CBN reveals currency outside banks hits all-time high

Estimated reading time: 3 minutes

The Central Bank of Nigeria (CBN) has raised concerns over a dramatic increase in cash circulating outside the formal banking system. According to the bank’s latest data, currency outside banks surged to a record N3.28 trillion in June 2024, constituting a staggering 93% of the total N4.04 trillion currency in circulation.

This unprecedented figure indicates that commercial banks are holding onto a paltry N1 trillion in cash, raising questions about their ability to meet customer demands for withdrawals and other cash-based transactions.

A month-by-month breakdown reveals a consistent upward trend throughout the first half of 2024. While the pace of increase varied, the overall trajectory is alarming. The CBN has yet to provide an official explanation for this phenomenon, but analysts speculate that factors such as increased economic activity, inflation, and a waning confidence in the banking system may be contributing to the trend.

Experts warn that this development could have significant implications for monetary policy, financial stability, and the overall economy. If left unchecked, it could exacerbate inflationary pressures and limit the CBN’s ability to effectively manage liquidity in the system.

• Australian Open: Extreme heat forces stop in play on outdoor courts
• Wilfred Ndidi – What you didn’t know about the Super Eagles Star
• Bear with the CBN and FG on currency redesign – Peter Obi urges Nigerians
• Naira in circulation hits N3.87trn, raising economic concerns
• NRTC WEEKLY: Top 5 trending stories across the country this week

While the CBN has yet to provide a comprehensive explanation for this phenomenon, several factors are likely at play.

One possible explanation is a surge in economic activity. As the economy rebounds from the challenges of recent years, businesses and individuals may be holding onto more cash to finance operations and investments. However, the sheer magnitude of the increase suggests that other factors are also at work.

Inflation, which has been a persistent problem in Nigeria, could be driving people to hold onto cash as a hedge against rising prices. With the value of the naira eroding, individuals may find it more prudent to convert their savings into physical currency.

Furthermore, a declining trust in the banking system cannot be ruled out. Concerns about the safety of deposits, coupled with past bank failures, may be prompting people to withdraw their funds and hold onto cash. This trend is particularly worrisome as it undermines the role of banks as intermediaries in the financial system.

The implications of this development are far-reaching. With a significant portion of the money supply outside the banking system, the CBN’s ability to influence monetary conditions through interest rate adjustments or open market operations is curtailed. This could hamper efforts to control inflation and stabilize the economy.

Moreover, the cash-heavy economy is vulnerable to criminal activities such as money laundering and terrorism financing. When a large amount of cash is circulating outside the formal system, it becomes more difficult for authorities to track financial flows and detect illicit activities.

The CBN must act swiftly to address this issue. A comprehensive investigation into the underlying causes is essential to develop effective countermeasures. Policymakers may need to consider measures to incentivize the use of electronic payments, strengthen the regulatory framework for the banking sector, and restore public confidence in the financial system.

Tags: CBN, Nigeria, Yemi Cardoso, Bola Tinubu, Wale Edun, Economy, Cash