In recent times I have had the privilege to examine the Nigerian cash industry. Unlike many other countries with which I am familiar, cash usage in Nigeria is extremely high and is an important part of daily life for everyone. Suffice to say that access to “cash-on-demand” is important and so the supporting supply chain needs to be excessively robust.

Following are observations, comments and results cultivated from various resources and modestly refined for your review. I hope you find it to be interesting and informative.

In Nigeria, as in many developing countries, most people rely on cash to make payments and, to a lesser extent, as a store of value. Nigeria is a cash-intensive economy. Heavy use of cash has consequences for merchants, commercial banks, cash-in-transit (CiT) operators & the central bank. Cash handling is costly for all of the actors in the circulation chain. All else being equal, it may cost a merchant more to take cash than to take a debit or credit card. Cash is a valuable commodity that needs to be securely shipped from merchant to bank to the central bank, all at additional cost. Cash deposits are verified manually or with counting machines at commercial banks before merchant accounts can be credited. Likewise the cash deposits of banks into the central bank need to be verified before the banks’ accounts can be credited. In addition, there is the manufacturing cost of banknotes & coins. And, finally, some people believe that cash-intensive economies facilitate crime.

Throughout the world, there are alternatives to payments in cash, most notably cheques & cards. In Nigeria, consumer use of cards remains low. This is a consequence of consumer familiarity & comfort with the use of cash and the lack of a nationwide point-of-sale infrastructure that connects the mass of merchants, large & small, to an electronic network for cards.

Recent policy changes in Nigeria show that its central bank would like to discourage the use of cash & simultaneously, encourage the shift to card & other electronic alternatives by consumers, merchants & commercial banks.

The Central Bank of Nigeria (CBN) announced a new policy, a reform of the Nigerian payments system to encourage the use of electronic payments. The policy becomes effective on June 1, 2012. The policy would impose penalties on consumer & corporate account holders at banks if they withdraw more than a specified cap amount, in cash, each day. The policy imposes penalties on commercial banks if they fail to rigorously follow CBN’s rules for consumer & corporate accounts.

The CBN proposed a daily cash withdrawal cap of N150,000 (about US$1,000) by individual account holders, a cap that applies to ATM & branch transactions. Individual customers would be charged a penalty of N100 per thousand of the amount above this cap.

For corporate customers, there would be a daily withdrawal cap of N1,000,000 (US$6400). There would be a penalty fee of N200 per thousand of the amount above the cap for corporate account holders who withdraw cash in greater amounts in a day.

The CBN policy would also impose penalties of commercial banks that choose to waive penalty fees owed by their consumer or corporate account holders. For the first offense, commercial banks would pay 5x the amount waived (e.g., N75,000 or N1,000,000 for consumer & corporate accounts, respectively. For the second offense, commercial banks would pay 10x the penalty fee waived on the account holder.

In addition, 3rd-party checks above N150,000 will not be eligible for cashing over the counter. If a bank cashes a 3rd-party check, it will be liable to a sanction of 10% of the face value of the check or N100, 000 whichever is higher.

Most public reaction to CBN’s proposal has been negative. The Nigerian Association of Chambers of Commerce, Industry, Mines & Agriculture (NACCIMA) recognized that the policy could be improved. But they suggest that the CBN consider policies to make paperless transactions ‘cheaper & attractive’ as well.

The penalty schedule that applies to commercial banks was questioned by smaller financial institutions, including chartered Micro-finance Banks whose customers are cash-dependent. One concern is that micro-finance banks will have a difficult time adjusting & will face high costs in acquiring the equipment necessary for electronic operations.

On May 17, the House of Representatives objected to the proposal by the CBN & requested the CBN to suspend the implementation of the policy. They argue that that the country was not prepared for such a change & that the priority is to inform the population about the economic implications of the policy first.

Nigerian law makers also argued that small businesses would collapse & agro-allied businesses would remain sluggish & therefore this policy would make the banking sector suffer from patronage.

Electronic payments are very common for elites in the country & the use of ATM transactions is also gaining popularity. However, another apprehension is that Nigeria has an informal market that still relies heavily on cash but contributes meaningfully to the overall economy. Many transactions are done over the counter, with most trading happening in the open market.