HomeOpinion & AnalysisColumnistsFinancial sector spotlight: The cashless society: Distant possibility or mirage?

Financial sector spotlight: The cashless society: Distant possibility or mirage?


By December 2011, cash-based transactions above N150 000 (approximately $1 000) for individuals will attract a penalty in Nigeria.

A case of cash shortages as was once the case in Zimbabwe? No, it is actually a case of too much cash in circulation, so the Central Bank is on a mission to make Nigeria a cashless economy by 2015.

It is an interesting proposition that got me thinking. What are Zimbabwe’s aspirations in that regard?

Methinks it is far too early to start talking about a cashless economy in our part of the world because there are bigger fish to fry first. Bigger priorities such as financial inclusion — the quest to improve access to basic banking services by a vast swathe of the unbanked, instilling a culture of saving and banking, lowering the cost of banking services, stabilising the banking sector and improving its deposit mobilisation capabilities in order to enhance access to affordable long-term credit.

However, spirited efforts by local bank and non-bank players to deploy electronic and mobile banking systems not only complement cash-based transactions, but also signal that the march towards a cashless economy is already in motion.

The debate for a cashless economy would therefore not be entirely misplaced in the Zimbabwean context. This is therefore as good a time as any to consider the pros and cons of a cashless economy, of which there appears to be more of the former than the latter.

For the purposes of this article, a cashless economy is not one characterised by a total absence of cash; it is one in which the predominant mode of payment is electronic-based.

Even in countries such as America where electronic-based transactions are pervasive; cash is still a fact of life. In fact, payment systems experts in America say that the vast majority of payment transactions are cash-based.

“The cashless society is about as real a possibility as a paperless office. At this stage, it belongs in the realms of science fiction,” says Mike Lee, chief executive officer of the ATM Industry Association. For a man whose stock in trade is cash, I would say he is terribly biased.

Perhaps an important enough consideration for aspiring to a cashless economy is the emerging evidence that the global financial crisis had lesser impact on those countries with cashless economies.

In a cashless economy, most of the money coursing through the economy’s veins is channelled through normal banking channels.

This makes a more accurate determination of the size of the economy feasible, which in turn makes policy implementation far more effective. Monetary policy, for instance, becomes a far more effective transmission mechanism because control of almost the entire pool of liquidity circulates in the formal banking system which regulators can influence.

Contrariwise, in cash-centric economies, sizeable quantities of money are in the hands of the unbanked, firmly out of reach of the policy framework.

In the case of Zimbabwe this is not yet an issue since dollarisation took away the Reserve Bank (RBZ)’s money creation powers, but it will become an issue when we have our own currency.

An oft-quoted statistic is that about $2,5 billion is circulating in Zimbabwe’s underground markets.

This money cannot be lent by banks; so it effectively is not working for the economy.

From a fiscal point of view, a cashless economy could result in an increase in tax revenues as it makes inroads into the underground economy.

During the country’s jambanja of hyper-inflation, large quantities of cash were spirited out of the banking system into the parallel markets where it could wreak inflationary havoc, way below the RBZ’s monetary policy radar.

Had the country’s payment system been largely ebased, “speculators” would have found it difficult to conduct transactions requiring the movement of large amounts of money without being detected.

A cashless economy can therefore play a significant role in curbing crime and money laundering activities since money leaves a “spoor” which can be traced to its source.

Another advantage of the cashless economy is that bankers become more willing to lend because there is more cash in their vaults and because borrowers have less power to control and divert the proceeds towards inappropriate purposes without recourse to the lender, as would likely be the case with cash.

Zimbabwe currently has the challenge of replacing mutilated USD notes, an exercise that has onerous procedural and administrative requirements, in addition to obvious cost implications.

Electronic-based transactions typical of a cashless economy would significantly reduce currency handling and replacement costs.

The explosion of mobile telecommunications in Zimbabwe is fertile ground in which the seeds of a cashless society can be planted, at a time when the mobile phone is increasingly seen as a new frontier for the e-economy and has become the core of many people’s commercial existence.

However, the parlous state of ICTs in Zimbabwe is inimical to the development of a cashless economy due to the inadequacy of appropriate infrastructure. Consequently, many rural people still have neither access to nor literacy in ICTs.

It would therefore be pointless to encourage consumers to adopt electronic cards if there aren’t enough retailers or POS terminals to accept the cards.

A key hurdle to the replacement of paper money with digital dollars is people’s habitual attachment to the traditional idea of money — cash gives instant value and finality to financial transactions in a way other forms of payment don’t.

Naturally, given Zimbabwe’s recent history of bank delinquencies and cash shortages, the banking public will tend to be more confident when they have physical cash in their pockets.

Confidence building is therefore a precondition for a sustainable cashless economy.

Weigh in with your insights on omen.muza@gmail.com
Omen N Muza is a banker and managing director of TFC Capital (Zimbabwe) (Pvt) Ltd who writes in his personal capacity.

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