INTRODUCTION
1.1 BACKGROUND OF THE STUDY
In July 2021 during the 306th Banker’s Committee Meeting, the CBN Governor, Godwin Emefiele, announced that the CBN will start working on a digital currency and in that same month, a press briefing and a private webinar was held to describe how the digital currency would be designed and when it would commence. During the briefing, the Director of the CBN IT department, Rakiya Mohammed, explained that the CBN had been interested in a digital currency since 2017 and had been conducting its own research. She revealed that the name of the project is “Project Giant” and the digital currency will be called eNaira. She also stated that the CBN had opted to build the eNaira on a DLT with the use of the Hyperledger Fabric Blockchain.
During the webinar and the press briefing, the CBN specified that it planned to use the eNaira for cross border trade facilitation, financial inclusion, monetary policy effectiveness, improved payment efficiency, revenue tax collection, among other things. The apex bank also said that it believes that the eNaira will help FinTechs with their operational efficiency and product building. The CBN reiterated that the eNaira will not replace the traditional payments system and that it would only serve as an assistant to it, and stated that by 1 October 2021, the eNaira will be available for use.
In August 2021, the CBN showing its intent to meet up with its self-imposed deadline, sent a presentation to commercial banks in Nigeria which detailed various aspects of the eNaira. In the presentation, the CBN explained the operating model of the eNaira, the participants in the project, a high-level summary of the use cases of the eNaira, the role banks will play under Project Giant, and other relevant concerns about the project. The CBN declared during the presentation, that the eNaira is a National Critical Infrastructure, and will be subject to daily comprehensive security checks and all personal data will not be stored on the Hyperledger Fabric Blockchain. During the presentation, the CBN also discussed how Nigerian banks will onboard their customers unto the eNaira ecosystem.
The financial landscape of Nigeria is never static. Constantly evolving, new services and products are periodically introduced that change the way Nigerians interact with Financial Institutions (“FIs”) and the Nigerian monetary and payment system. Not so long ago, Automated Teller Machines (“ATMs”) and Point of Sale (“PoS”) Terminals were considered new and innovative. Today, Nigerians that own bank accounts may also have a debit card which enables them to move around without cash and use ATMs and PoS terminals.
Furthermore, with the creation of the Nigerian Interbank Settlement System (“NIBSS”) which serves as the central switch for Nigeria, internet banking was introduced which helps Nigerians easily transfer money to another customer within minutes rather than standing in long queues at banking halls just to achieve the same objective. Subsequently, there has been the introduction of mobile banking and mobile money which has made the banking process seem less cumbersome.
These payment systems and methods now serve as the backbone for the Payment Infrastructure in Nigeria and it seems that the Central Bank of Nigeria (“CBN”) wants to create other extensions to support and complement the infrastructure through the creation of its own digital currency called the eNaira.
CARRYING OUT FX TRANSACTIONS
An interesting part of the presentation were the options CBN considered for how International Money Transfer Operators (“IMTOs”) will interact with the ecosystem to enable Foreign Exchange (FX) transactions.
The first option is for the IMTOs to provide collateral to obtain eNaira from the CBN. A local bank that has partnered with the IMTO will provide a bank guarantee to the CBN. The apex bank will then advance eNaira to the local bank who will receive the foreign currency from the IMTO through its correspondent bank in the jurisdiction the currency was issued. Upon receipt, the local bank will send the foreign currency to the CBN and proceed to debit the account of the IMTO. The eNaira received by the local bank from CBN will then be sent to the IMTO.
The second option is for the CBN to permit IMTOs to use their digital wallets to receive eNaira by sending foreign currency to their local banks who will send the money to CBN before they receive the eNaira. Once they send the foreign currency through their local bank to the CBN, the CBN through the local bank, will send the eNaira to the IMTOs wallet.
The last option was to adopt the standard procedure for receiving foreign currency in Nigeria which is the beneficiary receiving the foreign currency that was sent to him or her through their domiciliary account. However, instead of receiving the foreign currency, the beneficiary will receive eNaira. The sender instructs their bank to send a certain sum to the IMTOs bank. Once the IMTO confirms receipt, it will send eNaira from its wallet to the beneficiary’s wallet.
1.2 STATEMEMENT OF THE PROBLEM
According to the IMF, one of the risks of adopting a CBDC is that it can lead to the disruption of the banking system and not in a good way. Individuals may decide to hold CBDCs instead of making deposits, thereby affecting the amount of money banks have at their disposal for loans and other financial products they offer. The local banks may have to raise their interest rates to ensure people keep their deposits. This may have a ripple effect on the interest banks will charge on loans as the banks may raise the interest rates to ensure payment into the interest-bearing accounts as promised.
Another problem with the use of CBDCs is that holders of the digital currency may turn to it in unstable financial climes. However, the eNaira may also not have such risk as it seems that there is no value tied to it other than being used as a means of exchange.
Though there are other assets that individuals can run to like bonds or mutual funds, the use of cryptocurrency and other digital assets as a store of value seems to point towards a trend of individuals using technologically backed medium of exchanges as speculative assets. CBDCs are pegged to the local currency, so if the local currency is falling against other foreign currencies in the FX market, the CBDC will most likely fall and not be seen as a worthwhile asset to use as a store of value. However, if central banks design their CBDCs in such way that it can integrate with the FX market, foreigners may use CBDCs of stabilised financial climes as a store of value which will affect their local currency and their domestic CBDC.
1.3 OBJECTIVES OF THE STUDY
Main objectives:
To assess the impact of e-naira on the economic development of Nigeria
Specific objectives:
We examine what central bank digital currencies (“CBDCs”) are, take a look at the eNaira and the steps that have been taken by the CBN to implement it, the issues that may arise with the creation, adoption, and use of CBDCs, and conclude with our answer to the question stakeholders have been asking, “Do we need the eNaira?”.
1.4 RESEARCH QUESTIONS
1. Does E-naira have impact on the economic development of Nigeria?
2. Is E-naira the best system of banking in Nigeria?
3. How will e-naira affect banking system?
4. How well will e-naira function in Nigeria with it recent economic challenge?
1.5 RSEARCH HYPOTHESIS
Ho: There is no significant effect of E-naira on the economic development of Nigeria.
Hi: There is significant effect of E-naira on the economic development of Nigeria.
1.6 SCOPE OF THE STUDY
This research will be limited to all financial institutions and users of the e-Naira in Nigeria.
