University of Nigeria
KANU, Emmanuel Ezegbulem
PG/MBA/99/30771
Faculty
Banking and finance
August, 2001
Signature
Business Administration
Department
“A Study of the Behavioural Impact of Changes
in Nigerian Currency Denominations:
1980 – 1999”
Date
Title
Author
Research Publications
Alice
Okore
Digitally signed by Alice Okore
DN: CN = Alice Okore, C = NG, O
= University of Nigeria, OU =
Library Department
Reason: I have reviewed this
document
Date: 2008.11.27 16:20:28 +01'00'
'*A STUDY O F THE BEHAVIOUIRAL IMPACT O F CHANGES IN
NIGERIAN CURRENCY DENOMINATIONS: l Y W - 1999"
KANU, EMMANUEL EZKGBULEM
13G/MBA/99/3O77 1
DEPARTMENT OF BANKING AND FINANCE
FACULTY OF BUSINESS ADMINISTRATION
UNIVEIXSITY OF NIGERIA
ENUCU CAMPUS
TITLE P A G ~
"A STUDY OF T H E BEHAVIOURAL l M P A C T OF CHANGES 1N
NIGERIAN CURRENCY DENOMINATIONS: 1980 - 1999"
KANU, EMMANUEL EZEGRULEM
PG/MRA/99/30771
b
BElNG A DlSSERTATlON SUBMITTED IN PARTIAL
. .REQUlREMENTS F O R TI-lE AWARD
FULFILMENTy,OFTWEJ
OF MASTERS OF BUSlNESS ADMINISTRATlON DEGREE IN
RANKING AND FINANCE
DEPARTMENT OF BANKING AND FINANCE
FACULTY OF BUSlNESS ADMINISTRATION
UNlVERSlTY O F NIGERIA
ENUGU CAMPUS
AUGUST 2001
1, t3nmanuel ~l~zegbulem
1<an~1is a postgraduate student in the
Department of Banking and Finance with Registration Number
IY~/MRA/99/30771 , has satisfactorily completed the requirements for
course and research work for the degree of Master of Business
Administration in Ranking and Financs.
This projcct work report is an embodiment of original work and
has hcen submitted in part or in f'ull for any other diploma or degree pf
this University.
Cd$
DR. A. M. 0. ANYAFO
S pervi visor
MR. A. 0. ANEKE
Head Of Department
'This project is dedicated to my new - born baby boy
ACKNOWLEDGEMENT
1 wish to use this column to acltnowleclge the assistance of all that
contributed in one way or the other to the success of this dissertation
Accordingly, I am using this opportunity to thank my dear wife
Mrs. Nkechi Omenwa l h n u for her tolerance during the hectic moments
01' writing the dissertation.
My thanks also go to Mr. Kindness who helped in no small way to
the succcss of this work. I equally acknowledge with thanks the ample
6
assistance of Dr. A. M. 0. Anyafo
-
my able supervisor who accorded
me all the e n c o ~ ~ r a g e ~ n eand
n t guidance 1 required to cope with this
I-esearcli \vorl;. 'I'his woitld not have been i n such a neat readable form
you find it without the sltillful job done by Mrs. Oltorie, Caroline and
Co. Many thanks to you all, but the greatest thanks go to the Almighty
God Jehovah who made all things possible.
'TABLE OF CONTENTS
Acknowledgement
Table of Contents
List of Tables
Abstract
CHAPTER ONE: INTKODUCTlON
1 .1
~3aclcgro~1nd
to the Problem
1.2
Statement of the Problem
1.3
The Objectives of the S ~ i ~ d y
1.4
Research Questions
1.5
Research I-lypothesis (NIJLL)
1.6
The Significance of the Study
References
CI-IAPTKfI TWO: REVIEW O F RELATED LIrI'EIIATIJHE
3.1
Psychology of Economic Ikhaviour
15
2.2
I listorical Review of Currency Changes in Nigeria
18
3.3
Legal Aspect of Nigerian Currency Changes
20
2.3.1 Sanctions on Banks that Abuse the Clearing System
28
2.3.2 Institutional Framework
2.3.3. Adequacy or Otherwise of thc Present Laws
2.3.4. Future of the Payments System in Nigeria
2.4
Impact of Currency Changes on Market Prices
of Goods :md Services
2.5
Impact of Variation in ~ u r r e n Denominations
c~
on
Foreign Exchange Situation in Nigeria
2.5.1 Evolution of the Foreign Exchange Market
2.5.2 Structure of Nigeria's Foreign Exchange Market
2.5.3 Foreign Exchange Management Before 1986
2.5.4 Foreign Exchange Management since 1986
3.6
Business Policy Issues in Naira Re Denomination
vii
3.0.1 I'lie 1'1.ohlems with Coins
3.6.2 The Problems with Naira Notes
2.0.3 (IS Dollar Notes
2.7
Cost Implications of Introducing New Currency
Denomi~iations
2.7.1 Manif'estatio~~s
of the Need for Higher
De~io~nination
Currency in the Nigerian
Economy Today
References
CHAPTER THREE: RESEARCH METHODOLOGY
3.1
Research Design
3.2
Sources of'Pri111a1.yand Secondary Data
3.3
Population and Sample size
3.4
'fecl~niquusof Data Collection
3.5
Methods of' Data Analysis
3.6
1 lq'potheses Testing Statistic
Rei'crenct's
CHAP'TER FOUR
El'kct of changes in Currency Denominations
On Inflatioi~aryTrend
1'11~
Extent Changes in Nigerian Currency
Afkcted Investors
Impact of Changes in Currency Denominations
On Demand for Goods and Services
Ilow Distributors Reacted to Changes in Nigerian's
Currency Denominations Between 1980-1999
The Way Changes in Nigerian Currency Denominations
A II'ccted Civil Sclwnts 13~twecn1980 - 1999
'Testing tho Hypothesis (A1ternative)
4.6.1 Hypothesis (FIO,)
4.6.3 klypothesis (tIo3)
4.7
Presentation of Data
clri-wrlaF I V E
5.1
S L I I ~ I I ~01.~ Findings
L~I-y
5.2
Discussion of Iiesults
5.3
Conclusion
5.4
Keco~nii~endations
5.5
Suggestions for Further Research
Bibliography (Appendix I )
Qucs~ionnaire(Appendix II)
LIST OF TABLES
Range and face value of coins circulating
I n Nigeria
Are there still coin-based transactions
flange and Face val~leof Niara notes
Coinage profile in a cross section of country
Intlationary trend and currency denominations
1980 - 1999
Investment and changes in currency
Currency changes and demand /'or goods and
Services
Distl-i~ L I ~ O Iarid
- s changes in currcncy
Civil scl-vants and changes in currency
Comnlerce and currency changes
ABSTRACT
Changes in currency denolninations in Nigeria have been of old,
quite noticeable since the abolition of West African Currency Board.
Subsequent governments have tended to establish their authorities by
minor cliangcs in currency denominations or the addition of new
currencies.
I hese crcate chains of I-eactions in the economy through
7
commerce and industry. Many investors would prefer increased prices
b
Sol- their goods and services. This opportunity is offkred on a platter of
gold during changcs in currency denominatiol~s.
We have cvaluatcd this trend in this research work. Both pri~nary
and seconclary data were i~scdto salnple opinion on this sensitive topic.
'fhe prirna-y data co~isistof oral interviews, questionnaires and direct
observations ~~iacte
on people's reactions on the impact of changes on
r
7
cilrrency dt.nominatioils. Ilie secondary data co~npriscthe related views
o f pcople on changes in currency denominations.
Q~lcstionnaires drafted on multiple choice scale were given to
different categories of people, ranging from civil servants, industrialists,
educationists, Students to traders.
In conclusion, we stated that it is very necessary to check the
introduction of new currencies or higher denominations as they have the
tendency of stifling lower denominations out of competition.
I-laving the various reconmendations, we particularly stated that:
Government s h o ~ ~ lcontrol
d
strictly the introduction of higher
curl-cncy cienominations so as to r e d ~ ~ inflation
ce
-
Investment and productivity should be encouraged to rise with the
introd~~ction
of new c~~rrcncies,
especially, the higher ones, in
ordcr to control inllation, among otl~ers.
CHAPTER ONE
1.1
13ACKGR01JND TO T H E PROBLEM
The issue of currency changes has been in the country from the
introduction oS Central Bank of' Nigeria in 1958, which started operation
in 1958. Before then, we were having the then African Currency Board
co-ordinating the monetary ajTairs of the four countries in British West
Africa: Nigeria, Ghana, Gambia and Sierra Leone. In 1959, after the
6
establishment of Central Bank of Nigeria, 'Nigeria started the pound
sterling with inscription of Nigeria. Again, in 1963, it was the Federal
Republic of Nigeria, pounds and shillings.
The denominations were:
Pound ( )
Shilling
Nine pence
'I'hrcu pcnce
One Penny
Suftice it to say that the quantity of items purchasable by each u~iit
of the currency was relatively high, and by far higher than what we buy
now with equivalent unit of our present currency.
In 1" January, 1973 Gowon the then Head of State changed pound
and shillings to naira and kobo. The trend of currency change took off,
in 1976. Precisely after the demise of the Late Head of State
Murtala Ramat Mohammed, &20 note bearing his portrait was
introduced.
h
Between 1892 and 1958, payment system in Nigeria had evolved
into inany forms. It was trade by barter which was succeeded by that
which i'caturcd the usc of multiplicity of coins and commodity money
such as metal coins from France, Mexico, America and Spain in
conjur.~ctionwith native Manila, Cowry shells, Wani Paun, brass and
copper bracelets.
A programme to demonetize colnlnodity n~oney,
which conmenced in 1880, and was concluded in 1948, ensured their
replacement with British silver coins.
The setting up of the Bank of British West African (BBWA)
which had the monopoly of supply of silver coins in 1894 ushered in a
r~~dirnentary
form of colnmercial banking, while the issue of legal tender
currency for the West African region in 1912 with the establishment of
the West African Currency Board (WACB) marked a watershed in the
development of the payments system, within the region.
The first WACB notes and coins were issued in 1946. These
remained legal tender in the four former British colonies of West African
b
until 1959. The development of the payments system was thereafter
greatly aided with the establishment of the Central Bald< and growth of
rht. ban king i~lclustry.
BACKGROUND TO T H E ESTABLISHMENT OF TI-IE C1iN
The growth and development of international trade along the West
Afi-ican Coast played a major role in extending the meclium of exchange
beyond trade by barter in the nineteenth century. The "native currency"
system which, relied on items such as cowries, manila, brass and copper
rods, had to accotnmodate foreign currencies such as Maria Tlwresa
dollar and British Silver Coins. Increased trade motivated the setting up
of the Rank of British West Africa (BBWA) in 1894, thereby drastically
reducing the bastes system and ushering in a rudimentary form o r
co~z~~nercial
banking. The issue of legal tender currency for the West
Afiican region was, however, deferred till 1912 when the West African
Currency I3oard (WACIS) was established. The WACR was an offshoot
of the recomn~endationof the Emmot Co~n~nittees
set up by the then
b
Secretary of State, the Rt. IIon. Lewis [Iarcourt. The WACB retained
the sarviccs of the BBWA as its currency distribution agent. It set up
Ihur currency centres in Lagos (Nigeria), Accra (Ghana), Freetown
(Sierra 12eonc)and Barthurst, now Banjul (The Gambia). 'The currency
in circulation in West Africa increased steadily through the 1950s in
response to the gsowing demand and increases in the world prices for
West Afsica prirnasy products such as cocoa, grounclnuts and palm oil.
The WACB, however, did not have discretionary control over the
lnoncy stock of the territories under its sphere of influence. It was set up
5
p-imarily to promote the financing of export trade. Specifically, it was
charged with the issue of a West African currency, the exchange of
existing currencies, the repatriation of such currencies, an the investment
of' reserves. There was a tixed parity between the local currency and the
British pound, while the currency had 100 percent sterling backing. The
reserves were invested in British and this, in a way, facilitated Nigeria's
international payments. As the WACB was autoinatically linked to the
British system, the investment policy was rather conservative in the
b
sense that sterling reserves were invested only in Britain. Moreover, the
WACR could not engage in monetary management, neither were
Nigerians trained in the art. In order to eliminate this deficiency and
promote the growth of the domestic money and capital markets,
especially as the country inarched towards political independence in
1960, the CBN was established by the Central Bank of Nigeria Act of
1958. The Bank commenced business on I " July 1959 with an initial
capital of the equivalent of N3.O million.
TliE LEGAL FRAMEWORK FOR T H E CBN
The legal framework of the Central Bank has been strengthened
over time to address lapses in the financial system.
Prior to thc
enactment of the 1958 Central Bank Act, the banking system in Nigeria
was largely unregulated.
Initial attempt in 1952 at streamlining the
practice of banking to ensure monetary stability through the enactment
of the Banking Ordinance did not qwite address the problem. The spate
of bank failures could not be stemmed, thus the Central Bank Act of
b
1958 was enacted to forin:illy establish a central monetary authority that
would perform the traditional roles of a Central Rank.
The 1969
Banlting Act and its amendments which defined the business of banking
and stipulated penalties for banking inalpractice fbrther strengthened the
legal ti-amework..
To further strengthen the supervisory capacity of the Bank, the
Central Bank of Nigeria Decree No. 24 and the Banks and Other
Financial Institutions (ROFI) Decree No. 25 of 1991, were promulgated.
The BOFI decree, among other provisions defined the Apex Bank as the
Rank that centralises the functions of licensing as well as regulation of
banks and other ihancial institutions in the Bank. The. two decrees, by
conferring greater powers on the Bank in the areas of banking
supcrvision and examination, monetary management and enforcement of
prudential standards in banking, made it easier for the bank to introduce
measures aimed at promoting monetary stability and soundness of the
ilnancid system. In 1994, the Failed Banks (Recovery of Debt) and
Financial Malpractice in Banks Decree No. 18 was pron~ulgated. The
b
Decree strengthened the earlier legislation's (Decrees 24 and 25) and
confers enormous powers on the Bank to prosecute those who
contributed to the failure of banks and to recover the debt owed to failed
banks. In short, these decrees have, to some extent, strengthened the
Bank's powers to co-ordinate and control the pace and direction of
monetary and financial activities in Nigeria. In spite of this situation, the
Bank was still constrained in a number of ways, especially, in the areas
of independent selection of suitable instruments to enhance the
realimtion of its mandate. However, the CBN arid BON Decrees were
amended with effect from 1 '' January 1997. Under the new arrangement,
the CBN is now to report to the Presidency through the Federal Ministry
of Finance, instead of the earlier arrangement, the Bank reported directly
to the Presidency.
Also, under the same law, the Central Bank of
Nigeria is to effectively assume the leadership of all the banking
institutions in the financial system. In this regard, the CBN now has
responsibility for controlling and supervising all commercial, merchant,
community banks and People's Banks of Nigeria. In addition, finance
b
companies, discount houses, mortgage institutions, bureau de change,
and all development banks have been brought i~nderthe purview of the
Bank.
