Analysts raise concern over N3.79tn outside banking system

The amount of currency held outside Nigeria’s banking system surged to N3.79tn in June 2024, up from N3.61tn in April, the latest data from the Central Bank of Nigeria showed.

Experts said this vast sum of unbanked money has been significantly hindering the CBN’s ability to effectively implement its policies and manage the country’s economy.

The Chief Economist at Zenith Bank, Marcel Okeke, highlighted the implications of this issue, noting that the large volume of money outside the formal banking sector complicates the CBN’s policy objectives.

“The money in circulation, whether within or outside the banking system, has no direct relation to recapitalisation,” Okeke said. “However, a significant amount of money remains outside the banking system, particularly in rural areas where people haven’t developed banking habits.”

He said the presence of such a large amount of unbanked currency limits the CBN’s control over key financial metrics, such as the Cash Reserve Ratio, and weakens its ability to influence economic activities.

“The CBN may struggle to effectively implement its policies to manage excess liquidity due to the significant presence of the informal sector,” Okeke added.

To address this issue, the CBN has been promoting financial inclusion through campaigns aimed at educating and encouraging banking in remote areas.

However, Okeke emphasised that these efforts have only reached a small fraction of Nigerians, leaving many still without basic banking knowledge.

“To improve financial literacy and bring more money into the banking system, the CBN and deposit money banks must continue campaigns and provide incentives for digital banking,” he advised.

A Chartered Accountant and former banker, Mary Ogundokun, also expressed concerns about the increasing volume of cash outside the banking system, warning of potential cash pool inflation.

“Banks primarily generate income through loans and deposits. Loan interest rates are a significant source of income,” Ogundokun explained.

“However, if there’s insufficient cash in the bank’s vault, they cannot loan as much, reducing their income.”

This reduction in lending capacity can have far-reaching effects on the economy. Ogundokun said, “This affects the economy, as people’s purchasing power increases with more cash in circulation, potentially leading to cash pool inflation.”

 “Considering the implications of banking activities on the economy, we must act now to prevent potential economic instability.”

Data from the CBN showed that the total currency in circulation increased to N4.05tn in June, up from N3.92tn in April and N3.97tn in May.

The CBN special intervention fund decreased by 35.7 per cent from N433.23bn to N278.86bn. This fund, historically used to support critical sectors such as agriculture and manufacturing, provides a financial cushion for banks.

Its reduction could be part of the CBN’s strategy to manage the country’s money supply and stabilise the economy but it also exacerbates the difficulties banks face in meeting recapitalisation demands.

Moreover, there has been a decrease in credit to the private sector, from N74.3tn to N73.12tn, indicating reduced lending activities by banks. This decline is likely due to liquidity constraints and the need for banks to prioritise their recapitalisation efforts.

The CBN’s data also revealed an increase in the money supply to N101.35tn, up from N99.24tn, and a rise in narrow money, which includes physical currency and demand deposits, to N36.78tn from N33.38tn.

An economist at Lotus Beta Analytics, Shadrach Israel, noted that while these figures suggest growing liquidity in the economy, the concentration of funds outside the banking system limits banks’ access to these resources.

On a positive note, the CBN’s net foreign assets have increased to N18.33tn, signaling strength in the country’s external reserves. However, net domestic assets have slightly decreased to N83.0tn from N83.90tn.

“As the CBN continues its efforts to manage the money supply and stabilise the economy, the challenges posed by the large sums of money held outside the banking system will remain a significant obstacle,” Israel said.

He added, “Without broader financial inclusion and improved literacy, these challenges are likely to persist, hampering the CBN’s ability to implement effective monetary policies and support economic growth.”