How Banks Violates CBN Policy, Operate Unlicensed Infrastructure –Nwodo

Charles Nwodo Jr., is the Chairman and Founder, Integrated Cash Management Services Limited. He is also the Executive Chairman/CEO of XL Africa Group.

He recently spoke at an interactive meeting in Lagos on issues bordering on cash handling and management services . Excerpts:

Nigeria’s cash industry is relatively new. Between 2006 to 2008 what we call the cash industry today used to be part of banking operations. So it was in an attempt to improve customer experience that a full department of currency operations was created. It was both in recognition of the importance of cash and also to give vent and expression to the need to attract investments into the cash handing industry. Before then, the Central Bank of Nigeria (CBN) was subsidizing the banking industry in the entire value chain of cash, from distribution to processing, packing, and others.

But, as the global economy advanced, it became imperative for the CBN to align itself with developments in the world, because in other parts of the world, the distribution, processing, securing and even packing of cash are done by private entities. What central banks in other countries do, including South Africa, is simply to issue new notes and to destroy unfit legal tenders.

So, they set standards on processing that would enable them identify counterfeits, identify notes that are unfit for circulation, in order to extract and destroy them. That indeed was what gave rise to the licensing of ICMS and other operators in the market. The cash industry ecosystem is made up of cash-in-transit (CIT) companies, of which there are nine licensed companies and two cash processing companies (CPC), of which ICMS is one of the companies providing cash processing services.

The CITs essentially distribute cash from point to point, city to city, branch to branch, branch to CBN and retailers to banks. Before now, some banks used to distribute cash themselves, using their own bullion vans. Before now also, some banks used to process their own cash in order to feed into the ATMs. But by licensing CPC’s the CBN now has a responsibility to populate this business for us and make it viable.

By this licensing , the CBN has rolled out policies that actually disallow banks from distributing and processing their own cash. And because we have a responsibility as licensed operators regulated by the CBN in terms of standards and processes that we must achieve, that is why it is important for the CBN to insist that we undertake the processing.

Part of the policy is that banks that elect to do their own processing have to now apply to be licensed and regulated as cash processing companies. But, the CBN has not been able to enforce this policy as we still have some banks processing their own cash. The business of processing and distribution of cash constitutes the cash industry value chain. In that industry, you have the retailers that generate a lot of cash, such as Shoprite, petrol stations, Spar, markets, gambling, casinos, churches and mosques. Also, we have the distribution companies in different parts of Nigeria that actually pick up these cash and take them to either bank branches or the CBN. Then, you have processing companies and also the distribution companies with distribution vans that deliver cash from the retailers to our cash centres. Then after processing them, we take them from our cash centres either to feed the branches or to feed ATMs or to return to the CBN for destruction.

Today, part of the challenges we face include persuading the CBN to enforce its own guidelines. What that has done is that it has created a situation where certain practices that are against our laws are continuing. Some of these are the spraying of the currency as well hawking the naira openly. Nigeria is the only country in the world where such practices are still happening.

Today, there is a law that says banks are not allowed to issue notes that have not been processed. The reason is because if they are not processed, the state of the notes cannot be determined. If they are not processed, you don’t even know whether they are counterfeits. If they are not processed, they continue to accumulate and pollute the rest of the notes that are fit for circulation.

Presently, we are under pressure by the CBN to expand our capacity to service this industry. People must understand that cash is going nowhere. I can tell you authoritatively that the volume of cash in circulation is increasing. The reason why CBN initiated the cashless policy was not necessarily that overnight all the cash in circulation would disappear. It was because it was becoming a crisis and therefore needed to be managed.

The principle is that of shared services. Even the banks had in the past tried to implement this over the years, but they couldn’t. You probably must have heard about a collaboration between banks called the Pioneer sorting company. It was set up in the 80s and 90s by some banks – FirstBank, United Bank for Africa, and some others. They floated it then under the guidance of the CBN, but it failed. You know Nigerian banks famously don’t cooperate with each other. They also set up another one called ATM Consortium. The purpose of the ATM Consortium was to create a shared platform to enable them process cash and then be able to feed into ATMs. Again, it failed. So, there is a recognition that a shared services platform is the way to go.