'I'he introduction of any coin or note in the payment system ol'the
country 113s always had adverse effects in t l ~ ceconomy as well as good
ones.
The level of infation tends to go hand in glove with t l ~
introduction of new and higher currency notes. At the introduction of
currency notes of N5,$420,$4100,$4200, $4500, the level of inflation was
~no~nentarily
affected upwards.
So, we sec that the problem really lies on how the introduction of
currency notes could be handled so as, to reduce inflation. How the
introduction can affect the behaviour of suppliers, prospective demand,
general workforce as well as firms capitalisation is the main problem of
the study.
1.3
TI1E 013JECTlVES OF STUDY
1.3.1 To determine how clianges in Nigeria currency denominatioiis
af1i.ctc.d inflationary trend between 19S0 - 1909.
1.3.2 'I'o evaluate how changes in Nigeria currency denominations
affected investors between 1980 - 1999.
1.3.3 To examine how changes in Nigerian currency denominations
affected demand for goods and services between 1980 - 1999
1.3.4 To find out how changes in Nigerian currency denomin:itions
affected distributors of goods and services between 1 980 - 1 909.
1.3.5 To find out how changes in Nigerian currency denominations
dfected civil servants between 1980 - 1999
1.3
RESEARCH QUESTIONS
1.4.1 How did changes in Nigerian currency denominations affkcted
inflationary trend between 19S0 - 1999?
1.4.2 To what extent did changes in Nigerian currency denoininations
affected investors between 1980 - 1999.
B
1.4.3 What impact had changes in Nigerian currency denominations on
demand for goods and services between 1980 - 1 999?
1.4.4 How did distributors react to changes in Nigerian currency
denominations between 1980 - 1999?
1.4.5 What impacts had changes in Nigerian currency denon~inationson
civil servants between 1980 - 1999?
1.5
RESEARCH I-IYPOTHESIS (NULL)
1.5.1 M0,: There is no significant impact of changes in Nigerian
currency denon~inationson inflation between 1980 - 1999.
1.5.2 HOz: De~nandfor goods and services did not adversely change
due to changes in Nigerian currency denominations between 1980
-
1999.
1.5.3 Changes in Nigerian currency denominations did not adversely
affect commerce between 1980 - 1999.
1.6
b
THE SIGNIFICANCE OF STUDY
Nigeria has been having increasing rate of inflation since 1970.
Many have attributed this to the rtxonstruction work and developmental
cfroits since after the war. Deficit budgeting has been the et'fect of this
move, many a government after the time, has been neck deep into
efl'ecting measures to c~lrtailthe surge oi'inllation. No s~ibstantial~.esults
have been forthcoming due to incessant government expenditure. The
expenditure has left government at nothing than tampering with the
payment system. Many currency denonlinations have been introduced
ranging from % kobo to 44500. Many denominations in coins have been
convrted to notes and vice versa. One naira note has been converted into
coin, many denominations of the higher cadre have been introduced to;
$420
1976
4450
1991
44100
1999
WOO
2000
N500
200 1
With these higher denominations the lower ones tend to fizzle out
of use, the prices of items tend to trail the move.
The lower
denominations tend to be less valued, prices sky-rocket leading to
inflationary spiral.
Government critically faces the temptation of
conver~ingthe lower notes into coins. Presently, there is the agitation to
convert $45 and $410 notes into coins due to the introduction of $4100,
44300 and 44500 notes.
It was without saying, therefore, that a study of this type would be
3 good
guideline to government in handling the aftermath of introducing
higher denominations of the currency. B~lsinessmen,investors, civil
servants and the general public would marvelously gain in their demands
and supplies in the denomination as it will serve as a principle of better
bargaining power.
REFERENCES
Federal Republic of Nigeria; C B N Decree No. 24 1991
Federal Republic of Nigeria; BOFID No. 5 1 1991
Federal Republic of Nigeria; Failed Banks Degree No. 18, 1994.
CI-IAPTER TWO
REVIEW OF RELATED LITERATURE
2.1
PSYCHOLOGY OF ECONOMlC BEHAVIOUR
A good analysis of economic behaviour starts from the law of
demand and supply, that is the economic behaviour regarding price
changes and quantity of goods demanded each time.
The central
tendency is, therefore, a survey into economic behaviour of people as
prices rise or fall.
FIRST LAW OF DEMAND
The higher the price, the lower the quantity demanded for a
normal good
SECOND LAW OF DEMAND
The lower the price, the higher the quantity demanded for a
nor~nalgoods.
FIRST LAW OF SUPPLY
The higher the price, the higher the quantity supplied for a nor~nal
good.
SECOND LAW OF SUPPLY
The lower the pricc, the lower the q~~antity
supplied for a normal
good.
These laws like any other in several sciences, are not strictly
followed, they are subject to exigencies of human behaviour, the rich
sometimes display their wealth in such a manner that the higher the
price, the higher their regard for that product, and so, the higher the
quantity demanded. These are the so-called articles of ostentation.
B
These buttress the fact that human beings behave irrationally at
times, which concept defies a pre-empted way of explaining their
beliavio~11-s.So also what motivates them are difkrent. In the rnacroecormnic sense, the nation also seeks for motivations and challenges to
iollow, especially, from outside the country. The demand placed on the
country due to the introduction of currency denomination, sometimes, is
a li~nctionoS international politics.
According to Muoha Otanka !1975 : 28) the concept of economic
behmiour transcends peripheral analysis, be it noted that the economic
laws of demand and supply were only used to explain the concept of
human behaviour, to buttress the fact that it is not a linear graph.
Saja Wachukwu (1960 : 15) observed that as it is with individual
differences in behaviour, so it is with nations due to differing interests.
The level of developlnent and perceptions affect individual and
collective behaviour.
Applied in the Nigerian sense, changes in
denominations really induce less regard to the lower ones and more
propensity to grab the higher ones.
This is especially true in the
b
comlnercial transactions.
Even people receiving transfer payments
prefer it in higher currencies. Ego makes many to prefer holding money
in higl~erdenominations. These coupled together induce traders to state
their prices in the more preferable denominations, thereby inducing
inflation.
' I h social behaviour of people when in group also contributed
immensely to the regard given to different denominations. When they
g:itl~c.r in groups, more discussions ensue on the aesthetics of the
different denominations, which culminates to preferences, one to
another. Naturally soins ssek higher dsnoininations for convenience.
Jonah
Jenny
(1982
:
12) observed that
more
currency
denominations meant more transactions preferably held in the higher
denominations which obviously is inflationary.
2.2
HlSTORlCAL REVlEW OF CURRENCY CHANCES IN
One major feature of the payment system in Nigeria is its
dominance by cash as a means 01' payments. Dependence on cash
for
transactions implies that niuch cash is held outside the banking system
which otherwise w o ~ ~ have
l d been available to banks for lending to 1110re
productive sectors ot' the economy. ?'he currency component of broad
nioncy (h.12) recorded
;I
sharp rise fi.oni 22.1% in 1980 to 35.4% in 1994
which implied a corl-esponding decline on the deposit ratio ol' M3. In
newly industrialized economies such as Malaysia and Thailand the ratio
of currency to money supply has settled below 10%.
Similarly,
mobilizing i'inancial resources remains an arduous task in Nigeria.
Mobilization of financial saviiigs as measured by tile savings to GDP
ratio declined from the annual average of 17.2% growth recorded
between 1983 and 1988 to below 8% in 1996 and thereafter.
The
comp:~rative ratios for South Africa, Kenya and USA in 1996 were
29.7%, 37.9% and 30.5% respectively.
The low level of domestic
savings in Nigeria caused by the low level of income had impacted
adversely on the level of investment. And capital formation while the
b
over all efliciency of the payments systems have been hindered by
cultural values which encourage excessive reliance on cash transactions
with obvio~islimitations for economic management.
Similarly, Nigeria's present currency structure consisting mainly
of' smdl denomin:itions of $45, $41 0, 9420, and N50, 81 100, N200, $4500
notes contributes in no s~nallway to high intermediation costs.
I;or
example, banks have had to employ more cashiers, construct large cash
vault, purchase bullion vans, cash sorting machines, etc. in order to meet
the cash requirements of their customers and other clientele.
Nan-cash payments system available in the count~yinclude the
bankers clearing, the inter-bank clearing system, the securities clearing
and settlement system and some types oi'electronic clearing system.
2.3
LEGAL ASPECT OF NlGERIAN CI'RRENCY CHANGES
'Thc payments system has been defined as the apparatus or
mechanism through which obligations incurred as a result of economic
activities and personal transactions are discharged through transfers of
b
monetary vdue. Payment system may bc regarded as a direct cl~annel
through which liquidity and credit are transferred from one participant in
the financial system to another. There is therefore no doubt that liquidity
and credit problems may be transferred much more rapidly from one
participant to another with adverse implications for management of
monetary policy.
Because of the central rolb payments system play in a country's
financial system, monetary authorities are concerned about the integrity
of their payments system and they seck to p ~ l tin place adequate and
effective legal and institutional arrangen~ents for an efficient and
cflective payments system.
Depending on the level of sophistication of a country's h a n c i a l
system, there are many payment instruments and mechanisms that
countries employ in their payments system.
They range from the
co~nmonlyused currency notes and coins, Postal and Moncy Orders,
Cheques and Smart Cards to electronic devices like the Automated
Teller Machines and Electronic Funds Transkr mechanisms.
WhiJe
most developed countries carry out clearing and settlement arrangeincnts
via electronic devices, most developing countries still rely, to a large
extent, on cash transactions.
Nigeria's economy is largely a cash-based economy. This means
that most 01' the payments for business transactions are effected with
cash rather than through other payment instruments.
It is not
uncommon for big business enterprises to settle business transactions
with large amount of cash. This is in spite of the inherent dangers, like
asmed robbery attacks, co~mterfeitingof cun-ency notes and coins and
the inconvenience of carrying large amount of currency notes and coins.
If confidence is lost in a country's currency notes and coins as an
effective instrument of payment, such a country, witho~ltdoubt, will find
it difficult if not impossible to formulate any meaningf~ileconomic plan
for the good of its subjects. Most governments, therefore, put in place
effective laws to ensure the integrity of their payments system and its
instruments.
b
Monetary authorities in Nigeria, like their counterparts in other
pasts of the world arc interes~cdin ensuring an cffectivc and efficient
payments systcm and in safeguarding the integrity oi'the system.
It is, therefore, not sul-prising that when the CBN was established
in 1958, it was given the power as the soIe authori~yto issue legal tender
notes and coins in Nigeria and the power to print and arrange for the safe
custody of these notes and coins. Thus section 18 of the CBN Ordinance
( 1 958) provides as follows: The Bank shall have the sole right of issuing
notes and coins throughout Nigeria and neither the Federal Government
nor any Regional Government nor any other person shall issue currency
notes, bank notes, or coins or any documents or tokens payable to bearer
on dt'n~andbeing documents or tokens which are likely to pass as legal
tender. The same Ordinance in section 19 provides as follows:
(a)
arrange for the printing of notes and the minting of coins;
(b)
issue, reissuc and exchange notes and coins at the Bank's offices
and at such agencies as the Bank may from time to time establish
or appoint.
, : ,
. ,.
(c)
b
Arrange b r the safe custody of ~missuedstocks or currency and
for the preparation, safe c ~ ~ s t o dand
y destruction of plates and
papcr for the printing of note and of dye for the minting of coins.
The combined effect of these provisions is that the CBN is the
only authority in Nigeria empowered to issue currency notes and coins in
Nigeria and it has the power to arrange for its printing and minting.
'I'he Bank, in exercising of its powers, arranged for the printing
and minting of notes and coins and began issuing these notes and coins
Decree provide as follows;
1.
Any person who falsely makes or counterfeits any bank note
resembling any bank note issued by the Central Bank of Nigeria
b
and which is legal tender in 14igeria shall be guilty of any offcnce
under this Decree and shall on conviction thereof be sentenced to
death.
2.
Any person who falsely makes or counterfeits any coin reseinbling
any current coin which, is legal tender in Nigeria shall be guilty
of an offence under this Decree and on conviction thereof shall be
sentenced to death.
3.
Any person who falsely makes or counterfeits any bank note or
coin resembling any bank note or current coin which, is legal
tender in any country other than Nigeria shall be guilty of an
offence under this Decree and on conwiction thereof shall be
sentenced to imprisonment for 14years.
The death penalty prescribed in sub-section (1) and (2) is airned at
deterring would-be forgers and to ensure that they think twice before
undermining the integrity of Nigeria's currency notes and coins. So also
are the provisions in sections 2 and 3 (1) on the issue of proof which
runs contrary to the principles of law which states that an accused person
B
is innocent until proved guilty. The law, though seemingly draconian,
was promulgated to safeguard the integrity of the Nigerian currency
notes and coins.
Another major instruments of the payments system are cheques.
Section 73 of the Bills of Exchange Act 1882 (reproduced as sec. 73 of
the Bills of Exchange Act Cap. 3.5 laws of the Federation of Nigeria
1990) defines cheques as follows;
"A cheque is a Bill of Exchange drawn on a banker payable on
demand;
Th~isto l'acil itate the use of cheques, drafts and otl~crpaper based
payments instruments in Nigeria, the CBN Ordinance aforementioned
provides in Section 44 as follows;
I t shall be the duty of the Bank to facilitate the clearing of cheques
and othcr credit instr~lmentsfor banks carrying on business in Nigeria.
For this purpose the bank shall, at an appropriate time and in co~ljunction
with the other banks organise a clearinghouse in 1,agos a11cl in such
other place or places as may be desirable in premises provided by the
B
Bank.
Pursuant to the provisions of Section 44 of the CBN Act, 1958 and
in consultation with other duly' established banks in Nigeria, the CBN
established in Nigeria Bankers Clearing-klouse in Lagos in May 176 1.
Rules and regulations stipulating among other things, condi lions for
membership, eligible instruments for purpose of clearing and settlement
clcaring duration, responsibilities of ~ m ~ n b cand
r s sanctions fbr :lbuse o r
the system were p ~ in
~ tplace.
provides as follows;
For instance, Article 1 ol' the I<ules
Membership of an Nigeria Hankers Clearing I-louse (NBUI 1) sl::~ll
be restricted to appointed coininercial banks and the CBN. Eligible
banks should have been doing com~ncrcial biinking business a n d
consideration shall be on individual merit.
(a)
Any bank wishing to become a inember of an NHCH shall apply
in writing in the prescribed form provided by the CDN.
Membership of an NBCH shall imply membership of the
appropriate Bankers Clearing-I rouse Committee (liereinafter
b
called the Committee).
(b)
Every member bank shall be required to deposit with the CBN
adequate collateral to be determined and advised to it by CBN.
The collateral shall be realized to fund any debit balance arising
from clearing operations. No bank shall be admitted into
session if its account is in debit.
