In Nigeria, a startling 92% of the country’s currency is currently held outside the banking system, a trend that has escalated dramatically in the past year. This resurgence of cash hoarding poses a significant challenge to the Central Bank of Nigeria’s (CBN) monetary policy effectiveness, particularly in an environment where inflation rates have reached alarming levels.
As of the end of February, the CBN reported that over N3.41 trillion was being held by the public, bypassing traditional financial intermediaries and evading the usual monetary policy controls. This amount represents a staggering 92.4% of all currency in circulation, an indicator of a profound distrust in the banking system and a preference for liquid assets amidst economic uncertainty.
This situation is exacerbated by banks continuing to ration cash disbursements, a practice that has not only frustrated customers but also fueled the hoarding behavior. The phenomenon of cash outside banks is not new to Nigeria but has intensified following the controversial naira redesign and the subsequent push towards a cashless economy, which many perceived as premature and poorly executed.
The rising trend of cash hoarding coincides with an inflation rate that soared to 33.2% last month, with projections indicating it could surpass 35% soon. Despite the CBN’s aggressive interest rate adjustments—raising the policy rate to 24.75%—the expected dampening effect on inflation has not materialized. This anomaly, where high interest rates coexist with high inflation, underscores the complexities of managing an economy with significant informal sectors and low financial market penetration.
The volume of currency held outside banks reached its second-highest level at N3.41 trillion in February, only slightly less than the N3.43 trillion recorded in December. This represents a 300% increase from February of the previous year when the currency total was just N843 billion. Such dramatic growth in currency outside the financial system reflects the public’s response to the CBN’s cash handling policies during the naira redesign, which many criticized for causing significant disruptions without adequate preparation or availability of new banknotes.
The prevailing high velocity of money outside the banking system limits the effectiveness of traditional monetary policy tools and calls for more innovative strategies from the CBN. The central bank faces the dual challenge of reining in inflation while also encouraging the public to reintegrate their holdings into the formal banking system.
The mistrust in banking institutions is partly attributed to the restrictive practices regarding cash withdrawals. Many banks have imposed limits well below what many businesses and individuals require, exacerbating the public’s preference for keeping cash on hand. Although there are no official caps on withdrawal amounts, reports indicate that some branches limit disbursements to as low as N50,000 per transaction, based primarily on cash availability.
To address these challenges, policymakers must consider measures that rebuild trust in the banking system, perhaps by ensuring more transparency and reliability in cash availability. Additionally, there may be a need to revisit the approach toward transitioning to a cashless economy, ensuring that such transitions are gradual, well-signaled, and accompanied by robust infrastructure that can handle increased digital transactions without excluding significant portions of the population.
The situation of currency hoarding in Nigeria is a complex issue stemming from a combination of economic policy decisions, public mistrust, and systemic inefficiencies within the banking sector. As the CBN navigates these turbulent waters, the broader implications for Nigeria’s economic stability and growth are profound. Effective resolution would require not only policy adjustments but also a concerted effort to engage with and address the concerns of the Nigerian populace, ensuring that financial policies and systems align more closely with the needs and realities of its people.