Typically, currency operations constitutes between 25 to 40 per cent of the cost of operations for most banks. So, if you have, let’s say a FirstBank, with a branch in Victoria Island and if the cash operation hub for FirstBank is at Ikeja and the branch at Victoria Island requires cash, what they would typically do is to call the Head of Cash Management, to contact Ikeja which is the cash hub and they would arrange for a bullion van which would take the cash from the cash hub at Ikeja and drive to Victoria Island. There is a cost for the bullion going to and from Victoria Island.

How do we come in? Now, let’s say there is a Fidelity Bank at Ikeja that needs cash and maybe the cash hub of Fidelity Bank is at Victoria Island and they would typically go through same process FirstBank did. So, what you have is FirstBank and Fidelity Bank spending money by going in opposite directions.

Now, ICMS operates bullion vans at Victoria Island and at Ikeja. And because ICMS uses these same bullion vans to service multiple banks, when there is a call for Fidelity Bank that says it has excess cash to evacuate from Ikeja and a FirstBank at Ikeja that says it needs cash at its Ikeja branch, ICMS operator is seeing the two messages and is able to match the needs of those banks. So, we simply direct the truck at Ikeja to move from Fidelity Bank to FirstBank or vice versa.

What does that do, it reduces the cost to Fidelity and FirstBank. And because we are using same vehicle to do this, we are able to render this service cheaper than either of them can do and hopefully, these savings can be passed on to bank customers in the form of reduced interest rate. We operate for 24 hours because that is our business. We use same cash processing infrastructure, operating in a factory -like situation of about three shifts. So, in terms of efficiency, we save the banks much time because by the time they come to work in the morning, the night shift has finished processing, the CIT has delivered the cash and the bank can just open for business as if nothing happened.

In terms of cost optimization, because same cash we are processing for Fidelity, we are processing for FirstBank, Union Bank, Wema and others, using same platform, same personnel and technology, it is easy and cheaper for each of them. What each of them pays is only a fraction of what it would cost them to buy those same machines, set them up in their hubs and pass it on to customers. So, our intervention as a sub-sector of the industry was intended to achieve cost optimization for banks as well as efficiency improvement which rubs off on customers.

We have more banks in violation of this CBN policy. We are probably servicing about 30 per cent of the available market share. I sympathize with the CBN on this because the capacity constraint exists. And the CBN has a responsibility to maintain an orderly and safe financial system. So, the challenge is for us to ramp up capacity in order to be able to strengthen the regulator’s hands to come down on the banks. The truth is that because the banking industry in Nigeria is highly profitable, a lot of Nigerian banks don’t care about cost optimization. There are several easy ways that banks are making money. But hopefully, with the pandemic and its consequences which includes shrinking window of revenue generation, I am sure many of them are going to start rethinking their mode of operation. Many of them invested so much in cash management infrastructure – they have tellers, managers, security men, and a lot of others. But, that is not the business of a bank. A bank’s business is simply to lend money, collect deposit and issue payment. So, the banks doing otherwise are simply cannibalizing the business.

To be honest, what the regulator should do is similar to what they do for banks. Whenever a Wonder Bank comes up, the CBN always warn members of the public against them and at times, they even direct the security agencies to arrest them. CBN doesn’t allow the Wonder Bank to operate because they have licensed some banks to operate. So, if the CBN has licensed us to operate in the cash management value chain, they should protect us by forcefully and aggressively enforcing the guidelines. With that, the banks would be forced to work with us. The problem is that the banks have infrastructure and operations that they are not licensed to undertake. So, the CBN has to enforce its guidelines. When we started this business in 2008, we had a South African Technical Partner called SBV Services. SBV Services is owned by the four biggest banks in South Africa.

Our plan is to solve the problem of capacity in cash management sub sector of Nigerian banking industry. So, in the next 12 months, we plan to have nine cash centres across Nigeria. Presently, we have one in Lagos and we plan to expand our fleet.

Our ultimate goal is to be listed on the Nigerian Stock Exchange in the medium term. We understand the business, we are the only licensed operator that attracted a foreign partner. We still have that technical partnership. We see what they are doing in South Africa and the kind of value they are adding to the financial services ecosystem in South Africa. That is exactly what we aspire to replicate in Nigeria.