Has the eNaira arrived well?
Amid a series of speculation and expectation, Nigeria’s digital currency, the eNaira, was launched on Monday, October 25, 2021.
Developed by the fintech company, Bitt, the Central Bank Digital Currency (CBDC) is an alternative payment system and store of value for households and business firms for which transactions may be settled.
Like every other electronic money such as stable coins and cryptocurrencies, CBDCs leverage on the blockchain technology to facilitate peer-to-peer (P2P) transactions while excluding the need for intermediaries in the transaction process.
With the launch of the eNaira by the Nigerian government, there are some concerns that border on its rather early arrival.
Many believe that the emergence of the eNaira will usher in a new era of disruptive technological renaissance, in line with the experiences of countries like the Bahamas, Saint Kitts and Nevis, Antigua and Barbuda, Saint Lucia, and Grenada. However, there are some sceptical opinions about Nigeria’s readiness for the eNaira.
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Knowing fully about the technological inclination that drives the operation of the eNaira, it may be difficult to capture Nigeria’s large illiterate population in the on-boarding process of the new currency launch. With a literacy rate of 69.1 percent (2019 estimate), Nigeria’s over 30 percent illiterate population may find it challenging to comprehend the need for a digital naira.
Premised on the ubiquitous and amorphous nature of the informal trade sector in the country, which is largely dominated by illiterate micro, small and medium scale business holders, cash-based transactions are the most widely accepted forms of payment for goods and services. Attempts to lure small scale business holders towards digital management of their financial transactions may result in futility since the technological alternative to traditional money handling will seem overly foreign.
Nigeria has not been able to prepare its largely informal and illiterate population for financial transitioning. Even banks have not exhausted their options towards increased financial inclusion as they race towards reaching more among the million unbanked populace.
Another interesting point is the potential access to gadgets that will help manage the use of digital currency. Many of Nigeria’s illiterate and unbanked population lack access to smartphones and internet services. With the country’s current poverty level, many poor citizens will perceive the ownership of smartphones as too luxurious, as they struggle to afford the basic items that support their everyday living.
Even in the face of decently large smartphone ownership across the country, access to appropriate support infrastructure is still missing. The lack of sufficient internet coverage across the country and the epileptic nature of the manageable supply may not be encouraging. Digital transactions require sufficiently stable internet network access for smooth processing between end-users. In the face of frequent hindrance and glitches, many transactions may return with failed executions.
The CBN has noted that the eNaira will assume the fiat currency value and not mimic the cryptocurrency’s volatile property. While this seems like a favourable call, Nigeria’s fiat currency is well known to fluctuate, often depreciating relative to the US dollar and other foreign currencies. With the digital peg onto the paper equivalence, many Nigerians ask what advantage the e-currency may have over the paper alternative, especially in terms of stability.
To this end, many financial strategists question the need for the digital currency rush if issues with the current paper naira still linger.
The unease within the banking sector is too visible to ignore, as deposit money banks fear disintermediation risks that may follow from the eNaira launch.
As a disruptive technology, the eNaira thrives on a different modus operandi, separate from the traditional banking status quo. Hence, with this new digital system, banks can either accept and adapt to the new game or fizzle out if they cannot.
As a non-interest bearing currency alternative, the eNaira is expected to enjoy widespread acceptance and adoption, especially among large volume traders and cross border business concerns. In light of this, other bank-based transactions may suffer a shrink, and revenue losses are predictable.
Indeed, the blockchain technology upon which the eNaira is administered will render orthodox banking models with high costs irrelevant. Although the CBN assures Nigerians of a mitigation plan against disintermediation risks by apportioning daily transaction volumes among various classes of users, banks themselves have no control over the evolution and impact of eNaira’s blockchain methodology and its consequent usage.
With widespread acceptance and usage, conversion of bank deposits to eNaira will affect the bank’s deposit liabilities and the availability of funds for bank lending. If this happens, banks could suffer a drastic fall in liquidity and suffer a liquidity management crisis. Also, there will be a shrinking of banks’ balance sheets, and their capacity to lend to the real sector becomes limited.
While many Nigerians are happy about the nation’s position as Africa’s first CBDC holder, many others believe that the arrival of the eNaira may have met an unprepared ground for the launch. It is hoped that the government will not be carried away with the frenzy of a leading holder of the much-praised crypto alternative. Rather, Nigerians anticipate that the leaders will brace up for the challenges on the way and provide adequate responses wherever it is necessary.