October 27, 2022/CSL Research
In a press statement yesterday, the Central Bank governor, Godwin Emefiele announced plans to redesign, produce, and circulate new series of banknotes at N100, N200, N500, and N1,000 levels from 15 December 2022. The new and existing currencies shall remain legal tender and circulate together until 31 January 2023, when the existing currencies shall seize to be legal tender.
Accordingly, all Deposit Money Banks currently holding the existing denominations of the currency are to begin returning these notes back to the CBN immediately. The newly designed currency will be released to the banks on a first comefirst-serve basis. Bank customers were also encouraged to begin paying existing currencies into their bank accounts so they can withdraw the new notes once circulation starts in December. Due to this transition, bank charges for cash deposits were suspended with immediate effect.
According to the CBN Governor, the decision to print new notes is in response to a few challenges being faced by the apex bank as regards currency management. Such challenges include. Hoarding of banknotes, resulting in over 80% of currency in circulation being outside the commercial banking system; worsening shortage of clean and fit banknotes; and increasing ease and risk of counterfeiting evidenced by several security reports.
In our view, the plan appears to be a positive move if implemented properly. First, with 80% of currency in circulation outside the banking system, it is impossible for monetary policy to effective. However, we expect the CBN to implement tighter rules around withdrawals to retain the money within the system.
This may also be an opportunity for the CBN to push its e-money agenda. Again, we may see some positive fall out with respect to the forthcoming elections. Vote buying will certainly be more difficult if the CBN succeeds in getting cash into the system and makes it more difficult to get it out. We also expect this to curb money laundering activities if the implementation is done in conjunction with agencies like the EFCC and the banks. Suspicious transactions can easily be flagged as cash comes in and out of the system.
For the banks, we expect more deposits within the system to lower funding cost as many of these deposits will likely come in as CASA (Current and savings deposits). We also expect the banks will have more funds available for lending and investments post CRR requirements and this should be positive for assets yields. On the flip side for the banks, we expect a lot of cash management expense and the portion of fees gotten from deposits will be lost for the period of the implementation. Before the announcement, individual cash deposits above N500,000 attracted a 2% charge while corporate cash deposit above N3m attracted a 3% charge.
That said, we expect some negative fall outs from this announcement such as further depreciation of the Naira and a hike in asset prices. Individuals and organisations trying to avoid taking their cash to the bank will likely buy foreign currency and other assets at any possible cost
