative to crypto. It is a payment system designed to supplement the existing payment system in Nigeria. The clarity provided by the CBN has thrown more questions as to its relevance and the necessity of payment system duplication.

The Central Bank Digital Currency (CBDC) is an alternative means of payment to cash. While we acknowledge that there are two types of payment modes i.e. physical and virtual, cash is termed physical while CBDC is virtual. The CBDC can be local (i.e. within the country) or cross the border (between two or more countries). The CBDC is usually used in situations where the local currency of a country is often subjugated in which case the government may ban the use of foreign currency and make the local digital currency compulsory.

Before now, there have been attempts to introduce CBDC. The first in 1992 was by the Bank of Finland which operated for 3 years and got transferred to private ownership and technically ceased to be CBDC. It was aimed at providing small-scale retail payments and operated as a prepaid stored-value card. Ecuador attempted it in 2014 but shut it down in 2018. This attempt failed because the government had asked the citizens to trust it and keep their monies in a virtual currency backed by physical dollars during their financial crises. It was abandoned as the government could not live up to its billing. Cambodia through the National Bank of Cambodia in 2020 implemented it to address the gluttonous appetite for foreign currency and hoped it would encourage the greater use of their local currency as opposed to the dollar.

The advent of crypto and by extension Libra (Facebook digital currency) has put pressure on countries to delve into finding suitable alternatives that will make them remain relevant. The recent progress made and the implementation of CBDC by the People’s Bank of China (PBOC) has also been a major driver of interest. However, as of date, eighty-one countries have signified interest in the onboarding of CBDC out of which only five have taken off. Recently Australia, Singapore, South Africa, and Malaysia formed a consortium of countries for a cross-border CBDC which is expected to improve trade and exchange. Though CBDCs are not the obvious best solutions, problems ranging from hygiene to macroeconomics have been touted as key issues to be addressed through its implementation.

Paraphrased dynamics of e-Naira
The e-Naira has been proposed to take effect on October 1, 2021. The process starts with your commercial bank which is expected to send your account details to the CBN. On receipt of your account details, it generates a CBDC code for you that will enable you to maintain an account directly with it. This account opened for you by CBN will be tied to your commercial bank account and will be called “Wallet”. So you will maintain your wallet with CBN alongside your existing account with your commercial bank, for now, to enable the CBN to meet the October 1 deadline. Once this is done, you can then start to transact.

Your first transaction will involve moving a certain sum to your wallet from your commercial bank. You will not earn any interest on this sum in your wallet as it is not for investment purposes but for transactions. In utilising the balance in your wallet, you can pay for goods and services using familiar channels of POS etc. You can transfer to the wallet or commercial bank accounts of individuals (friends, relatives, etc.). When you do not need it in the wallet, you can transfer the balance back to your commercial bank account. This opportunity is opened to people that have never opened accounts with any bank in which case when they do and upon providing their NIN, their single transaction cannot exceed N50,000 and daily total, not more than N300,000. It is also opened to people who already have an account and have BVN but minimal KYC in which case they can do up to N200,000 in a single transaction and a total of N500,000 daily. Individuals with full KYC and BVN will be able to transfer or receive N1m in a single transaction and a total of N5m per day. Businesses are not excluded in which case they can send and receive N1m in a single transaction and a no-limit for daily transactions. 
 
Some mixed feelings
Since the release of the guideline in Nigeria, many concerned voices have expressed their fear that this is not different from what they are currently used to and in that case not necessary. The beauty however is in the charges for those who are cost-sensitive. All charges are zero! Let me repeat that. All transactions done on this platform are at no cost to the customer. So some people may find it smart to move a large single sum from their commercial bank account to spend from their wallet thereby avoiding all the charges that come with spending from commercial banks. While this seems to be a great idea benefitting the majority of the citizens, analysts have queried the fate of commercial banks claiming that the movement of funds to wallet may create a run on the banks while the loss of income will erode their bottom line. They feel it is not sustainable and will eventually be reviewed. The technology is not owned by the CBN which makes charges inevitable in the future and when this happens, customers will find it unattractive and may port.

Despite the fears expressed, some analysts have given the CBN a pass mark on innovation and responsiveness. The issue of the cost of printing currency, Naira abuse, inclusion, theft and infection/disease are among the few that the emergence of e-Naira will address. 
 
The guidelines released by the CBN have addressed only a few areas of concern and the CBN has confirmed that it is only to enable the process to commence on the deadline date of October first. While I commend the CBN for their innovation, I would expect the CBN to; one, be more inclusive and recognise all institutions under their license in the operation of CBDC.

Two, while it may be impracticable to run this model at zero charges since the technology was imported, leased or acquired, the CBN should be upfront with expectations in terms of cost to avoid distrust. The distrust that exists between customers and banks today can be linked to what the customer calls hidden charges and it smacks bad fate for the CBN to put itself in this position being the bank of last resort.

Three, Nigeria has ranked highest among start-ups all over Africa beating Kenya recently to first place. Therefore, engagement of our local fintech to understudy Bitts Company, the Caribbean incorporated Fintech engaged to power the scheme. This will gradually ease the pressure on our fx reserves as the contract can be structured to include split payments in both local and fx currencies. Fees may be paid in Naira while fx is limited to equipment acquisition.

Lastly, the countries that implemented CBDC in the past did so to address the specific economic need. The CBN should exercise clarity in their objective and not adopt the scheme for the sake of innovation or a reaction to external pressures of China’s implementation, Facebook Libra‘s lunch or wanting to be Africa’s trailblazer.