Recent statistics from the Central Bank of Nigeria (CBN) reveal a striking increase in the amount of currency circulating outside the banking system, highlighting a notable shift in how the public manages cash.
As of September 2024, the total currency outside banks surged by 66.2% year-on-year, climbing to N4.02 trillion, up from N2.42 trillion in September 2023. This equates to a substantial N1.6 trillion that has exited bank vaults over the past year.
On a month-on-month basis, the currency outside banks rose by 3.8% from N3.87 trillion in August, representing an increase of N147.9 billion. This growing trend indicates a clear preference among the public for holding cash outside formal banking institutions, potentially impacting liquidity and monetary policy.
High Percentage of Currency Held Outside Banks
Remarkably, about 93.1% of the total currency in circulation is now outside banks, up from 87.5% a year earlier. This shift may reflect concerns over banking services, inflationary pressures, or a deep-rooted reliance on cash in Nigeria’s largely informal economy. With such a high volume of currency outside the banking sector, there are concerns that the economy may struggle to channel funds effectively into productive investments, hindering overall growth.
The total currency in circulation has also seen significant growth, reaching N4.31 trillion in September 2024—an increase of 56.1% year-on-year from N2.76 trillion. The report indicates that the amount of currency taken out of the banking sector surpasses the new currency entering circulation within the same period.
Potential Implications for Financial Inclusion and Monetary Policy
The increase in currency outside banks may indicate a lack of confidence in formal banking systems, particularly as inflation and living costs rise. Limited access to banking services in rural areas, where digital banking is often unavailable, could further exacerbate the situation, making it challenging for the CBN to promote a cashless economy.
This trend complicates the CBN’s monetary policy operations. With a significant portion of cash reserves outside formal channels, liquidity available to commercial banks for lending purposes may diminish, impacting their capacity to support businesses and individuals.
To address these issues, the CBN has announced measures to enhance cash availability. Earlier this month, the bank stated it would penalize banks failing to ensure cash dispensing through ATMs and plans to inject an additional N1.4 trillion into circulation over the next three months to improve cash flow.
The CBN’s latest data also shows that Nigeria’s money supply (M3) grew by 62.8% year-on-year in September 2024, reaching N108.95 trillion, despite ongoing efforts by the Monetary Policy Committee to tighten liquidity in an attempt to control inflation.
As the dynamics of currency circulation continue to evolve, stakeholders will need to closely monitor these trends and their potential implications for Nigeria’s financial landscape.