(c)
A newly approved member of a committee shall appear t:
for formal admission and shall be required to address it on the
scope of its banking business before its admission.
2 :i
(cl)
Any licensed bank that is not eligible to become a member of an
NRCI-I may enter into agency arrangements with any members of
any NBCI I for the purpose of accepting cheques drawn
collecting cheques drawn on other banks.
011
it and
S~lcha bank may
;1rrange to issue its own cheques under the logos of its banlcers
without which such instrument shall be treated as strange
instruments at the NBCH. While Articles 14A and 14R provide as
~'OHOWS;
b
2.3.1 SANCTIONS ON BANKS THAT ABUSE THE CLEARING
SYSTEM
Abuse of the clearing systein shall involve any of the under-listed
acts of violation of the clearing systein such that the offending bank
stands to derive ~mdueadvantage:-
(i)
Drawing instruments on un-fimded accounts by a bank ancllor with
the connivance of customers of' other banks;
(ii)
Wrong presen~ationo r instruments of Iigh v a l ~ ~with
e fraudulent
intent on other banks; and
(iii)
Presentation of fake/forged instruments on other banks;
(iv)
Any other act that may be determined by the Central Bank of
Nigeria from time to time as an abuse of the clearing system.
A.
First offenders; A first offender shall be;
(i)
Charged penal interest (inter-bank interest rate) on the face
value of the cheques concerned.
(ii)
@
Suspended from further participation in forex auction for
four consecutive bidding; and
(iii)
B.
Issued with a letter of warning.
Second Offender
(i)
Charged penal interest (inter-bank interest rate) on the face
value of the cheques concerned.
(ii)
Suspended from further participation in forex auction h r
twelve consecutive bidding.
(iii)
Suspended
from
clearing
house
activities
for
ilve
consecutive clearing sessions, and
(iv)
Iss~ledwith a final letter of warning.
A subsequent offender shall be;
(i)
Charged penal interest on the value of the cheques
concerned.
(ii)
Banned indefinitely from participating in forex, clearing grid
inter-bank activities and
(iii)
Have its banking license suspended indefinitely.
As can be seen from the Articles of the Rules quoted above, it is
clear that
the
rules
are quite comprehensive and
almost
all
enco~npassmg.
In order to further engender coniidence in the use of cheques as an
acceptable instrument of the payments system, thc Dishonoured cheques
(offences) Decree of 1977 was promulgated.
The Decree seeks to
discourage the use of dud cheques without reasonable expectation that it
would be honoured.
To also ensure that people do not run away from their legitimate
obligations and to instill disciphne in the conduct of personal affairs, the
Bankruptcy Act of 1979 was enacted. The Act in Section 1 states that a
debtor commits an act of bankruptcy in each of the fof'lowing cases;
(a)
IS a creditor;
(i)
1 las obtained a final ji~dgelnentor final order against hi13
ior any amount and execution thereon not having been
stayed, has a bankruptcy notice served
(ii)
011
him, and
does not, within lourteen days after service of the notice
comply with the requirements of the notice or satisfy the
court that he has a counter-claim, set off or cross demand
which equals or exceeds the amount of the judgement debt
or sum ordered to be paid and which he could not set LIPin
the action in which the order was obtained, and for the
purposes of this paragraph and of section 4, any person who
is for the time being entitled to enforce n final judgement or
final ordes shall be deemed to be creditor who has obtained
a final judgement or final order;
(b)
If execution against him has been levied by seizure of his ,goods
under process in an action, or proceedings in the court, and the
goods have either been sold or hel, by the bailiff for twenty one
days, provided that, where an inter-pIeader summons has been
taken out in regard to the goods seized, the time elapsing between
the date at which such summons is talten out and the date at which
the proceedings on such summons are finally disposed of, settled
or abandoned shall not be talten into account in calculating such
period of twenty-one days;
(c)
1 1 ' 1 ~tiles in the
COLM
a declaration of his inability to pay his debts
or presents a bankruptcy petition against himself.
The CBN in exercise of the powers conferred on it by the Banks
and other fi~~ancial
institutions Decree, 199 1, as amended, has also been
issuing from time to time regulations to banks aimed at ensuring an
orderly dwelopment and growth of an efficient payments system in
Nigeria. Thus, before banks are allowed to introduce new products into
the system, they are enjoined to clear such products with the CBN.
The failed banks (Recovery of debts) and Financial Malpractice
Decree, 1994 as amended, was promulgated to instill discipline in the
iinancial system.
Tribunals conferrea with enormous powers were
established to deal expeditio~~sly
with cases of financial malpractice in
It is known that people who are alleged to have issued Qud
banks.
cheques which were put into clearing and settlement system have been
arraigned before one of he tribunals.
INSTlTUTIONAL FRAMEWORK
CENTRAL BANK OF NlGERlA
As mentioned earlier, the CBN was established in 1958 and was
confirred with the power as the sole authority to i s s ~ notes
~ e and coins in
Nigeria.
'I'he CBN Decree, 1991, as amended, still rccognises and
maintains this position. In deed, the position of the CBN as the sole
issuing authority was judicially recognised in the case of Sylvester Olcoli
VL'I.SLISFirst
Dank of Nigcria ( 1986) SNWLR 106 1. The learned Justice
of the Court of Appeal said in that case that he was convinced beyond
any shadow of doubt that the member and quantities of currency notes
serialised in exhibit 4 and certified to be fbrged are in fact not genuine
and counterfeit. I t was accepted in that case that the ccrtiticate issued in
due form by the Central Bank of Nigeria on its findings on certain notes
alleged to be forged was conclusive evidence to determine the
b
genuineness or otl~erwiseof the notes in question.
-1 he bank has been taking necessary steps over the ycars to ensure
7
safe and sound banking practices in Nigeria.
Thus the Bank
Examination Department was created in 1967 to undertalte the
supervision of banks. The bank (as earlier pointed out) establisl~edthe
first clearing house within the premises in Lagos in 1961 and other ones
have over the years been established in most of its branches all over the
federation.
co~rMGrticlA1,
AND MElZCliANT BANKS
q y i p p r d to play the role of payment i r ~ t c r ~ ~ ~ e d ifor
a~ies
two reasons. First, they hold the accounts of those engaged in economic
actij~itics. A second reason, is that banlts can provide credit services oil
terms to payer whose credit rating is good so that a payer's obligation
can be discharged even though it may not have the limds avail~lblew11cn
the p a ~ r n ~ eis~due.
i t In essence banlts provide the liquidity to allow the
payment process to run smoothly. The clearing and settlement process
B
i n thc clearing house involves the banlts as intermediaries.
Banks
aggregate payments due to and from each other are often settled by
pnynients througli the account participants maintain with the CBN. The
net efl'cct of this is that the CBN does offer liquidity support to clearing
house participants whose accounts are not sufficiently funded to ensure
completion of payment on schedule.
NIGERIA INTER-BANK SETTLEMENT SYSTEM 1'LC.
'The Nigeria Inter-Bank Settlement System PLC. (NIBSS) was
established in 1993, to facilitate inter-bank funds transfer and settlement.
The aims and objectives of the company include supporting and
participating in the development of infinstr~~cturel o r enhancing the
s p u d and et'ticiency of the national paymunts system.
When 1Llly
operational transactions will be conducted electronically. I t is expected
that NIUSS PLC., through its colnputeriscd inter-bank li~ndstrapsfer
system (CIFT), will serve as an electronic clearing
~ O L L S Lfor
'
switching
of fimds transfer instructions fi-om transferor bank to transferee bank. It
is believed that NIBSS opcrations will assure settlement of accepted
transfer instructions within the s h e business day.
2.3.3 LIDEQUACY Oli. OTHERWISE O F T H E PRESENT LAWS
It is the view of the author that the present laws and regulations
governing the payments system seein adcquatc to sateguard the integrity
ofthe Nigerian Payments System ~ i v o nthe present voluine of payments'
tsansf.i.r/transactioils. However, as the instruments and lnechanisrns for
effecting payments transfer become more sophisticated, it appears that
the present laws and regulations, will become inadequate. But for now,
suffice: it to say that conscious efforts, should be made to enforce
religiously the present laws and regulations, especially clearing house
participants should discharge their obligations.
The thinking that
payment system is essentially a mcclianical process which should be left
alone in the hands of members of staff with responsibility for operations
B
and automation should be discarded. Where participants in the clearing
system dcIi1~1lt ill I
y
o l l i t i o s scsious p~.oI~Ic~iis
01'
systclnic nature will cnsue which may, in turn, threaten the integrity of
thc cn~iscpaymcnt system. 'lhis may result in distress in the financial
system with advessc consequences for the implcmcntatioll of cf'cctive
monetary policy. I t is will1 this in mind that one wclcomes the policy
that pasticipants
;~I-L'
obliged to deposit some collateral to cover their
over-drawn positions. Apart from ensuring that the CBN is assured of
recovery of its liquidity support where it is grantcd, completion of
payment
and scttlcmc~it by participants is also assured.
The
introduction of MICR cheques where the essential data on payment
instructions are now encoded on the payment instrument in a machine
readable iorm is also a welcome development. This at least will serve to
~nalteit difficult to successfully forge payment instruments like cheques
and dividend warsants. Also the proposed automation of the operations
of the clearing house is a step in the right direction.
E q ~ ~ a l lheart
y
warming is the automated clearing and settlement system being pro~osed
for filnds transfer by the NIBSS PLC.
2.3.4 FUTURE OF THE PAYMENTS SYSTEM 1N NlCERlA
Imdting at tlic li1t~11.e
01. tile pay~nentssystem in Nigeria, it is
liopctf that more and more ol' thc paynient system opcratio~iswill be
comp~~teriscd. As more and more transactions are conducted
electronically, there will be need lor increased vigilance on the part of'
thc supervisors oi' the system, especially tlw CBN, to guard against
computer crimes. It is believccl tlut even with the establishment of
erratic power supply and i ~ ~ ; d e q u a t et e l e c o ~ n ~ ~ l ~ ~ ~ i i cfacilities.
ations
Current el'l'orts at ~ ~ p d a t i nthe
g laws of widence, presently in the view of
many, fit only for an age that is past, should be v i g o r o ~ ~ spursued.
ly
This
is to ensure the admissibility of c o ~ n p ~ ~generated
ter
evidence by our
courts.
Above all, there is need for discipline on the part of the
participants in the payments system to ensure confidence in the system.
@
Given a modernized, cfiicient and cfkctivc system, Nigeria will become
a strong regional l i ~ ~ a n c icentre.
al
2.4
IMPACT OF CUKIIENCY CHANCES ON MAIIl<ET
PRICES OF GOODS AND SERVICES
C'r11-rcncychanges in Nigeria have always seen the prices of goods
and service rise. Speaking on it, Ogwuma ( I 985) recalled that
dtet.
the
introduction of naira note of 4420 denomination in 1978, many products
rose
ill
price.
Mostly iklt he recalled is food stuff, that makes the
40
common Inan feel the ii,lpact mare. Besid~ss,he ~ccallcd,t!
!,.s::on from
the society so far has revealed that lmny swindlers find it easier to deal
with higher denominations than in the lower ones.
Speaking on the case of inflation, Nwankwo, Ojo (1993) noted
that the rate of inflation increases as new currencies were introduced,
adding that new and higher currencies have both ups and downs in the
economy. He said that one of the side efkcts was the tendency to wipe
off the lower denominations.
As indicated earlier such transactions are meant to be carried out
in metal coins, under the current exchange rate, the $450 note, is worth
j ~ ~ 50
s t
I1.S. cents. Impact, IJ.S. has just dccided to coin thc onc dollar
bill apparently to enable it stand the rigor of repeated use which it is now
?I he
. comparative :inalysis of the exchange rate shows that Nigcri:~
445 note is now worth only five cents, when M I 0 is worth 10 cents. The
$420 note is the equivalent of 20 cents and so forth. US has all those
rwgc of c~~uencies
in coi s, not notes, bccnuse they arc: all meant 1br
frequent uses.
In Britain thc 20 pencc, which is the equivalent of N5O is in coins.
In fact ever1 Kenya in Africa, has its 20 shillings Ksh clenomination,
(which is the cquivalent of W5O) in coins.
Kenya has five range of currency denomination in notes. There
are 1000 Ksh, 500 Ksh, (the equivalent of 441,000) 200 Ksh, 100 Ksh
and 50 Ksh; Britain has tbur denominations of currency in notes: 50,
&
10, and
5.
The lowest denomination ( 5) is equivalent in $41,000.
Nigeria has no note in'that range. The report, therefore, reconmend that
W 5 , N I 0, N20 and I450 notes should all be replaced with coins since they
are now used f'or fieque~ittransactions designed for coins.
It also a r g ~ ~ efor
d the introduction of $4100, $4200, W.500 a i d
probably 441,000 notes. It stressed they used to phase out 1k, 5 1 ~
and 25k
coins since there are no longer transactions at these levels. In other
words, inflation and depreciation of the naira have eroded the value of
these denominations of coins below the level of any meaningful
transactions in Nigeria.
It would, therefore, be wasteful tying down huge national
SCSOLII-CL'Sin
the minting of'coins which, no one is willing to use. It was
also ~.c=con~~iiended
that the range of coins to be introduced should be
able to beat the public resistance encountered by the NI and 50k coins.
The finding by the researchers is that public resistance to the coins
is the result of the weight and size compared to their i-ace value. The
b
study, therefore, recommended the remoulding of the coins into
someth ing portable, light and attractive. It also called for the circulation
of more coins than notes. CBN had argued at the introduction of the new
coins that it has to m o ~ ~ litd in a way that the temperature required to
melt it could not be attained by local black smiths.
Experts however contend that CBN can mould portable coins from
cheap metals, that would not be ensured anybody irlto melting them into
jewelries. By so doing CBN would have succeeded in getting the public
to carry out high recurring transactions in coins, while at the same time
pending off greedy jewelry makers wllo consider coins as clleap raw
materials.
Monetary econo~nistsare of the view that if measures are put in
pl;ux the apex bank world successti~llyreduce the cost of replacing worn
O L I ~naira
notes as the frequency of replacement would have been
drastically cut. Having won the battle for the face of the naira, the apex
bank would now have time to draw up strategies for Icecping up the value
of the nation's currcncy.
b
2.5
IMPACT O F VARIATION IN CURRENCY
DENOMINATIONS ON FOREIGN EXCHANGE
SITUATlON IN NIGERIA
Foreign exchange is the means of payment for international
transactions. It is made up of convertible currencies that are generally
accepted for the settlement of international trade and other external
obligations. Such currencies include those of the Group of seven (G7)
industrialised countries comprising the United States Dollars, British
Poi111d Sterling, Get-man Deutsche Mark, Japanese Yen, French b'ranc,
Italian Lita arid the Canadian Dollar. A foreign exchangc market is the
~ n e d i u nof~ interaction between the sellers and buyers of interactions in a
bid to negotiate a mutually acceptable price for the settlement of
international transactions. The objectives of such a market include the
provision of an avenue for the exchange of national currencies and the
creation of an effective mechanism for the allocation of foreign
exchange.
