The amount of currency held outside Nigeria’s banking system surged to N3.79 trillion in June 2024, up from N3.61 trillion in April, according to the latest data from the Central Bank of Nigeria (CBN). This growing volume of unbanked money is posing significant challenges to the CBN’s ability to implement effective monetary policies and manage the nation’s economy.
Experts warn that the substantial sum of currency outside the formal banking sector is complicating the CBN’s policy objectives. Marcel Okeke, Chief Economist at Zenith Bank, emphasized the impact of this issue, stating, “The large volume of money outside the banking system, especially in rural areas where banking habits are underdeveloped, limits the CBN’s control over key financial metrics such as the Cash Reserve Ratio.”
Okeke noted that while the presence of money in circulation whether within or outside the banking system does not directly relate to recapitalization, the significant amount of unbanked currency hinders the CBN’s efforts to manage excess liquidity and influence economic activities. “The CBN may struggle to implement its policies effectively due to the significant presence of the informal sector,” he added.
In response to this challenge, the CBN has been promoting financial inclusion through campaigns aimed at increasing banking awareness in remote areas. However, Okeke pointed out that these efforts have reached only a small fraction of the population, leaving many Nigerians without basic banking knowledge. He advised that the CBN and deposit money banks should continue these campaigns and offer incentives for digital banking to enhance financial literacy and bring more money into the formal banking system.
Chartered Accountant and former banker Mary Ogundokun also expressed concerns about the rising volume of cash outside the banking system, warning of potential inflationary risks. “Banks primarily generate income through loans and deposits,” Ogundokun explained. “If there’s insufficient cash in the bank’s vault, they cannot loan as much, reducing their income, which can have far-reaching effects on the economy.”
Ogundokun highlighted that this reduction in lending capacity could lead to cash pool inflation, as increased cash in circulation boosts purchasing power. She emphasized the need for urgent action to prevent potential economic instability.
The CBN’s data revealed that the total currency in circulation increased to N4.05 trillion in June, up from N3.92 trillion in April and N3.97 trillion in May. At the same time, the CBN’s special intervention fund, which supports critical sectors like agriculture and manufacturing, decreased by 35.7 percent from N433.23 billion to N278.86 billion. This reduction may be part of the CBN’s strategy to manage the country’s money supply and stabilize the economy, but it also adds to the challenges banks face in meeting recapitalization demands.
Moreover, there has been a decrease in credit to the private sector, from N74.3 trillion to N73.12 trillion, indicating reduced lending activities by banks. This decline is likely due to liquidity constraints and the need for banks to prioritize their recapitalization efforts.
The data also showed an increase in the money supply to N101.35 trillion, up from N99.24 trillion, and a rise in narrow money, which includes physical currency and demand deposits, to N36.78 trillion from N33.38 trillion. Shadrach Israel, an economist at Lotus Beta Analytics, 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 N18.33 trillion, signaling strength in the country’s external reserves. However, net domestic assets have slightly decreased to N83.0 trillion from N83.90 trillion.
“As the CBN continues its efforts to manage the money supply and stabilize 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 that 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.
