‘Prospects of Improved Monetary Policy with Increased Adoption of Digital Finance’

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    Over the last decade, developments in digital financial technologies such as e-money, digital banking and crowd funding platforms has tremendously changed the accessibility of financial services.

    For instance, peer-to-peer transactions permits economic agents to transmit funds in the absence of a banking channel; mobile software allow for financial transactions using smartphones.

    Digital financial innovation increases the range of intangible financial assets which may in future influence the ability of Central Banks to effectively conduct monetary policy.

    The constant substitution of e-money for cash will enhance the efficiency monetary policy implementation through the transmission mechanism of monetary policy.

     

    Director, Monetary Policy Department, Central Bank of Nigeria, CBN, Hassan Mahmud stated this at the 31st Seminar for Finance Correspondents and Business Editors, Organised by the CBN with the theme: Trends in Nigerian Payment System: Regulating the Fintech Digital Playing Field, holding in Enugu, Enugu State.

    The director who was represented by the Assistant Director, Payment System Management, CBN, Rekiya Yusuf, maintained that among the reviewed African countries, Nigeria performed the least in terms of its financial market development, ranking 129 out of 180 countries.

    “The use of improved digital financial services according to him can increase affordability of financial services.

    Talking about the difficulties in accessing loans in Nigeria, he said other African countries such as Kenya, Mauritius, Morocco and South Africa have more developed financial system which have propelled digital financial services growth in the region.

    He noted the fast growth in digital financial services in Sub-Saharan Africa and low usage of digital platforms by the public sector reflecting low participation in this sector.

    He listed other factors propelling the growth of Digital Financial Services to include persistent increase in percentage of population that transacts using the digital platform, private sector embracing digital innovation in wage payments, faster growth in digital financial services in Europe and central area and this is driven by advancement in technology in the region.

    Others are relatively Low usage of digital platforms by the public sector reflecting low participation of labor in this sector, persistent increase in percentage of population that have made or received digital payments, Asian countries record increased participation in digital finance.

    However, he noted that the growth in participation remains lower than that recorded in Europe and the development owes mainly to the region’s high smart phone penetration, utilization of ecommerce channels for daily activities, more than 80% of American population have made or received digital payments, due to the advancement in technology and more than 70% of the population pay bills using the internet.

    The Director stated that the Central Bank of Nigeria in partnership with Bitt Inc., an international fintech firm, is set to launch its digital currency, “eNaira”

    He listed the motivation to embark on digital currency to includes: increased cross-border trade, accelerated financial inclusion, cheaper and faster remittance inflows, easier targeted social interventions, improvements in monetary policy effectiveness and payment systems efficiency.

    He maintained that the CBN digital currency will offer parity of value and will operate as a non-interest-bearing asset. So also presentation to Nigerian banks about the design and operational module of the eNaira project, Nigeria’s digital currency will function under a tiered Anti-Money Laundering and Know Your Customer (AML/KYC) structure with different transaction limits. The AML/KYC pyramid will reportedly encompass unbanked citizens to provide their national identity-linked phone numbers for verification and the users in this category will be limited to a daily transaction limit of N50,000 (about $120).

    So also the provision of collateralized e-Naira credit to IMTOs via their banking partners in the country. Secondly, CBN pre-funding IMTO accounts, but this method might carry significant exchange fluctuation risks.

    Monetary Policy aims to achieve monetary targets and inflation objective according to him include,  premised on the quantity theory of money (QTM) which links the stock of money     (M) and its Velocity (V)  to the market value of output that it finances (PY), where P is the price level and Y is the real output.

    Increased used of digital money products is expected to be reflected in the behaviour of Money velocity over time. Digital Money products is expected to act as substitute for CIC. Implications for Monetary Policy. Do Digital money products affect monetary policy instruments of: OMO, Cash Reserve Requirements, discount window operations, liquidity Ratio and short Term Interest rates”, he stated.

    “Electronic money may not have effect on Monetary Policy. There is no creation of new money in the present fractional reserve system. Digital money does not affect Reserve Money (DMB’s reserves plus CIC, no Cash reserve requirement (CRR) yet for electronic money. can affect the Velocity of Narrow Money, (being the main means of payment). The velocity of narrow money trending above broad money supply. increased velocity of narrow money (M1) mainly driven by:Improvements in the digital financial system and increase use of digital payments platforms

    No effect on Monetary Policy: “… the arrangements by which the central bank controls the supply of, and conditions pertaining to, reserves and settlement balances also reflect the advantages of the central bank as the provider of the mechanism to settle payments imbalances among banks. These advantages include the riskless character of the central bank and its ability to act as lender of last resort. These characteristics give the central bank a comparative advantage in providing the settlement mechanism, making it very unlikely that other mechanisms, including variants of electronic money, will supplant the current types of arrangements for the foreseeable future”. (Friedman, 2000; p. 212).

    A key element in determining the effect on monetary policy is who will issue electronic money. If domestic banks, it can be measured and regulated easily by the banking authorities. If provided by domestic non-bank issuers, it can be at least measured as part of the money supply. Thus, the growth of electronic money would indeed have little impact on monetary policy (Griffith, 2012; p.54).

    Electronic money supplied by issuers outside its jurisdiction can circulate in a central bank’s realm. As online systems increase in importance… This will affect both the measurement of the money supply as a monetary policy indicator and the effectiveness of monetary policy instruments (Griffith, 2012; p.54).

    Digital money could lead to much more widespread currency substitution, especially in countries with high inflation and volatile exchange rates. Currency substitution could be exacerbated by the lower costs of obtaining, storing, and spending digital money (IMF, 2021).

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