'I'his briei'discusses the evolution of the foreign exchange market
in Nigeria and the modalities for its operations and management.
2.5.1 EVOLUTlON OF THE FOREIGN EXCHANGE MARKET
The foreign exchange market consists of the sellers of foreign
exchange (supply) and buyers of foreign exchange (demand). l'he major
participants in the foreign exchange market are authorised dealers
(banks), the public sector, the private sector, and correspondent banks
abroad. l'he s ~ ~ p p of
l y foreign exchange is derived from oil and non-oiI
exports, capital receipts incl~rdingdraw-down on loans, expenditure of
foreign tourists in Nigeria, repatriation of capital by Nigerians resident
abroad as well as other invisible receipts by the private sector. On the
other hand, the demand for foreign exchange rcIlects pay~nents for
imports, external debt service obligations, personal home remittance
11-11)
by
foreign nationals resident in the country, h a n c i a l
commitments to international organisations and the courltry's c~nbassies
abroad as wcll as other invisible out-payments by the private sector.
b
Tile evolution of the foreign exchange market in Nigeria up to its
present state was influenced by a number of factors, which include the
changing pattern of international trade, institutional changes in the
cconomy and structural shifts in production. Before the establish~ncntof
the Central Bank of Nigeria (CBN) in 1958 and the enactment of the
Exchange Control Act of 1962, foreign exchange was earned by the
private sector and held in balances abroad by commercial banks which
acted as agent for local exporters.
During this period, agricultural
exports contributed the bulk of foreign exchange receipts. ?'he fact that
the Nigerian pound was tied to the British pound sterling at par, with
easy convertibility, delayed the development of an active foreign
eschmge market. However, with the establishment of the CBN and the
subsecl~~ent
centralisation of foreign exchange authority in the bank, the
need to develop a local foreign exchange market became paramount.
'I'he increased export of crude oil in the early 1980s, following the
sharp rise in its prices, enhanced official foreign exchange receipts.
Thus, most economic agents had to patronise the CI3N fix 1'6reig11
exchange allocation to pay li)r international transxtions. 'I'he hrcign
exchange market experienced a boom during this period and the
management of foreign exchange resources became necessary to ensure
that shot-tage did not arise.
However, it was not until 1983 that
comprehensive exchange controls were applied as a result of the foreign
exchange crisis that set in that year. The activities of speculators and
numerous middlemen increased during this period.
The increasing
demand for foreign exchange at a time when the supply was shrinking
encouraged the development of a flourishing parallel ~uarltetfor foreign
cxchange. The parallel marltet premium that emerged over time as a
result of thc dis-equilibrium in t11c official foreign exchange market led
to various abuscs including under invoicing of exporls and overinvoicing of imports. 'I'hcse resulted in capital flight and diversion of
official Iorcign excl~angeto the parallel market, a practice known as
rot11~1
tipping.
The exclm~gecontrol system was unable to evolve an appropriate
meclimism for foreign cxchange allocation in consonance with he goal
b
of internal balance.
This led to the introduction of the second tier
foreign exchange market (SFEM) in September 1986. llnder SFEM, the
deterininalion of the iiaira cxchange rate and allocation of foreign
exchange were based on market forces. To enlarge the scope of the
foreign, exchange market, bureau de change was introduced in 1989 for
dealing in privately sourced foreign exchange.
The Central Bank
introduced a pro-rata system of foreign exchange allocation in February
1993 to ensure that all participating banks got some allocations of
foreign exchange. The Ccn~ralBank introduced rate for the naira was
established aclministrativcly, the rates in the other segments of the
nlarket rclnaincd unstable.
Further ret'or:ms were introduced in the foreign exchange market in
1993. Thcsc included the forrnal pegging of the naira exchange rate, the
centralisation of foreign exchange in the CBN, the restriction of bureau
de change to buy foreign exchanges as agents of the CBN; the
rc'af'tlrmatiun of the illegality of the parallel market. The discontinuation
of open markets accounts and bills for collcction as means of payments
B
for imports, except on specific approvals for the manufacturing and
agricultural sectors.
The foreign exchange marke~was liberalised in 1995 with the
introduction of an Autonomous Foreign Exchange Market (AFEM) for
the sale of foreign exchange to end-users by the CBN through selected
authorised dealers at market determined exchange rate.
In addition,
bureau de change was once lnore accorded the status of authorised
buyers and sellers of foreign exchange. This policy stance which was
retained in 1996 was further liberalised in 1997 and 1998, with the lifting
of a nurnber of restrictions on external payments, especially the lifting of
h e suspension on open accounts, Bills for Collection,
the removal of the
limit on personal and business travel allowances. Also, with effect from
1997, foreign nationals were allowed to remit 100 per cent against the
previous 75 per cent of their salaries net of tax as personal home
remittance (PHR).
2.5.2 STRUCTURE OF NIGERIA'S FOREIGN EXCHANGE
,
MARKET
r
1 he Nigerian foreign exchange market is made up of thrce major
7
segments, the official autonomous (made up of the inter-bank and bureau
de change) and the parallel markets. The various segments of the market
evolved over time and emerged due to developments in the economy that
warranted their debut.
The oflicial foreign exchange market, the largest and predominant
segment of the market, has remained one and has been in place
throughout the period of trade and exchange controls when the 1962
Exchange Control Act held sway. The official foreign exchange market
has also metamorphosed over the years. Since the institution of a regime
of exchange and trade liberalisation in 1986, the market has witnessed
tremendous ch~inges.At the moment, the inarket operates two exchange
rate systems, a fixed exchange rate for priority public sector transactions
and illarltct based exchange rate for private sector and other non-priority
public sector transactions through the Autonomous Foreign Exchange
Market segment.
b
The inter-bank market for free funds or privately sourced foreign
exchange was not apparent, when foreign exchange was centralised in
the CDN through the 1962 Exchange Control Act. I Iowever, the market
came to life and became vibrant with the introduction of the second-tier
Foreign Exchange Market and the permission granted to the banks by the
CBN to effect foreign exchange dealings among themselves. The sharp
practices that emanated from the system, in the form of round-tripping of
funds leading to persistent instability in the exchange rate, infonned the
merger of the official Foreign Exchange Market and the inter-bank
market in 1989 into an enlarged inter-bank Foreign Exchange Market
(IFEM). Thus, the inter-bank market was outlawed. The bureau de
change were established with the abolition of the inter-bank market in
1989 to accord access to small users of foreign exchange and enlarge the
officially recognised foreign exchange market. Exchange rates in the
bureau de change are ~narltetdetermined. With the introduction of the
AFEM in 1995, the banks are once more allowed to engage in inter-bank
dealings with only privately sourced foreign exchange.
B
The parallel market for foreign exchange has been in existence
from the exchange control era. The disparity in exchange rates was even
greater in some of the periods before Nigeria's economic reforms. The
renewed interest in the market is founded on the quest for windfall gains
associatcd with the instabili~y and upward pressures that the ~narltet
generates occasionally. The parallel market is a residual market as it
accoinmodates spillover demands from other sources.
It has been
established that scarcity in the official sector and bureaucratic procedures
necessitated the growth and development of the parallel market.
Although transactions through it are limited and small with speculative
tendencies when well monitored and built into the general framework for
foreign cxchange and exchange rate management, would res~iltin a more
cfkctivc and eficicnt system. 111 any foreign cxchange management
tiamework, whetl~erin developed or developing economies, speculation
arbitrage, hedging, and portfolio switching are important elements in
gauging the health and development of the foreign exchange market and,
by extension, the financial system
b
2.5.3 FOREIGN EXCHANGE MANAGEMENT BEFORE 1986
Before 1986, importers and exporters of no-oil commodities were
required to get appropriate licenses from the Federal Ministry of
Commerce before they could participate in the foreign exchange market.
The authorised dealers passed such applications for imports,
backed by the licenses and other relevant documents, to the CBN for
approval and foreign exchange cover, while they deposited the domestic
currency equivalent with the CBN. Similarly, exporters7 applications
Bank in exchange for domestic currency. Generally, import procedures
hllowed the international standard of opening of letters of credit (LICs)
and subsequent conk-mation by correspondent banks abroad. However,
transactions on unconfirmed letters of credit and open accounts cauied
foreign exchange risks and the licensed banks and foreign exporters
might lose in the process. The use of form 'M7 was introduced in 1939
when the Comprehensive Import Supervisions Scheme (CISS) was put in
place to guard against sharp import practices such as over-invoicing and
importation of undeclared items which resulted in persistent drain on
external reserves. The authorisation of foreign exchange disbursement
was a shared responsibility between the Federal Ministry of Finance and
the CBN. l'he Federal Ministry of Finance had responsibility for public
sector applications, while the Bank allocated foreign exchange in respect
of private sector applications. The CBN effected payments in all cases.
111
1983, a major foreign exchange reform was carried out when the
Federal Government, through the CBN, decentralised foreign exchange
allocation. Licensed banks were allowsd to approve applications and
allocate foreign exchange to customers subject to the maximum allocated
to them by the CBN. CBN made weekly allocations to the licensed
banks.
This practice was however discontinued in 1985 because of
abuses by banks, and the CBN once more took over direct allocation of
foreign exchange.
The principal instrumunts of foreign exchange management were
trndc and exchange controls and export promotion. During this period,
thc exchange rate was adlninistratively determined wit11 the objectives of
reducing external sector imbalances. Trade and exchange controls were,
however, the most prominent as they exerted direct iinpact on various
aggregates in the economy.
The controls included quantitative
restrictions in the form of import and export licensing requirements,
imposition of tariffs, and restrictions on certain categories of imports and
exports. Controls were tightened during periods of crises but relaxed
whenever the pressure lessened. Thus, from 1970 to 1975 and in 1980,
controls were 1i beralised but tightened progressively from 1976 to 1979
and from 1981 to September 24, 1986 when the foreign exchange
situation worsened and the pressures on the balance of payments
persisted.
Increased emphasis was placed on export promotion as a
means of reducing pressure on the external sector. The government
introduced a number of incentives to boost non-oil exports.
included arrangements for setting,
These
export free zones, concessions to
exporters to retain 25 percent of their export proceeds, the liberalisation
b
of export and import licensing procedures, and the provision for the
establishment of an export credit guarantee and insurance scheme.
The major shortcoming of the exchange control system was its
inability to achieve internal balance in the short term and guarantee
external equilibrium in the long run. Over-valuation of the currency
under the system was a major obstacle that made the achievement of
internal balance difficult.
Specifically, the problems with the
administration of the exchange control system can be suinmarised as
increased dependence on imports, depletion of external reserves,
cn~ouragement of
parallel
market
activities,
reduction
of
c~in~etitiveiiess
in export activities, reduced capital inflow, and the
inability to pay on c~irrentbasis. These led to the accumulation of
payments arrears, which compbunded the external debt problem.
Exchange control was discarded on September 26, 1986 in order to
evolve an exchange rate mechanism that would be more responsive to
prevailing economic conditions.
b
2.5.4 FOREIGN EXCHANGE MANAGEMENT SINCE 1986
The second-tier Foreign Exchange Market (SFEM) came into
being on September 26, 1986, when the determination of the naira
exchange rate was made to reflect market forces. Under the new system,
the exchange rate becanie an active tool of economic management and
thc rate derived in the market served as the means for the allocation of
foreign exchange.
The modalities for tlie management of the Foreign Exchange
Market have changed substantially since the introduction of SFEM, in
line with the principles of the Structural Adjustment Programme (SAP),
which mphasised the market oriented approach to price determination,
althougli the features have reinained essentially unck~anged. The supply
of foreign cxchmge has continued to bc mainly fi-om our receipts. The
flow of non-oil foreign exchange receipts to the CBN in 1986 failed as a
result of the provision that exports could retain their entire foreign
exchange proceeds in their domiciliary accounts. The composition of
demand for foreign exchange reinained largely the same except Qhat
dcmnnd pressures increased.
l'hc n~echnnislnof exchange rate determination and allocation of
foreign exchange under the deregulated system is based on forces of
demalld and supply.
Within the basic framework of market
determination of the naira exchangt: rate, various methods were applied
and some adjustments carried out to fine-tune the system. A transitory
dual exchange rate system (lirst and second tier) was adopted in
September 1986. The first tier was managed, while the second tier was
subjected to market forces. The first tier was applied to debt sewice
~mynents,other public sector disbursement and pre-SFEM transactions,
M hile
a11 other transactions were undertaken at the second tier rate. On
2"" J ~ l y1987, the first and second tier innrkets were merged into an
enlarged Foreign Exchange Marliet (FEM). Various pricing methods,
such as marginal, weighted average, and Dutch system, were adopted.
With the introduction of the SFEM, the Federal Ministry of
Finance had its allocative powers transferred to the CBN, but it retained
approving powers on public sector transactions.
Its powers were
#
enhanced in 1989 when it was assigned to the responsibility of licensing
bureau de change. These bureau de change were set up principally to
enlarge the scope of the officially recognised foreign exchange market,
accord access to small users of foreign exchange in a less formal manner
and enhance macro-economic nianagement. They are required to deal
only in privately sourced funds and are not allowed to finance imports.
Reputable hotels were also accorded tlie status of authorised buyers of
foreign exchange.
Correspondent banks abroad continued with their
intermediating role except that they stopped accepting responsibility for
paying on behalf of Nigerian importers until reimbursement were made.
This practice was a spill over from the latter years of exchange control
when foreign exchange reserves were rather low.
The constant fine-tuning of the market culminated in the complete
floating of the naira on March 5, 1992 when the system of predetermined quotas was discontinued. Under the new system, import
procedures rcmained largely the same. Sales were suspended at the
FEM by the CBN on December 19, 1992 while a pro-rata system of
B
foreign exchange allocation was introduced early in 1993.
The
unabating pressure on the foreign exchange market resulted in a policy
reversd in 1994 when the naira exchange rate was formally pegged and
f'ureign exchange centralised in the CBN as the sole authority to allocate
foreign exchange to end-users on pro-rata basis. In addition, transactions
on open accounts and bills tbr collcctio~~
were discontinued.
Under the pro-rata system, the manufact~~ring
sector got 50 per
cent, finished goods 30 per cent, agriculturc,lO perccnt, and invisible 10
pcrcent. 'I'ht: CBN allocated 90 percent directly to the productive sector,
~4-iilethe remaining 10 percent for invisible was allocated by the banks.
The 12 1 barilcs that were then in the system were thus grouped into six
categories for the purpose of invisible allocation, made up of 3, 6, 9, 19,
32 and 52 banks with respective percentage shares of 20, IS, 15, 15 and
17. For illustration, category 1 was made up of Union Bank, First Bank
and IJnited Ilank for Africa (Ul3,4), with an allocation o f 2 0 percent.
