My Banks and I… (2) – By Ijeoma Nwogwugwu

Posted by admin Articles, NNP Columnists Monday, August 1st, 2011

The feedback to the first part of this article was wide and varied. But I shall limit myself to focusing on a few of the pertinent issues that were raised. The governor of the Central Bank of Nigeria, Sanusi Lamido Sanusi, was the one of first respondents to the article. He held that the CBN already has the legal backing to introduce a surcharge on cash withdrawals over a certain amount. The Banks and Other Financial Institutions Act, he said, has the relevant provisions that empower banks to impose charges in exchange for banking services.

Sanusi further contended that the CBN is not pursuing a cashless policy per se, but is trying to encourage the banking public to use alternative payment channels in order to reduce the cost of distribution, management and processing of cash that is borne by the CBN and banks at the moment. He acknowledged that cash remains the most dominant means of payment around the world, but it co-exists side-by-side alternative payment methods and helps other jurisdictions to manage cash better.

His third point was that cash relative to GDP in Nigeria is quite high and impacts on the rate of inflation and the currency markets (the exchange rate). His last point was that the proportion of high value bank customers that withdraw cash from the banking system relative to low value customers is 1 to 10. That is, 10 percent of high networth individuals (HNIs) and corporates account for cash withdraws above N150,000 and N1 million respectively, in comparison to 90 percent of bank customers that withdraw less than these amounts. Meanwhile, this 10 percent of bank customers, account for 70 percent of total bank branch value of cash transactions.

Our conversation was not pretty and got heated, requiring that I express my regrets when I raised my voice. On the point that CBN does not require legislation for the introduction of bank charges, Sanusi was right. The imposition of commissions of turnover, processing fees, legal fees, wire and SWIFT transfer charges, among dozens of other fees the banks love to impose on customers may have some legal backing.

Still, my point to Sanusi is that these fees or charges, including interest charges on loans, are already imposed to cover the cost of services offered by the banks as well as cash management and processing. So why are customers, even the so-called 10 percent, being asked to pay more for services already rendered? This would amount to multiple taxation. In my estimation, central banks as regulators are supposed to introduce policies to reduce the incidence of charges on customers and consumers, and not the other way round. It is for this same reason, monetary policy committees of central banks or their equivalents meet periodically to lower their policy rates in order to lower bank lending rates to encourage customers to borrow.

The second point, or rather, question I asked is though there is a cost burden for managing and processing cash, which central bank in the world has ever transferred that cost to the customer. I have asked several bankers that same question in the last one week and not one of them, Sanusi inclusive, has been able to mention one central bank that directly and overtly transfers the cost of cash management to bank customers. It is an aberration and should not be allowed in this jurisdiction.

Another important point to add here is that Nigeria has its unique shortcomings. Owing to the country’s infrastructure deficit, banks also have to generate their own electricity, security, ICT infrastructure, and water for their branches and head offices. All these add to their cost of operations, making it difficult for them to lower charges imposed on customers.

But they forget that they do not operate in isolation, because these same infrastructure challenges are also borne by their customers. Bank customers also have to provide their own electricity, water, in some cases roads, and security. Both the bank and customer bear the same burden, yet customers in Nigeria, without whom banks will not be in business in the first place, are treated with the kind of levity that is uncommon in so many other countries.

In addition to this is that by imposing a charge on bank customers which account for 70 percent of total bank branch value of cash transactions, the CBN is inadvertently introducing another avenue for rent for the banks in this country. Following the crisis in the banking sector in 2008/2009, banks have become risk averse. This means that banks have turned their attention from the stock market, certain HNIs or corporates and are lending less, and this is impacting negatively on their margins.

As a result, more and more banks are altering their business strategy from pursuing corporates and HNIs to retail customers. The retail strategy will require banks to open more branches and offer innovative banking products to increase their customer count. This strategy is supported by the fact that retail funds have a price advantage over corporate and HNI funds, as the latter are much more sophisticated and discerning, and possess the wherewithal to bargain for much lower rates of interest and charges.

Now, with more retail customers being targeted, is it advisable that banks be allowed to impose a charge on cash withdrawals above N150,000 and N1 million respectively? Under this scenario, bank branches with high traffic need not lift a finger any longer. They would simply sit back, relax and report huge profits from charges made on cash withdrawals.

Conversely, another scenario could play out. In order to beat the system, bank customers that need to make frequent withdrawals above the limit stipulated by CBN, could easily open numerous accounts in different banks and make withdrawals below the limit, thus putting pressure on bank branches and tellers.

