In a recent study conducted by the Nigerian Central Bank, concerns have been raised regarding the potential impact of Central Bank Digital Currencies (CBDCs) on the nation’s financial stability. The research highlights several key risks associated with CBDCs and underscores the need for careful consideration and regulatory measures as Nigeria, like many other countries, explores the possibility of introducing its digital currency. This in-depth analysis has shed light on various significant risks connected to a CBDC, considering it a threat and emphasizing the necessity for deliberate evaluation and regulatory actions, aligning Nigeria with numerous other nations in contemplating the introduction of its digital currency.
The Rates of Financial Inclusion in Nigeria
As per a recent study conducted by the Central Bank of Nigeria (CBN), the e-naira, the country’s nearly two-year-old central bank digital currency (CBDC), is seen as a potential threat to financial stability. This evaluation comes despite the digital currency’s potential to boost Nigeria’s financial inclusion rate, aiming to raise it from the 64.1 per cent figure recorded in 2021 to the targeted 95.0 per cent by 2024.
Launched in late October 2021, the e-naira, an initiative championed by former CBN governor Godwin Emefiele, has not gained widespread acceptance among the Nigerian populace. As previously reported by Bitcoin.com News in August 2022, the e-naira app had been downloaded by fewer than one million users approximately twelve months after the CBDC’s introduction.
Several observers have argued that the relatively low number of downloads, considering Nigeria’s population of over 130 million adults, suggests a lukewarm response from the public to the CBDC’s launch. Nevertheless, the Nigerian Central Bank’s persistence in promoting the e-naira and offering incentives to potential users remains undeterred.
Ensuring Stability in the Banking Sector’s Deposit Foundation
Enhancing Financial Inclusion stands as a pivotal benefit championed by the CBN in advocating for the CBDC. Furthermore, in the report titled ‘Economics of Digital Currencies,’ the CBN once more delves into the impact of introducing the e-naira USSD code for non-smartphone users, noting its contribution to the growth of e-naira transactions. Alongside its commitment to elevating the financial inclusion rate, the central bank asserted that the CBDC would also expand and fortify the banks’ deposit foundations.
Nevertheless, despite the anticipated advantages of a CBDC, the CBN, in its report, expresses concerns about the potential destabilization of the banking system due to the conversion of bank deposits into e-naira. To support this viewpoint, the report highlights the volume of bank deposit conversions observed since the CBDC’s introduction.
The report notes, “Since its inception, the conversion of bank deposits into e-naira has displayed an average monthly growth rate of 78.3 per cent, amounting to approximately N1.66 billion [$2.1 million]. Additionally, the proportion of e-naira in circulation relative to the average liquidity within the banking system has maintained an average of 0.1 per cent, peaking at 0.2 per cent in both May and August 2022,” as cited in the CBN report.
Furthermore, the central bank asserts that the e-naira could potentially have a detrimental impact on banks’ overall profitability by reducing non-interest income. Additionally, the CBN report underscores the heightened cybersecurity risks associated with the adoption of a CBDC.
While Central Bank Digital Currencies (CBDCs) hold significant promise in advancing financial inclusion and modernizing payment systems, the Nigerian Central Bank’s study raises vital concerns, stating that CBDC is a threat. The potential risks to financial stability, including the possibility of bank runs, disintermediation, cybersecurity threats, and adverse effects on bank profitability, underscore the need for prudent implementation. Striking a balance between innovation and safeguarding the financial system through phased introduction, stringent regulation, enhanced cybersecurity measures, public education, and international collaboration will be crucial for Nigeria and other nations considering CBDCs. Careful navigation of these challenges will be vital to realizing the full potential of digital currencies.