The reversal of policy in 1995 to that of "guided deregulation"
necessitated the instit~ltionof the Autonomous Foreign Exchange Market
b
(A17EM) and the liberalisation of tbreign exchange dealings thro~ighthe
active participation of the bureau de change in the AFEM. The bureau
de change would purchase and sell privately sourced foreign exchange at
the autonomous exchange rate. The major goals of the new policy were
to deliberately b~iildup and strengthen external reserves to enhance
confidence in the Nigerian economy, strengthen the naira and pave the
way for its sustained stability and ultimate convertibility. Under AFEM
guidelines, private sector concerns would source their requirements from
the AFEM at market determined rates. The banks were allowed to deal
among themselves in autonoino~~sly
sourced foreign exchange, while
dealing in intervention Sunds from the CBN in the autonomous market
\vas prohibited. To ensure adherence to this rule, the CBN intervention
funds were disbursed directly to end-users at current market rates. This
mode of disbursement was maintained in 1996. Although the thrust of
policy was retained in 1 997, suhstantial liberalisation of foreign
exchange practices occurred. Such reforins included the lifting of the
suspension on open accounts and bills for collection, removal of the limit
on personal home remittance (PI-IR) by foreign national as well as
personal and business travel allowances.
In 1998, the bulk of the policy measures in the proceeding year
was retained while some of the existing ones were either further
liberalised or fine tuned to align with developments in the economy. The
new measures included the requirement that public sector, parastatals
and agencies should henceforth source their foreign exchange needs
from the AFEM, the lifting of the ban on some categories of imports
including used vehicles, customs and port reforms to ensure clearance of
goods within 48 hours through computerisation and installation of the
Automated System for Customs DATA (ASYCUDA), and the phasing
out of pre-shipment inspection of imports. The policy on pre-shipment
of imports has, however, been suspended owing to perceived abuses.
Apart from the institution of an appropriate mechanism for
exchange rate determination, other measures increasingly applied in
managing Nigeria's foreign exchange resources included demand
management and supply side policies. Demand management policies
b
were meant to curtail foreign exchange expenditure. This objective was
pursued through external debt management policy as well as fiscal and
monetary measures. New external borrowings were restricted to key
projects and a debt conversion programme was introduced in 1988 to
further reduce the debt stock. In the area of monetary policy, the Federal
Government directed its agencics in 1989 to transfer their deposits from
the banks to CRN. The tariff structure was also re-aligned to reduce the
importation of non-essential terms or items. Excess liquidity was further
mopped up from the banking system through the issuance of stabilisation
securities.
However, under the current dispensation, efforts are
underway to divest the CBN of its retail banking fuunctions, while
i~~oderation
of the liquidity in thc system is based largely on the Open
Market Operations (OMO) mechanism.
Measures designed to increase the supply of foreign exchange
were directed mainly at the non-oil export sector.
For instance,
commodity bnards and licensing requirements for non-oil exports were
abolished
in
1986.
Furthermore, commodity foreign currency
b
domiciliary account scheme became operational and exporters could
retain 100 percent of their export proceeds in such accounts. In the 1994
Budget, foreign exchange was centralised in the CBN and authorised
dealers held domiciliary accounts only as means of transferring
a~~tonornous
foreign exchangc to the CBN. Owners of such foreign
exchange were granted unimpeded access for eligible transactions.
However, the domiciliary accounts scheme was fully restored in 1995 for
exporters and other holders OF foreign exchange, but oil conipanics,
parastatals, and beneficiaries of foreign loans were scq uired to keep such
cnm- into agr.cc3mcnts with h-cigra p:rrmcl+s lLaa h e processing of m v
t",u;:l~11 :e Control Act 1992, as u d l as the Enterprises P~.omotion
Decree? 19Y5, were geared tbwrtrds i~nprovingnon-oil ruceipts and
encouraging forcign direct and portfolio ii~vestmenls. The CBN m d the
Export Import Bank (NEXIM) in the drive to earn more foreign
alike have encountered numerous problems with naira notes and coins in
circulation in the last few years. This article presents an analysis of the
problems created for manufacturers of retail price, the buying public
bankers and even the Central Bank by the current drawbacks of naira
notes of coins and proposes a clear set of reform measures.
A discussion of the nature and sources of the problems with naira
coins is presented in section 1. It is shown that the economic players that
suffer most from the drawbacks of coins are manufacturers, retailers and
b
the general public. Section 2 shifts attention to nature and sources of the
problem with naira notes. It is also shown that the economic players that
suffer most from the drawbacks of notes are retail bankers and the
general public. Section 3 presents the picture in a wide set of other
countries as a mirror for evaluating the current Nigerian situation.
Section 4 reviews the options for rcform and presents a set of
reco~n~nendations
for resolving the numerous problems with naira notes
and coins.
2.6.1 THE PROBLEMS WIT11 COlNS
Range Of Coins: The five denominations of coins in circulation in
Nigeria today are: 10 kobo, 25 kobo, 50 kobo and lnaira.
Rounding. Up: As it is well known, many consumers goods rely very
heavily on retail transactions that require the use of coins. Coins are
indispensable for both the pricing and actual trading at retail outlet.
Painfully, however, retailers in most parts of the nation have been
observed to routinely round-up prices, making retail prices much higher
b
than those rccolninended by manufacturers.
For example, if a retail price of 12 naira per unit is recommended
for a product, it is common practice for retailers to sell the product for
15 naira per unit.
In this event the lcvcl of production and sales
consistent with the rccornrnended retail price will not be attained,
because the effective retail price is too high. This implies that retailers
keep prices above levels at which manufacturers can achieve highest
levels of production and sales. Even when producers wish to implement
marginal reduction
ill
retail prices to boost sales, it is impracticable
because of the relevance of coins to retail trade. In practice retail prices
based on ~nultiplesof five naira notes can be fully enforced.
The same is tr~leof retail price increases, manufacturers can no
longer enforce compliance with small price changes, as coins are not
generally acceptable to buyers and sellers.
Many producers have often been forced to present products in
such forms that notes, rather than coins can be used for retail
transactions. Of course, this involves significant amounts of avoidable
b
packaging costs on the new sizes.
One Way Trips: A survey of retail outlets in June 1996 revealed that
the problem does not in fact originate from the retailers. Virtually all
buyers now offer naira notes in payment for items that are priced in
coins, expecting to get their change in coins.
TABLE I
RANGE AND RACE VALUE OF COINS
CIRCULATING IN NIGERIA
COINS
$41
7
VALUE I N -973
1.5
r VALUE IN 1991
10 coins
VALUE I N 1998
1 '/4 cents
50 Kobo
75 cents
5 cents
0.625 cents
25 Kobo
3 'I?cents
2% cents
0.3 I cents
10 Kobo
15 cents
1 cent
0.125 cents
5 Kobo
7% cents
phased out
phased o ~ l t
1 Kobo
1.5k0b0
0 1 cent
0.0 125 cents
% Kobo
0.75 cents
0.2 phased out
phased out
'
SOURCE: FIELD SURVEY
$41 and 50 Kobo notes were coined in 199 1.
It is only some street outlets that children still bring coins to
p ~ ~ r c h a spetty
e
items. Even here, out-llow of coins exceeds inflow in
most cases. Shortage of coins is clearly observable at virtually iill retail
outlets.
Hence, some customers are sometimes encouraged to take
~ O L I Ithe
I~
prices up to t.liii-~inatet h e need to give coins altogelher.
coril71-meda widespre:~daversion to the use olcoins among Llic populxc.
T l i ~US 1 ccnt coin suffers a fate similar to that of naira coins. For
:dmost t\twthirds of the 10 to 14 billion pieces of thc 1 cent coins
prmh.~cc.clm n ~ ~ a l lthe
y , trip from the mint to the Federal Reserve Bank to
,
the Corn11a-cia1 D n ~ k spockets is
3
one way trip. Most o!-the coins xc,
e i h c r str~sllcd:~thome or simply thrown away. It was recemly cstin~atccl
:I
inill ion people in Sout11-Fasttsn hilass:tch~~sctts
throw O L I $8,000
~
wort11
oi' c l ~ a ~ ~
cf:tily.
g c h4oslly
1113 111a11
ill
1 cenl coins (I'arbcs 17cbruary 1097).
l'he
l x c p lllc 1 ccnt coin c o n h n s that the pressure to round up
PRICE IN
1986
30 Kobo
PRICE IN
' 199X
--.
N30.50
25 Kobo
10.20
10-20 Kobo
15.50
10 l b b o
5.00
5 Kobo
B
5.00
25 Iiobv
1 5.00
30 Kubd
35.00
70 Kobo
1 1.00
SOURCE: I'IE1,D SURVEY
h I m y buyers in Nigeria co~nplainthat the one naira coin is too big
and rather i~lconvunicntto carry. Many claim that it damages Ihe inncr
li~iingsol*their bags, purses or pocl;ets, and are reluctant to c x ~ yit or
accept i t as change. Many indeed pointed out that the coins are not
worth much relative to the average retail prices anyway, it is now rare to
find items with unit price of one naira or less.
Value Of Naira Coins: Relative to the US dollar, the face values of all
naira have fallen rapidly over time (See Table I).
'Thc prices of goods and services have risen substantially in
contrast to this decline in the value of coins between 199 1 and 1997 (See
'Table 2). This has made the coins irrelevant to the pricing and trading
arrangements in retail transactions.
b
A simple way of putting it is that the coins have become too short
as measuring rods of financial value and are progressively petering into
disuse. In spite of the fact that tllc Central Bank still keeps them in
circulation.
Of the five denominations of coins now in circulation in Nigeria
the only two that are ~ ~ s ae bit
d are 86.1 and 50 kobo coins. This largely is
because most products that could be purchased with coins before now
require notes owing to inflation.
Adverse Irn~acts: Retailers are obliged to round up prices to these
nearest paper note. This forces a drop in total production and sales on
producers. The attendant loss of economics of scale implies higher unit
costs and subsequently higher retail prices.
Many manufacturers desire very strongly to price their products to
the nearest coin to inaxiinise sales. The desire for sales growth males
them rc'l~~ctaiit
to charge 'high' prices of increase retail price too much at
a go.
This is more so in I~igl~ly
competitive sectors where small
b
increases in prices may make buyers to switch to substitutes making the
manuf:ict~~rersof the product whose price has increased to lose some
marlet share to competitors.
2.6.2 THE PROBLEMS WITH NAlRA NOTES
0 1 1 1 ~ four
denominations of naira notes circulate in the Nigerian
economy today. These are the 5, 10, 20 and 50 naira notes. In face
value the highest denominations of naira note is 50 naira, is worth just 60
US cents today as against $5 dollars in the year of the reform, 1991.
TABLE 3
RANGE AND FACE VALUE OF NAIRA NOTES
YEAR
(INTRODUCED)
1991
US $ VALIJE
IN 1991
1
US $ VALUE
IN1998
60 CENTS
24 CENTS
12 CENTS
6 CENTS
SOURCE: FIELD SURVEY
The total value of naira notes in circulation grew from 444 billion
in December 1985 to 4 1 4 . 4 billion in December 1997. The number of
pieces of notes in circulation grew from 1 billion to 3.4 billion over this
period.
All has not been well with t l x management and use of naira notes.
If the cr-isis of the coinage has been a rclntively quiet pricing segn~entof
the econolvy and feeds stealthily through these to the rest of the
economy, the crisis with naira notes has been much less quiet.
Central Rank of' Nigeria (CBN) has quite surprisingly, been the
most vocal complainant on the crippling burden of sorting unfit (soild
and mutilated) currency notes from cash deposits by Commercial Ranks
M o r e .retl~rningfit ones into circulation. It is sui-prising beca~isegiven
the institution monopoly power over the issuance and management of
currency notes, any crisis with currency notes must ultimately be
traceable to an error, either of comn~issionor omission, on the part of the
CBN.
b
Central Bank of Nigcria (CBN) commenced currency printing and
distribution in July 1959, when counting and sorting of used notes was
done by a srnall number of pal-t-time note counters. Full time note
counters became necessary fiom 1968 but their task remained manual
Acute currency sorting problems in 1984 attracted the attention of
the government in the form of growing heaps of boxes waiting for
I
sorting at the CBN. I n the general public, the problem manifested itself
in the ibrm or rising n~imbersof mutilated or dehced naira notcs in
ci~culuion.The general decay in the physical quality of currency mtcs
in circul~ition easily cailght the attention of even the most casuiil
obsel-ve1-s.
One immediate response was a media campaign for better
liandling of currency notes by market people.
Another was the
empanelling of a committee of CBN and Fedcrd Ministry of Finsnce
Ofticids to address the problem.
In 1985, when the committee released its report, the goverm~ent
dirccted the C13N to automate its ci~rrency treatment by 1986.
Commel-cia1 R:mlts were also dirccted to start counting tlicit' currency
lodgments with CBN by 1986.
(;o\~cl-nmcntsect ion at that point rcl1ccti.d thc view that escalation
in the piccc of
C L I I - ~ C I I Cin
~
circul:ltion was inevitable thus Ccntral 13atik
and Commercial Uanks slioi113 c~ilargetheir capacity to process morc
notes.
Auto~nationof sorting by CBN started in 1987 with a f e w Ilcavy
duty Gicscckc. and Dcvrient (G & I)) machines at b u r Iccations t l k
eventually grew to 80 machines in t~velvelocations in the country,
C'o~n~ncrcial
h d i s did not rcspond.
17r01n 1988 to 1995, several C13N circulars directed C o ~ ~ l , ~ i c ~
Banks to start sorting thcir currency prior to lodgmznt will1 CUN. There
was .also
CHN G
;I
3-day worltshop fbr Co~nmcrcialBanks (co-facilitated by
S( D and De La Rue) on automation of currency processing in
April 1993. All these failed to persuade Commercial Uanks to buy the
idea.
b
I'ersistent pressure of CBN on Colnincrcial Banks resulted mainly
from inability of the CBN to cope with the rate at which currency for
processing out-grew its currency processing capacity in spite of
111 the various circulxs and papers prescntcd to the @on~~nerci;
I3anlters, Ccntrd Hanks oflicials h a r p d on the growth in tile value of
currency in circulation. They ltept quiet on the ability of the CCN to
curtail or elim;r~:~tetlie grcnvrh oS pieces "1%cilrrelicy in c i r c d ~ t ; ~ wc11
!l
as v a l ~ ~rises
e by introduction progressively of higher dmomination rmes
Incidentally,
government
did
introd~lce two
new
higher
dcnomination notes (N20 note in 1976 and the $450 in 199 1) and coilled
two I o w r denomination notes (50k and Nl notes in 1991) since the
problem erupted in 1984. While value of currency in circulution rose by
57.3 perccnt and 54.3 perccnt in 1991 and 1992 respcctivcly, the nirinbcr
of pieces of notes in circulation declined by 4.0 percent in 1991 nnd,8.7
pc~-ccntin 1992. This slmws that the transmission of growth in the v s l i ~ c
oi' currency in circulation into an increase in the number of nvtcs was
e;lsiI~~
i~~oidabl~'.