The bigger issue that has not been addressed by the CBN and banks in the country is how much of the cost associated with currency production, distribution and processing arises from the inefficiencies in the system. Last week, I did mention that I was hoping that Tunde Lemo, CBN’s deputy governor responsible for operations would avail me information on currency production and processing. Admittedly, I was unable to follow up on my request due to work commitments during the week, but I hope that the CBN will open up on this issue soon.

My interest in the production of currency notes stems from my past knowledge of the operations of the Nigerian Security Printing and Minting Plc. At this juncture, it will be best to openly declare my association with the Nigerian mint: as deputy director with the Bureau of Public Enterprises between 2001 and 2004, I was the transaction manager responsible for the privatisation of the mint and was a member of its board of directors.

Without delving into the details that led to its eventual sale to the CBN, which I also superintended, I was privy to information that showed that between 1994 and 2002, over 75 percent of the CBN’s annual currency indent was not manufactured by the mint. It was manufactured and imported primarily from De La Rue in the United Kingdom, Giesecke and Devrient in Germany, and later Fabrica Nacional De Moneda Y Timbre – Real Casa De La Moneda (better known as the Spanish Royal Mint) in Spain.

Much later entrants into the currency importation regime were the French mint and the Australians through Securency International Pty Limited, which aggressively marketed and got the CBN to commence the printing of plastic banknotes using the polymer substrate. (An article on Nigeria’s dalliance with polymer banknotes will be written in the near future.)

At the time of the Nigerian mint’s financial restructuring and eventual sale to the CBN, we noted that by importing a significant proportion of the country’s currency requirements, the CBN was incurring a lot more than it would have cost to produce banknotes locally. Other than paying for the banknotes manufactured overseas at the prevailing official exchange, imported banknotes attract freight, insurance and duty charges. These costs are eliminated when the banknotes been produced locally.

Today, the CBN claims that this same mint, which was unable to manufacture ballot papers and other electoral materials needed for the 2007 and 2011 general elections, has drastically cut back on the importation of banknotes and manufactures much of the its annual indent locally. This, the Central Bank claims, has been achieved through the rehabilitation and upgrade of the currency production line at the mint’s Lagos factory and by maximising the operations of the two lines in the Abuja factory. Both factories have the capacity to produce some 3.5 billion banknote per annum. Nigeria’s annual currency requirement is currently estimated at 5 billion banknotes.

Related to this are two subsidiaries that belong to the Nigerian mint and are critical to providing the raw materials for the production of banknotes. However, both companies have remained suboptimal for several years. They are the Tawada Ink Factory that is meant to manufacture the intaglio ink used in the production of banknotes, and Pacific Printers Limited which produces the cotton paper used for banknotes. Given their inability to supply the raw materials need for banknotes production, the mint has to import its paper and intaglio ink from overseas. So in addition to providing its own electricity and water, the mint incurs expenses on freight, insurance and duty for the raw materials needed for banknotes production. It should be noted that all this is based on the assumption that much of the nation’s banknotes are produced locally.

The mint aside, the CBN has 18 currency centres nationwide where banknotes are supposed to be processed or destroyed. A visit to any of the currency centres will reveal that they are stocked to hilt with tons and tons of banknotes that are neither processed nor destroyed. These unprocessed banknotes not only constitute a security risk, they pose an economic risk, especially when they make their way back into the banking system and larger economy.

On top off all this is the lack of tracking capabilities by the CBN. The Naira is one of the most counterfeited currency notes in the world. Counterfeiters have acquired the technology to manufacture banknotes that have all the security features of genuine banknotes. But whilst other central banks track every batch of banknotes exiting their vaults using the serial numbers and other security features to curtail the volume of counterfeited banknotes in circulation, the CBN does not have the capacity to do so. The result is that the CBN and banks have to grapple with a larger volume of banknotes and the attendant cost this attracts thereof.

Clearly, it is apparent that a significant part of the cost of cash arises from the inefficiencies that the CBN and the Nigerian mint have failed to deal with. This same CBN, however, sees nothing wrong with diverting resources to the establishment of a poultry farm and the construction of an international conference centre, mall and residential complex in Abuja. Perhaps if it invested more resources in its core functions such as currency management and processing, this cost it is attempting to pass on to bank customers would not arise.

But let me be clear about one thing: my problem is not with a policy that aims to encourage the use of alternative payment channels, where they are available. My issue is with the methodology being adopted by the CBN to encourage bank customers to transit to alternative payment methods. This objective can be met through education and enlightenment, enforcement of the clean notes policy of the CBN, and outsourcing of cash management and processing to cash management companies. It most certainly cannot and should not be achieved through the introduction of another bank charge that will make the banks richer and their customers poorer.

Ijeoma Nwogwugwu, Email: [email protected]

-ThisDaywp_posts

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