In September 2024, the Central Bank of Nigeria (CBN) reported a significant increase in currency circulating outside banks, which surged by 66.2 percent year-on-year, reaching N4.02 trillion from N2.42 trillion in September 2023. This remarkable growth of N1.60 trillion indicates a strong trend where the public is favoring cash retention outside formal banking institutions, suggesting potential shifts in consumer behavior and preferences. Month-on-month, the currency outside banks experienced a more modest growth of 3.8 percent, an increase of N147.9 billion from August 2024’s figure of N3.87 trillion. Such trends could have far-reaching implications for banks’ liquidity and the Central Bank’s monetary policy strategy.
The CBN’s data reveals that a staggering 93.1 percent of the total currency in circulation was held outside banks in September 2024, compared to 87.5 percent in the same month a year prior. This remarkable increase may signal a decline in public trust in banking systems, exacerbated by rising inflation and a historically cash-dependent informal economy in Nigeria. The high percentage of cash outside banks not only raises concerns regarding trust and stability in financial institutions but also risks impeding efficient channeling of funds into productive investments, potentially stunting economic growth and development.
In agreement with this trend, the total currency in circulation, which includes both currency outside banks and currency held within banks, also witnessed a notable year-on-year increase of 56.1 percent, growing from N2.76 trillion in September 2023 to N4.31 trillion in September 2024. This growth represented an increase of N1.55 trillion and occurred alongside a month-on-month rise of 4.0 percent, adding N166.2 billion to the previously recorded N4.14 trillion. The increase in cash held outside the banking sector was significantly more pronounced than the rise in the total currency in circulation, indicating a shift in how Nigerians prefer to manage their finances.
In response to the apparent cash shortages and increased demand for currency, the CBN announced in early September its intention to sanction banks that fail to ensure adequate cash availability for their automated teller machines (ATMs). This move indicates the bank’s commitment to improving cash flow within the financial system. Additionally, the CBN plans to inject N1.4 trillion into circulation over the next three months, aimed specifically at relieving cash shortages experienced at ATMs and bank branches. This strategy highlights the central bank’s active role in addressing the liquidity issues facing the banking sector.
Furthermore, despite the tightening measures adopted by the CBN’s Monetary Policy Committee to manage excess liquidity and combat inflation, money supply in Nigeria grew substantially by 62.8 percent year-on-year in September 2024. The M3 measure, which captures broad money supply, reached N108.95 trillion compared to N66.94 trillion in September 2023. Month-on-month, this metric increased by 1.6 percent, rising from N107.19 trillion in August 2024. Such significant changes in money supply suggest that, despite the policy efforts aimed at curbing inflation, factors like increased currency outside banks may be contributing to overall economic pressures.
The rising trend of currency being retained outside the banking system raises questions about the efficacy of monetary policy and the financial strategies adopted by the CBN. Concerns related to inflation, economic stability, and trust issues within the banking sector must be carefully navigated. If people continue to favor cash outside banks, it could lead to persistent liquidity challenges for financial institutions, further complicating the CBN’s ability to manage the nation’s economic health effectively. Striking a balance between ensuring cash availability, encouraging the use of formal banking channels, and managing inflation will be essential in fostering a stable economic environment in Nigeria moving forward.