Thus ratl1c.r than chasing its own shaclo\v by expanding and
~ l ~ ~ t o n i ~ iit~i ncurrcncy
sg
handling capacity or shilling the br.1rdi.n to the
C'ommcrcinl Baniis, the Cent~,d1-3ank could simply have elinlil~atedthe
Dcccml-)er 1985 to 81 144 1 billion (or less tllan
3
co~npo~~ncled
~ O \ lL
h of
3.0633) in llecembcr 1997. 'I'llc piece of notcs 5.357 billion (or a
coinpo~~ndect
growth of' about 1.08321) over this p e r i d . TIILKL i e an
circulation, tile Central Bank forced nn cxponcntial grow111 rate
1'
b
t\vcnt~,-onein the pieces ol'notes
ill
circulation on 111~'econuny.
Ifpicces ofnotes had grown at the same rate as the value of
~;otcs
(t.xpoiicntia1 rate of less than Sour), we would have needed to c o ~ ~ and
nt
sorl only 1.3 billion (or the 1987 number of' pieces) by the cnd of 1997,
(riven 1.083 tillio~iin 1985. Tlii: capacity provided by the few G & D
m x l ~ i n e sin only four locations in the country in 1987 would cope nicely
\vitli tile sol-tins. It ~-o~.rlcl
have been unnecessary to irlcrease the nc~~rlber
of ~nachinesto eighty in twelvc locations, and even ~ ~ n i m a g i n d to
~ l (r:;I;
e
Con1lnercial Banks to invest in autonlatcd c~~rreixy-so~.ting
equil-JIW~
lt.
C'u~::morcial E:jnks findly I-cnegoti:ilc;i on October 1995 CIjN
deadline (couplccl with threlits to sanctions and cliscrimiclation against
banks that f a i l 4 to comply with the CBN) from April 190'7 to July 1357.
l'his has bzcn the effective date for them to start sorting their. cLirreniy
against stipulated pcnalty payable on assorted lodgment aficr July 1997.
'I'od~~y,
some of the banks have been forced by tlic CCN to install
Desktop Currency Sorting System from De La Rue Systerns in the lji<
~ ~ h i al econsortium of banks have also been coerced into floatiny,a
currclicy sorting company.
A number oi' banks also pay thc CBN
penalties for depositing ~~nsortedcurrt'ncy, and probably suficr
discrilninatosy trcatnicnc from the CLZN.
Wc appc:~r td be dealilig with yawni~ig and widwing p~>Iicy
~llisniatch. 'k
great ti*~nchdug up by this policy error has bmn li1lc.d
by billiuns upon billions of naira to pl*o3~1ce
eizhty ( 1 ) heavy sortil~g
~i-~:icl~i~ic.~;
1;-om G %
; I) f i r . tlir CIjN., :]I1 to no avail. I1 is now k i n g l i l l ~ c l
ilh
111c)rr)i;i!lic)ns 01' ~~~~~~3 13uni C'oninicr~'i;llR:l~iksto
~ I ' O C L I ~CCO I L I I ~ I L ' S S
c!r~Atr,ps r ~ r t i ~111~1~1lillcs
~g
e ~ t t - a c u Ja tdal of 1 billio~i n:iir;~
lYo111
Coinmr~-rialR a n k s on c:tsh deposits from July 1997 to Ji~nc 1993.
Currency sorting l'iinction is iundcrlalien by Central r h k s in the US,
India, IJK and Kenya.
h a v ~shown that banks already carry huge currency management cos,;
on bullion vans, escort vsns, counting machines, and atldition.~l
per-conncl for these. Hanks have had to carry additional currcncjr sorting
costs since the last one year. ?'here were 5.4 billion pieccs of notes to bc
b
sorted by the erid of 1997. Sincc: 1111;. cost of doing this (instdling sorting
q u i p ~ n e n or
t paying CRN penalty) is obviously prohibitive, a
I I I I P ~ ~of'
L'~
dodging the costs in the following ways:
Imll,s
nl-2
-
Redistributing unsorted notes among branches to avoid CDN
penalty,
s r ~ notes.
h
Starcs ~ v i t hvalues ranging from $1 to $10,000. The full r2112.cis $ 1 , $2,
of total value of moncy holding in 1900 and 96 pcrccnt by 1931. 0 t h ~
@
s c v c ~ i dcnon~il~aiio~-i:i
(the rliree sniallcst, ~11d the
So~rr largest)
contributed much less (only 4 pcrccnt of lllc value of' money holding) in
1993 tlim 1112y used to do in 1960 (14 percent).
tli:
1900 - 93 period only two notes, $30 and $100 recoded a skacly
gi-owth. A11 other nolcls, except the two-dollar liotcs which nppearcd to
-
With elcvon clenomiaations of notes in circdation hoiclei-c of the
dollar 11;lve a wide cnough rsnge of notes to hold ovcr a wid?
varic~tyof cconon~icconditions.
a i y new currcilcy notzs providcil such n
I ~ L ' ; I S L I ~rad
~ I I ~ihnt
is
ccnditions such 3s a n out burst of inflation.
Co~npai.dwith the British currency management, I ~ u ~ ~ , ~i h\u~ c r ,
b
Cost A1ir;tctivcness of n'lctfil Coins.
l'hc (IS ~ J Y I ~ L I C C11S total of over 20 billion coins
billion 01' the 1 cent coin stone annually. ?'hc expectcd
alm~itI< fiw11to thirty
ears comlx~rcdwilh a rna,.;imui
y c x s for large denomina~ioncurrency notes like the $50, $1 00.
Ios Smart Cards, slill give a pride of place to coins in their cu~-rency
b
r n a i ~ q y ~ ~ e nO
t . \ w 70 billion coins are estimated to bc cur-rzntly
circulating in thc 15 countries of t l - 1 ~European U n i m . 'T'hcsc v,zill 11s
place in eleven of the tiliecn m~mlc>~'r
of the EU that belongs to the
regiwis monetary union. E M U France is taking the lead in 1993 by
I
than half3 ccm per y e x .
\':rlr~t.
Vcrsus Picccs: Total of coins in circulation Iud incrc3ascd sis-
Sold oirel- twelve years fiom 24101 billion in 1985 to N691 1nil1i011 in
1907. '1'ot:d pieces of coins recorcled a sharp decline ovcs t l x sanx
purioci, fium 2 billion p i c x s in 1985 ( a d inilecd 1 .4 billion pi;.ces in
130 1 ) to I .2 billion pieces by the end of 1997, u hich is about 40 ~-,t.rccnt
L
dccl iw.
T l ~ eirony of this dcveloplncnt is t l ~ crisc in i'lnan~i,,lv:il~ri. of
C L I ~ ~ L ' I Iin
C Y circiilation
is thc
US?
that is inflationary while the dcL*lint. in t l x
of ~ ; ~ p eccurrcnty
r
notcs for high velocjty small \;;tl~ie
The policy restricting what the Central 13anlt could do or co~ildnot
do with the currency in circulation must now be specified. Such a policy
must co\ftx both iivel.al1 volume of currency in circulation and tlic
brcakdouw of the total currency between notes and coins. Strict ceiling
about thc number of pieces of notes that can be printed \~oillclbe c d l d
for. Once
SLICR
~
ceiling is reached, the Central Rank of Nigeria must be
compelled to explore coining the lower denoinin:~tions of notcs and
siin~~ltaneously
replace the coined notes with larger denominalion n$cs
to keep prin~ing,sorting and replacement costs at rcmonably lmv I'vcls.
Thcre is
110
reason why t h e sho~lldbe more than half a I~illion-
currency notes in circ~ilationin the Nigerian economy today. After all,
the value ol'currctncy in circulation was only 441114 billion for aboi~t
1 billion British pound at the end of 1997.
Cost Of Currency Notes: To appreciate the cost of maintaining over
five billion pieces of naira notes in circulation three types of information
are required.
(i)
Average cost of printing each naira note
do, estimate-s are derived for naira from t.he facts a~railablefrom LIIC LJS
and the L K .
This is quit? rzasonable becausc Nigeria, like m
common wealth countries, still imports most of its note priqlin:,
t
inj.,i~ls
from the UK, which supplied them outright prior to indcpcndc.iice.
Cost of P ~ w d u c i nE~s h Note: In the United States, howevcr, each rwte
cc~sts:lbout 4 ccnts, each note costs about 3 pence for 5 cents.
Since Nigeria imports many of its currency printing inputs fi.0111
the UK, the average cost of naira notes should be ~ n ~ l cIligl~er
h
than 5
cents.
expcctancj of each nore varies : I C C O I . ~ ~ 10
~ I Iits
~ il:~~o~l~inatio~*l
:IS f;~llov!s;
ENGLAND
Dcno111ination\
$50
$30
$5
I t is it~str~l;ti~
c L O 1 w n l 1 at this p i n 1 that thc highest dcnominalion
ol'riotts in Nigerii, $450 notes, is wort11 much less tl1:in the one dc>llar
bill, on141 about 60 cents. The fill1 range of notes in Nigeria N5 or
6 ccrlts $4 10 or 13 cents, 4 2 0 or 23 ccnts and $450 ac1~1alIy11~1shigh
d c ~ ~ rate.
ly
As
S L ~ C ~the
I
u orsc ~ l i n n111atof the US.
c i u w q destruction r ~ t ein Nigeria mi~stbe
' I ' A ~ L E4
COINAGE PROFILES IN A CROSS SECTION OF COUNTlty
I 1ICil l1:S'T V A L U E OF
COINS
5 '2 S\viss Francis
500i3001'essoSa
2011 015 1:sancs
20i I 0 Krose
512 De~~tsclit'
Mark
5:I Dollar
10-Shakel
2011 015 Bew pesus
201 1015-Krono
5/25 Guilder
50-Franc120Franc
I -puund (punt)
I-po~~nd
!-Dollar (dollar)
10/5 Ksonu
I Dollar11 Dollar
5 MerLko
I0 Shilling
I Dolh
500 litra
)~~artttr
dollar
1015 Shilling
SOURCE: CBN BRIEF 1995
Appendix 2x Myths about Notes ar~dCoins: L a g e r denominations
will be inflationary; either increases the rate of inflation or inzrensc? the
rate of growth of inflation.
The new Euro provides a good illustration as there
W I I1
be eight
denominations of coins and seven denoininations of notes. This will
provide enough flexibility and adaptability to both very snml 1 and wry
large transactions. Since there should be some d~i~oim
appropriate for any transaction, there is no reason why
large denominations should affect inflation in any way.
The currency notes or coins are best viewed as a ~neas~~ririgxcld
or
ruler. TI~cI-L'
is no reason to expect that the public will wear over sizcd
dresscs if h e tape rule is too long. We can push tlic a n d o g , y \\,it11 t l i ~
ruler a little further to scl~oolchildren, c!ressn~;ikc:.s, :~rcllil~b~~s,
Ixld
surveyors, and civil engineers all use one type or the o t l w
(I/'
\vtr:it
basically the same (multiple of milimeters), Retailers al\\:i>.s ~
. ~ ~ l l ~ ~ l i c
retail prices because they are greedy. This is a most ~ : n h i n d;I!~'::ILIII
the image of Nigerian traders by policy makers.
is
011
The accuxrs tire
actually the cdprils. It is the poor currency policy that is responsible lix
the installation or mutilation of naira notes.
impost large volurne of coins and solve precisely tliis type ol'prublcms.
The life of Indian notes being amount as short as six months. Therefore,
1 and 2 Rupee coins introduced to replace 1 and 2. The 5 Rupees notes
\bere also marked for coining. i'he coins are expzcted tc~l~jstfifken t~
twenty years. Indian Commercial Banks were directed to exchange the
B
coins for soiled notes. They were aslted riot to refi.1~~
the noles, even i f
tom into two piece (the Hindu Business Times Deccrr-~bes1937).
rr-,
monetary authorities in the US also place a lot of emphasis on
maintaining a clean note policy. This is clone by clcfirlii-lit t l i ~r;l:iilJ,~rJs
for carrying out their roles in bringing this about. Not by ~ l t ' E m i ~ ~thc
[;
character of any segment of the American populace.
The US Treasury defines unfit currency as cilrce~-icywl-1ic.11is u~rfil
h r fiirther circulation because of ph1,sicd conJi~ions11,hich a r ~
. A I C ~ as
1m.e ~~doptcd
niore dctai1t.d clefinition (Lackcr : 1993) 'paper Currency
~ C ~ I ~ ~ L ' IIbr
- C ' ~rcdmption
in order to be classcd as fit for filrther
circuI:ltiun must be Fairly clear1 so that its class, denon~ination,and
genuinc~lcsscall bc detcnnined vithout any difficulty and must contain a
suf'ficicnt amount of life 01' sizing to permit its being handlcd with
l d contain heavy creases which break by one and in
facility. It s h o ~ ~ not
one hand, and p r e ~ ~into
d a slightly concave shape lengthwise sho~rld
si~stainitself substantially on a line with the hand. It should not present a
b
limp or rag-like appearance. If a note has retained a fair amount of the
original strength or sizing, it is ilt unless it is so badly soiled as to be
offensive or it is torn, perforated or otherwise mutilated. More creasing
or wrinkling that has not broken nor seriously weakened the note does
not ~nalteit unfit. So-called 'dog ears' or bent comers do not render
notes unfit. (Federal Reserve Bank of Richmond operating circulqr
I
No. 14, Marc11 30, 1990, p. 3).
The Central Bank of Nigeria should brace up and be more active
in reducing the load of work that paper notes are made to do: coin will
cope inore under pressure. It Aould also introduce larger denomination
notes with higher life expeclancy.
LARGE DENOMINATION COJNS WILL BE MELTED A J ~ D
CJSEI) T O MAKE TRINKETS BY METAL SMITHS AROUND
THE COUNTRY
Central Bank ensures that coins have significant intrinsic value.
What counts is the face value of each coin. It matters very little hgw
much zinc, copper or silver it contains. Kill the incentive to melt ths
coins away. This is the message that is instructive that American public
simply throw the 1-cent away or abandon it at home.
There is no
incentive to melt it down. Large denominations of currency notes will
encourage counterfeiting.
We should be careful not to throw out the baby with the bath
I
.
1
water, do what is necessary first and take measures to protect it
afterwards. The one hundred-dollar bill is probably the most widely
counterfeited currency bill in the world. Rather than withdraw it from
circcilation, the US po\,ern~-nenthas simply invested a littl.: more in
ssiouritjr proofing. Thnt is all.
If there are too lllany notes and coins, the range of currency will
be so wide as to confusing.
Most untrue, the public will choose the denominations they
\I
ant and others will become unpopdar, the range of
measurement units from the milimeters to the kilornetcrs
is quite broad but it c?nfuses no one. Rather, ir helps every
one. A useful cxample is the Euro that will be release into
circulation in the year 2002, it will have fifteen denominations,
eight coins and scven notes.
