August 30, 2024/CSL Research

Money Supply statistics from the Central Bank of Nigeria (CBN) as of July 2024 revealed that currency in circulation (CIC) grew by 56.2%y/y in July 2024 to reach a new all-time high of N4.05trn from N2.59trn (July 2023). Month-on-month, there was a marginal increase of 0.12% from a previous high of N4.04trn in June 2024. In the same vein, currency outside banks (COB) grew by 66.1%y/y to N3.66trn in July 2024 from N2.21trn (June 2023).

Howbeit, month-on-month there was a decline of 3.31% to N3.66trn from N3.79trn, a noticeable decline for the first time since January 2024. This implies 90.4% of the currency in circulation (CIC) was outside the banking system as of July 2024, a slight moderation from 93.62% in June, and still a notable rise from the 57.14% recorded in January 2023 following a few months of the CBN’s Naira redesign. COB marked its all-time high at 94% in December 2023 and an average of 84.58% between 1960 and July 2024.

Also, the money supply (M3), which is a broad measure of the total amount of money in an economy, hit a high of N106.27tn in July 2024, amid tightening measures by the CBN. In Nigeria, the informal economy is significant. Many transactions in this sector are conducted in cash, leading to higher currency circulation outside formal banking channels.

A rise in currency outside of banks often correlates with the growth of the informal or shadow economy. In such economies, transactions are conducted off the books to avoid taxes, regulations, or scrutiny. Despite the adoption of a wide range of electronic payments, cash is still king in Nigeria. According to the Global Payment Report 2024, Nigeria ranks number one in use of cash, with volume of cash transactions at c.55%.

Reducing cash outside of banks is a key step toward a more modern, secure, and inclusive financial system in Nigeria, with significant benefits for economic growth, stability, and overall development. Reducing substantial cash holdings outside the banking system is crucial for enhancing monetary policy effectiveness and combating illicit activities.

Effective control over the money supply also helps in managing inflation. With less cash circulating outside banks, the CBN can better manage liquidity and curb inflationary pressures. Furthermore, when more money is held in banks, it can be channelled into productive investments. Banks can lend more to businesses and entrepreneurs, driving economic growth and job creation.

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