Understanding The Effect of Cashless Policy Through Harmful Economic Policies

If you prefer to use cash to conduct large business transactions that involve huge sums of money, then you might be doing so at a cost henceforth.

This is because the Central Bank of Nigeria has reintroduced its cashless policy which stipulates a cash handling charge on daily cash withdrawals that exceed N500, 000 for individuals and N3m for corporate bodies.

The new policy on cash-based transactions in banks, according to the apex bank, is aimed at reducing the amount of physical cash circulating in the economy as well as encouraging more electronic-based transactions.

The electronic-based channels would be used for payments of goods, services, and transfers among others.

While the nationwide implementation of the cashless policy will begin by March 2020, charges on deposits are now being applied in Lagos, Ogun, Kano, Abia, Anambra, and River State as well as the Federal Capital Territory.

The implementation of the policy would signal the imposition of charges on deposits in addition to already existing charges on withdrawals.

According to the circular from the CBN, the charges, which took effect from Wednesday, will attract three percent processing fees for withdrawals and two percent processing fees for lodgements of amounts above N500, 000 for individual accounts.

For corporate accounts, the apex bank in the circular said that Deposit Money Banks would charge five percent processing fees for withdrawals and three percent processing fee for lodgements of amounts above N3, 000, 000.

This means that if an individual is withdrawing N900, 000, he will have to pay a fee on N400, 000. At three percent, the individual has to part with N12, 000.

On the other hand, if he is depositing cash of N900, 000; he will have to part with N8, 000.

Why The Cashless Policy?

The CBN said the new cashless policy was introduced for a number of key reasons. They are:

To drive the development and modernization of the country’s payment system in line with Nigeria’s Vision 2020 goal of being among the top 20 economies by the year 2020. The apex bank said an efficient and modern payment system is positively correlated with economic development and is a key enabler for economic growth.

To reduce the cost of banking services, including cost of credit and drive financial inclusion by providing more efficient transaction options and greater reach.
To improve the effectiveness of monetary policy in managing inflation and driving economic growth.

Implications Of High Cash Usage In An Economy

In addition, the cash policy aims to curb some of the negative consequences associated with the high usage of physical cash in the economy, including:

The high cost of cash: There is a high cost of cash along the value chain from the CBN and the banks, to corporations and traders. Everyone bears the high costs associated with volume cash handling.

High risk of using cash: Cash encourages robberies and other cash-related crimes. It also can lead to financial loss in the case of fire and flooding incidents.
High subsidy: Analysis from the CBN showed that only 10 percent of daily banking transactions are above N150, 000.

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However, this 10 percent account for the majority of the high-value transactions. The implication of this is that the entire banking population subsidizes the costs that the tiny minority 10 percent incurs in terms of high cash usage.

The informal economy: High cash usage results in a lot of money outside the formal economy, thus limiting the effectiveness of monetary policy in managing inflation and encouraging economic growth.

Inefficiency and corruption: High cash usage enables corruption, leakages, and money laundering, among other cash-related fraudulent activities.
Account Where Cashless Policy Is Applicable

The cash-policy applies to all accounts with exception to government revenue generation account, Primary Mortgage Institutions, Microfinance Banks and Embassies.

Banks have been directed to work with their corporate customers to arrange for suitable e-collection options.

Limits Of Transaction

The limits are cumulative daily limits each for withdrawal. For instance, for individuals, the daily free withdrawal limit is N500, 000

The limits apply to all accounts so far as it involves cash, irrespective of channel of payment, whether over the counter, Automated Teller Machine, and third party cheques cashed over the counter among others in which cash is withdrawn.

According to the CBN, if an individual withdraws N450,000 over the counter, and N150,000 from the ATM on the same day, the total amount withdrawn by the customer is deemed to be N600,000, and the service charge will apply on N100,000 which is the amount above the daily free limit).

The limit also applies to cash brought through Cash-in-Transit companies, as the CIT company only serves as a means of transportation.

Contradictory Policies

Although the cashless policy seems to be of immense benefit to several parties involved in a transaction, there are, however, policies which seem to contradict the policy and have the capacity to fuel cash transactions and even withdrawal of more cash from the banking system.

Merchant Collection On Electronic Transactions

For merchants who offer customers Point of Sale machines for payment, there is a charge. This is called merchant collection on electronic transaction.

Although it is the merchant that is charged by the bank, the implication of this charge is that the merchant eventually passes the payment to the customer.

Although the apex bank announced that it had reduced this rate, its existence could cause customers to opt for cash payments.

There had been cases where merchants who have PoS machines insisted on cash payment or additional fee (on small transactions) because they did not want to be the ones to bear the cost of paying through electronic devices.

Another CBN circular announced a reduction in merchants collections on electronic transactions.

The apex bank stated, “Banks shall unbundle merchant settlement amounts and charge applicable taxes and duties as stipulated by regulations.

“Merchants Service Charge has been reviewed downward from 0.75 per cent capped at N1, 200 to 0.50 per cent capped at N1, 000.”

“Applicable taxes and duties as stipulated regulations” may not be clear but ultimately, they are borne by the patrons of merchants.

Stamp Duty

A fiscal policy which became effective through a circular of CBN is the stamp duty charged on some electronic transfers to bank accounts in the country.

On electronic transfer of any fund N1, 000 and above, banks are caused to charge N50 as stamp duty.

Although an appellate court had ruled that the Stamp Duty Act, 2014 did not envisage electronic transactions, banks had continued to charge stamp duty on all electronic transfers.

Since the deductions began in 2016, more than N30bn had been accumulated into the account warehoused at the CBN. Government bodies, however, believe that banks had accumulated much more than this but only remitted about N30bn.

Tax On Online Transactions

Another fiscal policy that is set up against the cashless transactions is the recent announcement by the Federal Inland Revenue Service that it would begin to tax online transactions in 2020.

This policy may be defeatist even though tax experts had lauded it. It could discourage online transactions and payments. In Nigeria, many cash transactions go unnoticed and are not subject to taxation.

Many consumers may want to explore this opportunity which they cannot get from an online and electronic payment system.

Perhaps, CBN and other government bodies need to adopt a systematic approach and harmonize their policies if they are looking forward to achieving the same purpose.