2.7
COST lMPLlCATIONS OF 1NTRODUCING NEIV
CURRENCY DENOMINATIONS
According to Ekpo Eyo (1979), in 1977, in response to economic
growth necessitated by oil boom, a new twenty naira ($420) note was
introduced. The first major need for higher currency denomination is the
level of economic activity in the country. This was also the case with the
former colonial government when in 1954, five pounds was introduced
as a result of increased economic activities. The higher denomination
will inhmce el'ficirnt payment in (i growi~lgecGnomy. T i h is imporlan~
to fiinction well as a rnedi~mof exchange. 11
I I N I S ~ be
p o ~ ~ a t ~the
le,
ability to carry with ease in the co~lciuctof business, so as to retlucc tllc
high task or risk involved with I a g e volume of lower dcnominationt;.
With the introduction of Structural Adjusllnent I'rogrammr (SAP)
in 1986 by the Federal Government, economic activities grew ~ 4 t h
increased awareness especially in the financial sector and for trade to be
conclucted there is need for an efficient payment system. It was in ]&lit
of increased economic activities that the fifty-naira note was introduced
in 1991 by the government. To justify the need for higher currency
denoniination, the,fifty naira note has been the most widely accepted and
used currency in the economy. This conforms with a basic quality of
money which requires general acceptability. With increase in economic
activities, the higher currency denomination tends to be more ac
the conduct of business.
From 1993 to 1999, the BJ50 denomination had over 50 percent
general acceptance compared to all other currency notes, with the figure
on table 1 above. This trend shows the haste with which people want to
conduct business activities in higher denominations and reduce the risk
of carrying large amount of currency in lower denominations.
With the advocacy of free ~marltetsystem of privatisation and
liberalisation by the present civilian administration, economic activities
had been positioned for growth. This calls for review of the currency
policy to reflect the new thinking of government. In view of the new
economic thinlting, the need for higher currency denomination for
b
Nigeria is highly welco~neclto enhance the payment system.
Airother very important factor in the need for higher currency
denomination in Nigeria, which is not taken into consideration by critics
is the cost of printing.
Economic activities in the present
administration's economic blue print calls for cost effective techniques
being adopted to discourage waste and inefficiency.
It
I
1.13s
been obscrvzd that "the fifty nairta (g50)which, was worth
n b 6 ~ 1five
t dollar ($5) when it was introduced in 1991, is currently worth
only about 50 US cents now. When that is pitched against the fact that
the fifty kobo coin of 1973 was roughly worth 76 US cents, it would
become clear that serious reforins are needed in currency issued in
Nigeria. In the same vein, the face value of the highest denomination of
coins (i.e. the one naira coin) is worth 1.25 cents today, lower than the
1.5 cents which was the worth of one kobo coin in 1973.
With the increase in the cost of printing and minting the existing
currency over and above their present value calls for the introduction of
higher currency denominations. This is also true with the introduction qf
market orisnted foreign exchange system, the reduction of intrinsic value
as a result of the sharp fall in the naira over the years.
'l'hc introduction of higher currelicy denomination notes in Nigeria
\vill rcciiicc. thc volume of lower denominations.
'This will also
drastically reduce the cost of' sorting and replacement of dirty and
niuti lated notes.
The need for review and adoption of change in a dynamic global
system is also an important factor in the need fbr higher currency
cicnoniination in Nigei.i;i.
Economic activities are becoining more
internationalised with information technology, nations are moving away
from primordial to modern ways of doing things. The culture where
people prefer to hold large volumes of currency had hampered the
adoption and use of cheques, cxdit cards and other non-cash instruments
in transaction and the eventual movement to a cashless society. With the
openness of thc cconoiny, there is the need for periodic review as in the
case of the Kenyan currency, in 1986, the Kenyan two hundred shilling
was the highest denomination. This was reviewed to five hundred and
@
one thousand shilling notes in 1988 and 1995 respectively.
Closely related to the changing global system, is the pivotal role
the Nigerian economy plays in the sub-regional economic community
(ECOWAS). The Nigerian economy has abundant human and material
resources (if properly harnessed) could set the bench-mark for economic
activities in the subregion. The recognition of this very important
I
potential therefore calls for the economy to position itself appropriately
to perform its responsibility within the sub-region.
A for~ner Finance Minister, had predicted that the nations'
currency, the naira would soon become the dominant currency in the
West African Sub-Continent. The West African co~mtrieswoulcl soon
collapse, as France would not continue to support their currency. MJllcn
this happens, the naira, which is today the most convertible cuiwncy on
the sub-region would be used by everybody.
The fact that the Nigerian economy within the W O W A S subregion is very impostant calls for proper currency rcform policy. 'rlx
need for higher currency denomination in Nigeria at this point scq~~ires
the support and blessings of not only the government b ~ also
~ t the pcopIc
to enable us achieve an enhanced payment system in the ecommy.
MANIFESTATIONS OF TI-IE NEED FOR ItlG'amLll
DENOMINATION CURRENCY IN THE NICl'RIAN.
I
I
ECONOMY TODAY
After 40 years of political independence the Nigerian economy has
grown to become one of the most vibrant in the West African wb-region.
The Gross Domestic Product (GDP) was W , 1 Y,94On (1 097
current prices) and a per capita income of about &3 1,279. The minimuin
wage in the country presently is N5,500 and the year 2000 national
budget is $4645 billion. All these translate to the fact that given an
equitable income distribution the cash at the disposal of the average
Nigeria is substantial. Given the above scenario the circulation of $4100
denomination currency note as the highest in an economy where cheques
and credit cards are not widely used would create the problems og
portability of money.
Consequently, many businessmen who travel long distances to
buy goods with huge sums convey their money in suitcases or "Ghana
must go saclts". Since the bulk sums cannot be adequately concealed,
reported cases of loss of huge sums in transit have been frequent. This is
a strong individual factor or indication that Nigerian currency as
.-
-
-I-
--
- -- - --__
.___-
1
___._
presently denolninated?Ias"failed the test of easy portability which, is
one of the qualities of a good medium of exchange.
The i'rcq~t~nt
cast's of loss of huge sums of rnoncy in trar I.,: t led to
the eniergcnce of bogus and unregistered money transfer outfits by long
distance transport companies like ABC, The Young Shall Grow, etc.
They transl-er huge sums for travelers on the payment of unregulated
high charges.
The relatively low denomination notes in circulation are also
I-esponsiblt:for the long queues in most Commercial Banks. This arises
fkom the fact that cashiers spend long time counting the low
denomination notes which usually very dirty and mutilated that they
cannot be counted mechanically.
For sometimes, the Central Bank has been paying out unprocessed
and unaudited notes to customers with the consequent enibarrass~rlunt
caused by the huge shortages. The situation had arisen because the low
denomination notes processed by the Central Bank do not yield a d e q ~ ~ a t e
I
.-
".
---
arnoliilt that could-meet the currency requirement of the economy.
Akin to the above is the circulation of dirty, and mutilated notes
which are not generally acceptable. This phenomenon is attributable to
the dominance of low denomination notes in circulation thereby making
the currency to gradually lose its quality of general acL~ptability.
The cost of producing the low and higher value currency nates
denominations do not valy significantly.
There are therefore cost
advantages in printing higher denoinination notes.
THE SALUTARY EFFECTS OF CIRCULATION OF HIGHER
DENOMINATION CURRENCY NOTES
The introduction of higher denomination notes, especially into an
economy where cheques and credit cards are not widely used implies
that individ~lalscan conceal huge amount of money on them without
bcing easily noticed. They w o ~ d dresort to the nation's currency, the
quality of portability which low denomination and high inflation rate
gradually eroded.
The loss of huge suins of money in transit would be ininimised,
the circulation of higher denomination notes would reduce the long
qireiles e-xperienced in inany Coininercial Banks, as cashiers would
spend less time i n counting notes.
'The i~~troduction~ f I' ~ i g h x
denomination notes would engender efficient processing of currency
nolcs. I~rocessingof high denomination notes would yield higher value
of inoney that would meet the currency requirement of the economy with
genes;~llyacceptable notes.
These would be efficiency in currency movements.
TI1E ARGUMENTS AGAINST THE INTRODUCTION OF
,
HIGHER DENOMINATION NOTES
When the idea of introducing higher denomination notes was first
mirtccl, somc cynics came up with the Iallacious argi~nientsthat the
in~sod~~clion
of such notes would cause inflation and currency
counterfeiting. 'I'hcse arguments do not cause inflation per se. Rather, it
is the excess supply of money in relation to he available goods and
services that caused inflation.
In the same vein, the provision of
adequate security on the currency notes would forestall counterfeiting.
Afier all, less developed economies in the West Afiican sub-
region have in circulation, currency notes of higher denomination and
did not trigger off inflation. For instance, Franco-phone countries and
Ghana have denominations of CFA 100,000 and 10,000 respectively and
those expressed fears were not observed.
REFERENCES
J:~jaW ~ C ~ U ~( 1C960);
W L Independent
L
Nigeria,
Okpu-ala Ngwa:
Calvary I'rcss, p. 1 5 .
Jonah Jenny (1 982); Death in a Trance, Okpu-ala Ngwa:
Standard Publishers, p. 12.
Federal Rep~~blic
of Nigeria CBN Orciinance (1958) Section 18
Federal Republic of Nigeria, Bills of Exchange Act. 1880, amended
1990
Federal Repirblic of Nigeria, CBN Act (1958), section 21
Federal Republic of Nigeria; Banltruptcv Act of 1979 No. 16,
Fcdcral Ol'licial Gazette, vol, 66 No. 20, pp A 109 - A 165
O g a u n a , Paul (1985); Lagos: Vivian Press p. 8
N\vanltwo, Ojo (1993); Lagos: Unilag Press, p. 15
Federal Republic of Nigeria, Exchange Control Act 1962, No.
Federal Exchange Gazette vol. 36 No. 18, p B I0
Federal Republic of Nigeria; A~rtono~nous
Foreign Exchange b l d w l
(AFEM) Decree No. 48, 1995, Section 26
Decree 1986 No. 1 I
Federal Republic 01' Nigeria, Automated System iiw fJ151o1ns r h t n
-
ASYCUDA, Decree 13, No. 3 1
Federal Rep~~blic
of Nigeria, Exchange
Control Act ( 1 963), No. 12,
Federal Official Gazette Vol. 8
&
Federal Republic of Nigeria, Export-Import Radi ( N U lbl) ( 1 995),
Decree 12, No. 15
Federal Republic of Nigeria, Nigeria
Export Promotion Co~incil- NEPC
( 1992), Decree No. 1 5
Federal Reserve Bank 1993 Decree No. 2 1
Lacker, P. (1993); Banking- Profession, London: Oxford Press p. 30
Ekpo Eyo (1979); Banking Era Development, Lagos:
Vivian and Vivian p. 105
CIIAPTER THREE
RESEARCH MErI'HODOLOGY
3.1
RESEARCH DESIGN
This is both an evaluative and experimental research design. In
the evaluative sense, we look into the economic and social impacts of the
introduction of diffel-ent denominations in Nigeria so far, taking cue
from the colonial era till the present day. In the experin~entalsense, we
shall
critically
assess how the
changes
in Nigerian
ciirrcpcy
denominations affected econon~ic,social, political and religious lire
between 1980 - 1999.
To do this, a pre-test (Pilot) survey was conductccl t ~ 1 ~ 1 i(20)
ty
questionnaires were distributed to twenty people wlwtlw cl~angesin
-
Nigerian currency denominations inducc serious bc.ha~,io~~l-al
illlpacts on
the economy.
representing 95%.
Nineteen (19) were reti~rned i n h c aff?l-rnativc
3.2
SOLJRCES OF PIIIMAEIY AND SECONDARY DATA
Primary data are collected from the various spectra of the
pop~rlation in Enugu State: Arnalgarnated Traders Association, Civil
Servants, Industl-ialists, Educationists and Students
Secondary data are from the various write-ups by people that are
rclcvant to the topic.
3.3
POPULATlON AND SAMPLE SIZE
B
The pop~~lation
of the study of twenty one tho~~sand,
eight hundred
and ninety one (2 1,891), is spread across the population as follows:Civil Servants
3,128
Traders
5,2 19
I~idustrialists
1,296
Educationists
1,348
Students
10,900
2 1,89 1
.-
21,891
b'lierc N
=
the population
e
=
allowable sampling error =
5%
0.05
=
TECHNIQUES OF DATA COLLECTION
3.4
B
The data for the research is collected by; questionnaires, direct
observation and oral interview.
METHODS OF DATA ANALYSlS
3.5
1 he questionnaires are analysed ~lsingsimple percentage
7
7
distribution formula
Where
1. =
number of responses in each case of the questionnaire
n Z = Observable
sample
size,
being
the
number
of
l 390
c1~1er;tionnaires
rc~ur-nedout 01'393 distributud ~ h i c l is
HYPOTHESIS TESTING STATISTIC
3.6
The hypothesis are tested using Chi-square statistic
X' (R-R) (C-L) for the table value
=
level of significance at 5%.
R
=
Row number
C
-
Column number
For the calculated value is from the forlnula (0i-ei)*
Where oi
ei
Where
=
=
+ ei
observed frequencies for each cell
theoretical frequencies for each cell.
Rt
=
Row total
Ct
=
Col~mmtotal
N
=
Total Number
-
390
REFERENCES
Yameni ( 1964)
Introductory Statistics
Iiio De-Jancro: XEB, p. 91
ClIAl'TEIZ FOUR
DATA ANALYSIS AND PKESENTATION
4.1
EFFECT O F CHANGES IN CURRENCY
DENOMlNATIONS ON 1NFLATlONARY T l W N D
A question was posed as follows:-
''140~ did changes
ill
Nigerian currency denominations aff-kct
inflationary trend between 1 980 - 1999?"
The response obtained is analysed at Table 5 :
TABLE 5
INFLATIONARY TREND AND CURRENCY DENOMlNATIONS
1980 - 1999
RESPONDENTS
Civil Servants
1
RESPONSES-RATE
TOTAL80
Traders
65
industrialists
70
Educationist
75
Students
100
Total
390
"/irTota1
100
Source: Llistributcd Questionnaire
servanls, 19.2356 from educationists, 17.95% from industrialists, nhile
1 6.679'0 came t h ~ ntradcrs. A mqj nrity of the respondents amounting to
67.95% 01' tile I-espondcnts i~rclicated h a t the impact of changes in
denomination was quite high on consumption in terms of high prices of
goods and services. 17.18% of the respondents indicated that the impact
w a s high, while 14.87% of the respondents were of the view thnt prices
So wc conclude that changes in Nigeria's currency denominations
to some reasonable extent induced inflation within the period.
