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Naira commoditisation as CBN's cashless policy flaw 12 Feb 2025

The Central Bank of Nigeria (CBN) expressed last month its commitment to combatting the widespread buying and selling of naira notes, a phenomenon known as currency commoditisation. The CBN's proposed solutions include public awareness campaigns, improved cash management, law enforcement collaboration, and promotion of digital payments. It took the bank long enough to announce its plans to address an issue that is an unintended consequence of its policies. The delay could have lasting negative impacts on various policy interventions aimed at curbing inflation, promoting a cashless economy, and reducing illicit financial flows.

The practice whereby Nigerians now routinely buy their own national currency poses significant challenges not only to the banking sector but also to the daily lives of millions of citizens who rely on cash transactions. For many low-income Nigerians, cash is not just a medium of exchange; it is a store of value. The scarcity of the bank notes or having to lose part of one’s money in order to access cash, can be quite frustrating. Also, the emotional connection people have to physical cash is strong, especially in rural areas where banking infrastructure is lacking. Not having access to cash in such rural settings is lack of access to financial services and economic empowerment whatsoever.

Many blame financial services agents, mostly Point of Sale (PoS) operators, for the worsening naira scarcity. But the rise of the agents had been particularly transformative, with financial services adoption rates increasing from 4.4% in 2018 to 54% in 2023, according to a Enhancing Financial Innovation and Access (EFInA) report released in December 2023. These agents have extended financial access to 11 million adults who do not use banks or mobile money, demonstrating the potential of technology to bridge the gap in financial inclusion.

However, the EFInA report also reveals the effects of the contradictions in the CBN's implementation of its Cashless Policy. For instance, the naira redesign initiative of late 2022, coupled with strict withdrawal limits, created artificial scarcity of the currency that has persisted into 2025. The survey shows the profound impact of these policies on Nigerian households and businesses. The naira redesign policy, in particular, had devastating effects: 46% of adults reported reduced income, 39% were forced to cut back on expenses, and 36% had to pay more to access cash. Perhaps most concerning, 36% faced sudden hikes in food and transportation costs, while 32% had to cut back on food consumption entirely.

The irony of the CBN’s cashless policy is stark. Citizens queue at banks to withdraw their money, only to be told there is no cash available. Yet, just outside these same banks, PoS operators readily offer cash services – albeit at a premium that can reach N400 for every N10,000 withdrawal. PoS operators, originally introduced to facilitate cashless transactions, have become key players in a burgeoning market for cash. They charge exorbitant fees for withdrawals, effectively turning the naira into a tradable commodity. This shift highlights how the original intent of promoting a cashless economy has evolved into a situation where cash is bought and sold at inflated prices.

While Nigeria has made progress in formal financial inclusion, reaching 64% in 2023, up from 56% in 2020, the persistent cash scarcity threatens these gains. People who already lacked access to formal banking services found themselves further marginalised, as they struggled to access cash for basic necessities. Small business owners, market traders, and citizens in rural areas – where banking infrastructure is limited – bear the brunt of these distortions. They often must pay premium rates to access their own money, effectively reducing their purchasing power and exacerbating economic hardship.

Consider the experience of a market trader in Lagos who needs cash daily to purchase inventory. Previously, she would withdraw money from her bank account at no cost. Now, she regularly pays PoS operators' fees, which can amount to several thousand naira weekly – an additional operating cost that ultimately affects her profit margins and the prices she charges customers.

The inflationary pressures caused by cash scarcity have also been significant. When currency is treated as a commodity, it can lead to speculative trading, driving up prices and destabilising the economy. In December 2024, Nigeria’s inflation rate further rose to 34.8 per cent, partly driven by the scarcity of physical naira and the hoarding of cash.

The amount of currency outside the banking system, which has reached an all-time high, demonstrates the scale of the challenge. Recent CBN data shows currency outside the banking system accelerated to N4.65 trillion in November 2024, representing a whopping 95.3 per cent of total currency in circulation. This represents a significant increase from January 2024, when N3.28 trillion (89.9 per cent) was held outside banks. A growing distrust in the banking system shows a preference for cash holdings – precisely the opposite of what the Cashless Policy aimed to achieve.

The interventions recently announced by CBN Governor Olayemi Cardoso may prove insufficient without addressing the fundamental issues that drove citizens to seek alternatives to traditional banking channels in the first place. As the American writer, Neil Irwin, aptly noted in his book, "The Alchemists: Three Central Bankers and a World on Fire," a central bank's greatest asset is not its gold reserves but the trust of the people. The commoditisation of the naira – and the high proportion of cash outside the banking system – represent a significant erosion of this trust. When citizens must buy their own currency at a premium, it signals a fundamental breakdown in the relationship between the central bank, commercial banks, and the public.

The CBN’s failure to anticipate the social and economic consequences of its policy interventions is a significant mishap. By restricting access to cash, the central bank inadvertently created artificial scarcity, driving demand for physical naira and fuelling a black market for currency trading.

Nigeria is not the first country to face challenges in transitioning to a cashless economy. Kenya’s experience with M-Pesa, a mobile money platform, offers valuable lessons. Launched in 2007, M-Pesa has become a cornerstone of Kenya’s financial system, enabling millions of people to access financial services without the need for traditional banking infrastructure. The success of M-Pesa was driven by a combination of regulatory support, public trust, and a focus on financial inclusion. Rather than forcing adoption through restrictions, Kenya created a system that naturally attracted users through its convenience and reliability. The success of this approach is evident in Kenya's higher rate of financial inclusion – 79% compared to Nigeria's 64%, per EFInA.

The path forward for Nigeria requires a delicate balance. While the CBN's drive towards a cashless economy aligns with global trends, the transition must account for Nigeria's unique economic landscape, where the informal sector contributes over 50% of GDP and cash remains king for many transactions. The EFInA data showing that nearly half of unbanked adults lack account ownership due to having no income suggests that financial inclusion efforts must be accompanied by broader economic development initiatives. These will include initiatives that address the root causes of currency instability, such as inflation and weak economic fundamentals. Restoring public trust in the banking system will require transparency, consistent policies, and a focus on the needs of vulnerable populations.

Immediate steps should include reviewing and relaxing current cash withdrawal limits, improving the reliability of electronic payment systems, and consistent policy implementation. Long-term solutions must focus on developing robust digital infrastructure, particularly in rural areas, and creating incentives rather than using law enforcement to drive cashless adoption. The success of financial service agents, whose adoption skyrocketed from 4.4% in 2018 to 54% in 2023, shows that Nigerians will embrace convenient financial solutions when properly implemented.

The commoditisation of the naira serves as a cautionary tale about the unintended consequences of well-intentioned but poorly executed monetary policies. It reminds us that currency is more than just a medium of exchange; it is a fundamental component of the social contract between a government and its citizens. When this contract is strained, the currency itself becomes a commodity, undermining its primary function and creating distortions that reverberate throughout the economy.

As Nigeria continues its journey towards a more modernised financial system, the CBN must learn from these experiences. The goal should be to create an inclusive financial system that serves all Nigerians, not one that inadvertently pushes them towards informal alternatives. Only then can we begin to reverse the commoditisation of the naira and restore the currency’s proper role as a medium of exchange as opposed to a tradeable asset.

Martins Hile is a sustainability strategist and editorial consultant.