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Once again, the
Central Bank of Nigeria (CBN) has set its now famous cat amongst the
banking sub-sector’s star-crossed pigeons. Initially much welcome, when
the financial services sector was the favourite bugbear of all who had
issues with the more adverse consequences of the global financial and
economic crisis, much heavy weather has been made recently of the
central bank’s continuing intervention in the sector.

From concerns over
what now appears to be the apex bank’s penchant for trying to
micro-manage the sub-sector, the popular gravamen against the CBN has
moved through new charges of its interfering with the evolution of
market-driven solutions, to the accusation that (as with such
regulatory measures in the near past) the apex bank can no longer see
the monetary policy formulation trees for the banking supervision woods.

Yet, the story
could be told differently. The CBN’s latest directive to banks
indicating that effective June 1 next year, it shall be imposing a
“daily cumulative limit of N150,000 and N1,000,000 on free cash
withdrawals and lodgements (from banks) by individual and corporate
customers respectively” does have its benefits. To the extent that this
reduces the use of cash payments for all but the most basic of
transactions, it should reduce the wear on the existing stock of fiat
money; and to the same degree, it should help trim the CBN’s spend on
minting cash.

In addition, it
should likewise moderate the cost to the financial services industry of
managing cash, and help nudge bank customers towards alternative
payment channels. The jury will be out for a while yet on the effect
that this policy would have on crime and related anti-social behaviour;
but it is a safe bet to believe that the fewer cash-based transactions
we have, the lesser the tally of crimes based on the supposition that
the victims have money on their persons.

Unfortunately, the
close relationship between practice and policy, promises to overturn
this narrative. In effect, the connection between objective conditions
and the subjective state invites further interrogation of the likely
effects of the CBN’s latest initiative. Fail to acknowledge the former,
and, as a policy maker, you run the risk of turning turtle. Alas, the
CBN has run this gauntlet several times too many.

It failed, for
instance, in 2004 to understand that a bank is as big as the needs of
the economy it serves; and ignoring clear local constraints, aimed to
have banks in Nigeria equivalent in size to their South African
counterparts. Of course, the rest is history.

Not all of it
though. The inability to persuade the local economy to use cheques is a
real and present problem; and it bears strongly on the CBN’s renewed
drive for reduced cash transactions. You could dismiss this failure as
the result of a local affinity for cash. Or you could go one step
better; and see instead at the bottom of the problem, a huge trust
deficit. This latter problem, on the other hand, is one of the many
upshots of our failure to enforce rules across every department of the
economy. Because few persons have been penalised for issuing dud
non-cash payment instruments, most people feel safer paying with cash.

Besides the absence
of trust, and the difficulty with enforcing contracts, or seeking
redress for the non-enforcement of contracts, there are objective
constraints to the use of non-cash payment methods, which the current
CBN circular appears blissfully ignorant of.

The CBN recently
forced banks to shut down their off-site ATMs, without arrangements to
replace these. And even where ATMs exist, cash-outs, and network
problems ensure that a precautionary hoard of cash, appropriately
concealed on one’s person is a wise decision in this economy. For small
enterprises (the market women, largely) operating in this economy, the
challenge is of a different order. It still takes forever to open an
account; and the yields on these accounts are a swindle that the apex
bank is privy to.

On the CBN’s side, an argument could be made that this precautionary hoard of cash cannot be anything close to N150,000.

In essence, the point is that as crafted, this directive would not
hurt daily transactions. However, this is to ignore, again, the
incentives to, and the role of the shadow economy in keeping a sizeable
amount of the money in circulation outside the banks’ vaults.