Welcome E-Naira And Quasi Disintermediation of Commercial Banks

The Director, Information Technology Department, Central Bank of Nigeria (CBN), Mrs. Rakiyat Mohammed, stated at the banker’s committee meeting that the apex bank will be launching a Central Bank Digital Currency (CBDC) before the end of 2021: “As I said, before the end of the year, the Central Bank will be making special announcement and possibly launching a pilot scheme in order to be able to provide this kind of currency to its populace.” This follows a statement by the bank governor a few weeks ago: “Under cryptocurrency and Bitcoin, Nigeria comes 2nd while in the global side of the economy, Nigeria comes 27th. We are still conducting our investigation and we will make our data available.”

Across the world, central banks are exploring the options of creating digital currencies. Just like we moved from cowries to paper notes over centuries, it does appear that digital currency is going to be part of the history of this generation. As US moves with e-dollar and China ramps up e-yuan, Nigeria is making sure that it is not being left out.

“We have currency in two forms in Nigeria as of now, there are the notes and there are the coins. So the Central Bank currency is to be the third form of money which means just as we have electronic money, digital money is not new in Nigeria. Just as we are about the third or fifth in the whole world as far as advancement in the use of digital money is concerned. So this is going to compliment the coins and cash that we have. The Central Bank digital currency will just be as good as you having cash in your pocket and even as you have the cash in your pocket, you are going to have the cash on your phone.

“We all know how money has to travel for someone to send money from Nigeria to abroad and it is huge money in Africa. We also know that a recent report by EfiNA was that our target was to achieve 80% financial inclusion. We are about 60 percent and at the rate at which we are going, we are not going to meet this target. Central Bank digital currency will accelerate our ability to meet this target.”

But as this redesign happens, expect pressure on the commercial banks. You know what? If CBN has these digits, they can bypass commercial banks to reach the end users. So, government policies can be managed directly by the central bank, and there is also a concern that some customer deposits will now sit in the central bank’s vault instead of commercial banks’.  Yet, we do not know fully what we do not know, but one thing is evident, Nigeria is on the right path in reducing financial transaction frictions, and could possibly advance financial inclusion at scale. China is also showing that digital currency could remove ghost workers with the launch of its blockchain-enabled salary payment system: “China has taken a major step in its central bank digital currency (CBDC) tests. The country just debuted and successfully launched blockchain-enabled salary payments with digital yuan at Xiong’an. According to the official website of the Xiong’an New Area, the People’s Bank of China (PBoC) has successfully integrated the country’s first on-chain wage payouts in the digital yuan”.

The biggest threat from digital national currencies is sucking deposits from commercial banks. In other words, most customers will have to open bank accounts with a central bank, and that means moving some of their deposits from banks to the apex bank where the digital currency is domiciled.

A payment system which offers a seamless way to make transactions sounds interesting – and will thrive, even though it has no way to magically boost the strength of Naira. The opportunities could be for those companies which will play well at the edges of the smiling since the central bank will be the de facto operator at the center. The future of banking could possibly go to tech firms which offer banking services!

And as that happens, expect a phased disintermediation of 1st generation coins like Bitcoin as e-yuan, e-dollar, e-naira, etc evolve. Now, you know the risks!

The Challenge Ahead for Banks As Fiat Currencies Digitize

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