Some Potential Implications of the eNaira

The Central Bank of Nigeria on Monday, 25th October 2021, launched Nigeria’s Central Bank Digital Currency (CBDC), known as the eNaira. Like other CBDCs, the eNaira is essentially the digital equivalent of the physical Naira stored in an electronic wallet. Similar to paper naira bills, the eNaira is issued and backed by the CBN with full legal tender status and will not yield interest.

CBDCs, in broad terms, are digital innovations that will fundamentally revolutionise the financial sector as we know it. The adoption of CBDCs have benefits and implications for monetary authorities, commercial banks and the ultimate end-users.

For end-users, the eNaira’s (and other CBDCs’) potential benefits have been well-publicized, including increased financial inclusion, ease of diaspora remittances and cross-border payments, and lower payment processing costs, among others.

Another less cited benefit for individuals is that CBDCs such as the eNaira are not at risk when bank transactions fail since they are a direct liability of the central bank and not the commercial banks. Individuals and businesses may find the elimination of this risk appealing. The eNaira provides the Nigerian monetary authority with a new and more effective means of monetary policy transmission. Banks and other financial institutions will be used to distribute the eNaira to individuals and businesses. However, the CBN will issue the currency directly, operate the digital wallet, and keep a central log of all transactions. The central bank’s capacity to engage end-users directly broadens its powers and reach. For example, the CBN will be able to inject cash directly into the accounts of recipients of its intervention programs without having to go through commercial banks.

In an extreme scenario, if the eNaira is widely accepted (without restrictions), banks will have less money to generate risk assets, which will have the unintended consequence of raising interest rates on loans. Deposit losses will also have a detrimental impact on banks’ funding and liquidity positions.

However, the eNaira seems to be well thought out. We see that in recognition of these risks, the CBN has limited the eNaira payment system to micro payments and imposed spending limits on individual digital wallets with daily transaction limits ranging from NGN20,000 (c.USD48) to NGN 500,000. As such, banks’ potential losses will be reduced.

Hypothetically, another scenario is where the central bank decides to grant loans directly to individuals. However, we believe this scenario is unlikely and the CBN would not want to jeopardize the stability of the financial system.

Concerns about personal privacy have been raised on CBDCs, particularly with account/identity of connected ones like the eNaira, in the same way they have been raised on BigTech corporations. Another major concern is the amount of authority it grants to the government. The latter motivation has been cited as a driving force behind the Chinese government’s rapid development of its digital currency, the digital Yuan. This is in addition to the threat that Bitcoin’s volatility poses to the China’s economic and financial stability, as well as the dominance of the two largest online financial services payment platforms, Alipay and WeChat, which together account for 94% of China’s online transactions.

CBDCs such as the eNaira have far reaching potential benefits and implications for all stakeholders. It has  the potential to completely transform the financial system, as well as the roles of the different agents involved in the value chain. Analysts at FBNQuest, believe that the potential benefits outweigh the costs if properly implemented.

Tunde Abidoye
Head Equity Research, FBNQuest

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