4.2
THE EXTENT CHANGES IN NIGERIAN CURRENCY
AFFECTED INVESTORS
A question sought to determine the extent changes in Nigerian
Currency denomination affected investors between 1980 - 1999.
Another question also s o ~ ~ gto
h t find out how the spate of increase
B
in investment between 1980
-
1999 related to changes in currency
denomination
Table 6 below provides the analysis of the responses obtained from the
two questions.
TABLE 6
INVESTMENT AND CHANGES IN CURRENCY
DENOMlNATlON BETWEEN 1980 - 1999
RESPONDENTS
Civil Servants
7
TOTAL
% RESPONSE
1 radcrs
7
Industrialists
Iicl~~catio~~alists
Students
'Total
Yi Total
A
=
The changes increased investment
B
-
The changes attracted better government policies
C
-
Both reasons above
Source: Distributed Questionnaire
Table 6 shows that both Civil Servants and Educationists have 25.64%
each, 20.5 1 % from students, 1,5.38% from traders, 12.82% from
industl.ialists. Everybody said that changes both increased and attracted
better government policies.
So, we conclude that changes in Nigerian currency denominations
affected investors, as initially they increased investment due to the
increase in demand for goods and services.
1.3
INII'ACT OF CHANGES IN CURRENCY
DENOMINATIONS ON DEMAND FOR GOODS AND
SERVICES
1
'1
' 1s respondents were required to indicate the impact of changes
in N i ~ c r i a ncurrency denominations on demand for goods and services
I ~ \ Y C L ' I I 1080 and 1099. The res~lltobtained is presented in the tablc 7
.
l)i.lo\.y.
-
B
TABLE 7
CUR!ZENCY CHANGES AND DEMAND FOR GOODS ANL)
SERVICES
r
--
-
Civil Servants
RESPONSE
TOTAL
% TOTAL
-
20.5 1
Industrialists
Educationalists
Students
'l'otal
A
E3
=
Prices of goods and services soared after each change
Prices of goods and services dropped after each change.
Source: Distributed Questionnaires
Table 7 shows that 25.64% responses each came from traders and
industrialists, 20.5 1% from Civil Servants, 15.38% from educationists,
12.82?4 froii~students. 64.10% said prices soared afier each change
while 35.90% said it c i r q p c l .
So, we conclude that prices really increased afier each change in
Nigerim's currency denomination w it11 occasional drops.
4.4
HOW DISTRIBUTORS REACTED TO CHANGES IN
-
NIGERIAN'S CURRENCY DENOMINATIONS BETWEEN
An investigati~igqi~cstionwas posed to the respondents on how
distributors reacted to changes in Nigeria's currency denoininations
1~ctwec.1119SO
below.
-
1999.. The results obtained are presented in table 8
TABLE 8
DISTRIBUTORS AND CHANGES IN CURRENCY
RESPONDENTS
---
- -- .- -
-
.. .--..
..
.
RESPONSE
TOTAL
.-
% TOTAL
Civil Servants
Traders
Industrialists
Educationists
Students
Total
0 'I-0131
A
--
Dislributors 111ndcb e ~ ~ sales
c r after each cllangc
B
-
Distributors discovered more outlets after each change
C
-
Both Reasons above
Source: Distributed Questionnaires.
Table 8 shows that 25.64% response rate came from Civil Servants,
20.5 1%
from traders,
13.82% i'rom industrialists, 10.26% from
educationists and 7.69% fi-0111students.
Everybody said distributors
made better sales after each change and also discovered outlets after each
change.
So, we c o ~ ~ c l ~that
i d e changes in currency denominations helped
distributors between 1980 - 1999.
4.5
THE WAY CHANGES IN NIGERIAN CURRENCY
B
DENOMINATIONS AFFECTED ClVlL SERVANTS
BETWEEN 1980-1999
A question so~rghtto determine the way changes in Nigerian's
currency denominations affected Civil Servants. The results obtained
are presented in the table 9 below.
TABLE 9
CIVIL SEIIVAN'i'S AND CHANCES IN CURRENCY
--
- --
--
RESPONDENTS
"...
_______?_
% TOTAL
Civil Servants
Traders
Industrialists
Educationist
Students
Total
% Total
A
B
-.-
Civil Scrvanis enjoyed better bargain
--
C i ~ l, iServants dissented the changes because they paid
more for their products and services.
Source: Distributed Questionnaires
Table 9 ;~bovc.shows that 25.64% response each came fi-om Civil
Servants, industrialists and educationists, 17.95% from students while
5.1394 c a ~ wlium tr:idclrs.
59.97% said Civil Servants enjoyed better
bargain \i.llilc 3 1.03% C'ir il S~lrva~its
dissented changes.
helped Civil Servants by ililproving thcir bargaining power, but clropped
as time elapsed due to inflatiotlary trend that greeted tile change.
4.6
TES'lllNG TIIE lIk'l'OrTI I 1SIS (ALTERNATIVE)
4
4.6.1 IIYI'OTIIEIS 1 (I-10,)
denominaiions o n inflation between 1980 - 1999, this is tested from
reseal-ch questionnaire 4.
I
The table value is (0.05)
(5- 1 )(4-1 )
DECISION
Since 5 2 3 is not greater than 34.743 12528 we reject Mo I
3.6.2 HYPOTI-IESlS 2 (1-lo2)
Demand for goods and services did adversely change due to
changes in Nigerian currency denominations between 1980 - 1999.
This is tested ti-om research hypothesis 10.
,
1
TOTAL
I
I
TABLE V A L U E
2(0.05)
=
z(0.05)
(4)(1 )
(5-1 )(?-I )
---
0.71 1
=
3(0.05)
4
Since 0.71 1 is not greater than 10.82357889, we reject 1402
Changes in Nigerian currency denomination did adversely af'fected
Commerce between 1980 - 1999
This is tested from research questionnaire 16.
b
RESEARCH QUESTIONNAIRE 16
How commerce reacted to changes in Nigerian currency
deno~ninationsbetween 1980 - 1999. The table 10 below shows the
results obtained.
TABLE 10
CORlh4EtiCE AND CURRENCY CHANGES 1980 - 1999
RE:
-NEGATIVELY
ONSE
NO
CHANGE
TOTAL
% TOTAL
100
25.63
100
25.64
80
20.5 1
20
5.13
90
23.08
390
100
100
b
TABLE VALUE
2 (0.05)
2(0.05)
=
( 5 - 1 )(3- I )
-
2(0.05)
=
(3)(3) =
=
8
DECISION
Since 2.7 is greater than 0, we accept Hoj.
1
Do not reject
110
Reject Ho
Graph showing the rejected and accepted hypotheses
2.73
-5.7 PRESENTATION OF DATA
?'he q~~estionnairss
are hereby presented in pie chart for easy
per~~sd.
Key: 4, 7, 10, 13, 15, 16 are analysed questionnaires according to their
I-esponses.
intxC;lscld investment and attracted more government polices.
-
f~islributors made more sales after each change in currency
-
Den-land fix- goods and services slightly rose after each change in
-
Co~nme~-ce
improved aficr cach change in currency denomination.
-
Civil S c ~ w n t sspcnt inot-c after each change as well as other
-
I~lll,t~iol-I
greeted he whole afihirs aticr each change
-
Investment increased after each change initially, but dropped
5.2
DLSCUSSlON OF RESULTS
Changes in Nigerian currency denominations started in 1973 when
pound sterling was replaced with naira. In essence, the whole affairs
started in 1950 when West African Currency Board was abolished
finally as the constituent countries gained independence. Earlier than
B
that still, payment system which, was based on metals was changed to
notes and coins. Of course, coin is a metal.
So, payment system has been evolving over the years, and
adequate changes 111ade. Many coins have been changed into notes, and
the denominations of notes di Werently changed over the years. This
agrccs with the Nigerian First Speaker, House of Representatives
.J;lja Wacl.i~~k\v~i
( 1 959) that Nigerian's currency denominations would
h e ~ ~ 1 1 ~ j e cto
t c realistic
'd
changes as time elapsed.
The changcs in Nigerian's currency denominations initially helped
in\,estors. It attracted investors, at least at the initial stages. When the
investors started business, the culminating inf-lation continued which
c11ecltc.d ~'LII-tllw
investment because it was at the galloping stage.
Demand for goods and services are seen to initially fjvour
changes in currency denomination because changes in currency
denominations
increased investments and subsequently increased
ciemand. This was made possible beca~lsethe people appreciated it and
b
invcslors were willing to invest.
C'ivi l Servants discovered that it favoured them, though not
initially. 'l'he prices of goods and selvices tended to rise with each
change, but nor~nalizedsoon alier.
5.3
CONCLUSION
Changes in Nigerian's currency denomination have been a fairly
constant phenomenon in Nigeria.
It started quite early when barter
system was changed. Respective governments have deemed it fit to
change currency denominations to reflect the current trends in the
economic. It is these,changes that establish faith in the local currency as
seen by the Nigerian Central Bank Governor (1995).
Changes in currency denominations have comparative frequent
B
since 1973 when the nation reverted to naira. More currency changing
from coin to note has been taking place. Each change ushers in brief
dramatic changes i n psiccs of goods and services. Investment appears to
be favoul-cd initially ss prices of'goods and services mildly escalate.
However, no sooner such ephemeral price changes occurred than
the system reverted to the former nosmal demand. New currencies of
high denominations have the tendency of dragging the prices of goods
and services along in an upward direction.
1111111ediately8150 note came on board, rarely did 10k and 5k
survive, and afier the introduction of $420 note, nothing was heard of l k
coin. NOWNigeria has introduced $4100, $4200 and $4500 notes. The
consequence is that BJ5 and $410 notes are always squeezed out. Rarely
docs any product or scrvicc bear $41 coin.
So, the introduction of higher currency denominntions has the
tendency of chasing away the lower ones and/or coining them
.
5.4
" -
liECOMhlENDATIONS
In line with the findings of this research work, after logical
analysis, the Sollowing recommendations are hereby made;
o
Traders, industrialists, civil servants, everybody slio~~ld
endeavour
to
resist
the
temptation
of' forcing the
lower
denominations out of competition by way of pricing.
currency
Government should come up with better policies to control the
iss~~ance
of' currencies ol' higher denominations with a view to
controlling the concomitant inflation.
Industrialists should be encouraged to invest more during the
periods of changes in currency denominations to check the
ensuing inflation.
Since demand and supply agreeably rise in pursuance to changes
in currency denominations, it is necessary to beef up productio; to
be at par with the demand to preclude inflation.
0
The minting a~ithorities should fiercely fight falaltery/forgery of
currency denominations, especially the higher ones.
This will
check inflation.
There should be more even distribution of goods and services,
especially
during
denominations.
the
periods
of
changes
in
currency
1-edcral Republic of Nigeria:
Bankruptcy Act 1979, No. 16 Federal
Oflicial Gazette, Vol. 66 No. 30, pp A 109 - A1 65
Federal Republic of Nigeria: Bills of Exchange Act 1880 amended 1990
Federal Republic of' Nigeria: Ranks and O t h r Financhl Institutions
Decree No. 25 199 1
- -
-
Federal Republic of Nigeria: CBN Act. 1958, Section 18 and 2 1
1-ederal Republic of Nigeriri C13N Decree No. 24 1991
1-deral Iiepublic of Nigeria CI3N Ordinance 1958 as amended 1991
Federal Iiepublic of Nigeria; Exchange Control Act. 1962, No. 35,
Fcdetal Exchange Gazette Vol. 36, No. 18, p. U 10
F e d m l Repub1ic of Nigeria; Export - Import Bank (NEXIM) ( 1995)
Decrce 12 No. 15
Federal Republic of Nigeria; I-'ailed Banks Dccree No. 1 8, 1994.
Federal Iieserve Bank 1993; Decree No. 2 1
Nigerian 1;spot-t Promotion Coa cil Decree (NEPC) 1992
Decree No: 15
Ogwuma, I%ul ( 1985); Union Bank and "U"
Lagos: Vivian and Vivian Press, p. 8
b
APPENDIX 11
QUESTIONNAIRE
SECTION A: PERSONAL LETTER
Department of Banking and Finance
Faculty of B~lsinessAdministration
University of Nigeria Enugu Campus
Dear Respondent,
The questions before you are for academic documentation.
The
researcher is conducting a research on the topic: ''A Study of the
Behavio~~sal
Impact of Changes in Nigerian Currency Denominations:
T11e questions are not meant to undermine your privacy or
integrity in m y lbrm. SO, respond to the best of your Itnowledge as
uvcry divulged information would be treated with utmost confidentiality.
Yours faithfully
KANU, E. E.
Banking/Finance
UNEC
PG/MBA/99/3 077 1
SI<CrI'IONR: PERSONAL DATA
I.
M a t is your a; :bracket'!
(e)
7
-.
n
above 50
What do y o ~ do
l for a living'?
(a)
Teaching
(b)
Trading
(b)
NO
at'tkcted inllntionary trend'!
(a)
4.
yes
0
CI1
ISyes above, how?
(a)
Prices of comrr~oclitiesrose simult:~neouslywith every
c1r:rnge in currency dcnomina~ion(a) Yes
n (b) No n
--
-
jb)
The impact oS changes in denomination was q~litehigh on
cons~~mpt
ion in terns of hip,h prices or goods and services
(d)
5.
If' no
r]
None above
~ O L C ,wliy:'
i n f l ~ i o n( i ) yes
1999 (i)
1-1
r--
Yes
(Is)
(b)
r 7
(ii)
No
(ii)
No
[I
No
1 he changes attracted better govommcnt policies
Ycs
8.
If no above, why?
Changes in currency denon~inationsaffectcd galloping inflation
which discouraged investment ......................................
............................................................................
Changes in currency denominations created a political unrest,
which discouraged investors. .......................................
Both reasons above ...................................................
9.
Did changes in currency denominations affect the demand for
goods and services between 1980 - 1999?
10.
If yes above, how?
Prices of goods and services soared after each change
..........
...........................................................................
Prices of good and services dropped after each change ..........
............................................................................
11.
1i~no;1bovc,~vhy?
I'sices did not change in the period ..................................
b
Prices changes in thc period were due to other reasons other than
changes in cussency denominations ..................................
12.
Would you say that changes in currency denominations affected
distribution of' goods and services between 1980 - 1999
(a)
13.
Yes
0
(b)
No.
If yes above, how?
Distributors made better sales after each change ..................
Distributors discovered more outlets after each change
..........,
Both seasons above .....................................................
14.
If' no :~bovt.,why?
l'herc was no difl'erence between sales made by distributors during
and after or bel'ore changes in currency denominations.. .........
15.
I-low did changes in Nigerian currency denominations affect civil
servants, between 1980 - 1999?
(a)
Civil Servan~sgained better bargain ..........................
(b)
Civil Servants dissented the changes because they paid
more for their produc~sand services.. .........................
16.
I-low did commerce reacl to changes in Nigerian currency
denominations between 1980 - 1999?
(a)
Positively
0
(c)
No change
fl
(b)
Negaiively