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Friday, June 14, 2024

CBN eNaira : Charting a New Course for Financial Inclusion

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The Central Bank of Nigeria (CBN) is set to launch a digital currency this week. Dubbed the “eNaira”, the Central Bank Digital Currency (CBDC) is expected to improve financial inclusion to 95% by 2024 (vs. 36% currently).
The eNaira will have parity with the fiat currency in the country and will also be non-interest bearing. 
 
The key players across its transaction value chain will include the CBN, Banks, Government, Merchants, and Consumers. 
 
The proposed operating model of the eNaira and responsibilities of key players within its transaction value chain are shown in the chart below:
According to the CBN, the eNaira will be implemented via a wallet structure comprising four distinct types of users.
The user classifications, related minimum requirements, daily transaction limits, and expected cumulative balances for each class are as shown below.  
The potential impacts of eNaira 
• Government, CBN and Regulatory Agencies: The introduction of eNaira is likely to improve regulatory coverage for CBN and other government agencies. In particular, the scheme is likely to drive greater capturing of the informal segment of the economy, which constitutes 65.0% of overall economic activities in Nigeria according to the IMF. The effect of greater capturing could potentially help in the fight against corruption, reduce scope for tax evasion, and provide needed data for government schemes such as subsidies. 
 
• Banks: The introduction of eNaira could negatively impact banks’ fees and commission income. Notably, the scheme will allow users to carry out a few transactions at no cost (e.g. Wallet to Merchant). These cheaper transaction options could force a few banked consumers to rotate out of some banking products in search of more affordable eNaira transactions. However, long-term implications for banks could be positive as the resultant increase in customer base could create cross-selling opportunities. 
 
• Financial Inclusion: Financially excluded individuals and entrepreneurs are likely to benefit from being included into the formal economy. Specifically, these individuals could now have more convenient ways to accumulate, hold, and transfer value. 
 
 • Economic growth: The scheme could potentially be supportive for economic growth as it encourages easier access to capital and financial resources at lower interest and transaction rates.
 
 • Others: In addition to the above, the scheme could also lead to: 1) Cost savings associated with the printing, distribution and storage of paper money. 2) Improved efficiency of settlement driven by the bypass of intermediaries. 3) Consumer spending may be supported by freed up disposable income represented by the proportion of income formerly taken up by high bank transaction charges. 4) Facilitate remittances and cross-border payments.  
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