By Jay Brown
The Perspective
Atlanta, Georgia
November 29, 2019
Introduction
It is no brainer of an argument that several risks and disadvantages are involved with a cash-based economy, especially a highly cash-based economy such as Liberia’s. Many efficiency gains would be attained to have more financial transactions done using non-cash modes of payments, such as mobile money, Points of Sale (POS), internet/e-banking, etc. Jurisdictions all over the globe are taking bold, courageous and innovative measures to reduce cash-transactions. Paramount amongst the measures is the modernization of the payment system infrastructure including supporting technological innovations that would promote non-cash means of payments. Cross country reviews show that other measures include the placement of limits on the amount of cash that can be withdrawn from and deposited in banks. Also, some financial institutions around the world are not accepting certain cash transactions at all.
A substantial transition to digital means of payments will reduce opportunities for corruption, tax evasion, curb Money Laundering and Terrorist Financing (ML/TF) risks, etc. Digitizing financial transactions also militates against the risk of counterfeiting of the currency. This is so because as more financial transactions are done digitally, only banknotes with little monetary face value will remain in circulation over a long period (perhaps only coins). This will lead to savings as there would be significant reduction in the amount to be spent on printing banknotes either to replace worn-out banknotes (“tear-tear money”) and/or introduce additional notes in tandem with the growth of the economy. It should not also go unnoticed that although the use of digital means of payments provides lots of benefits including convenience, there are serious risks that policymakers and the public need to be aware of and take thoughtful steps to reduce these risks. Notwithstanding, the digitization of financial transactions lessens the inefficiencies associated with the use of cash and promotes financial inclusion, and economic growth and development.
For the rest of the article, I shall hypothesize on plausible explanations regarding the current dearth of local currency and explore ways in which digitization can ameliorate the current situation and prevent a reoccurrence. Before doing so, let’s unpack some of the terminologies relating to currencies that we normally come across within the realm of financial digitization: (1) Fiat Currency (2) Digital Currency (3) Virtual Currency; and (4) Cryptocurrency.
Fiat Currency: This is something that is physical but without intrinsic value (unlike gold, silver, etc.) that governments/sovereigns establish as money. For convenience, it can be defined as “paper money” although sometimes the material is at least not entirely, paper. Said money, because it does not have value within itself, is used because government declares it as money- so it is backed by the faith in the Government. Digital Currency: Unlike the fiat currency which has physical existence, digital currency (digital money, electronic money/e-money or electronic currency) exists in electronic form – it exists on computers, phones, and other gadgets. A very good example is Mobile Money! Digital currencies are normally denominated in legal tender. For instance, I can have $1,000.00 (USD/LRD) on my mobile money account. The exchange between most digital currencies and fiat currency is very frequent. Virtual Currency: These are representations of value in digital forms that are issued by private parties. They can be used for diverse forms of transactions once the transacting parties agree. However, they are not denominated in fiat currency, they have their own unit of accounts. They can be either convertible (bitcoins) or nonconvertible (i.e. game coins, air miles) to real-world goods and services and money. Cryptocurrency: This is an exchange that is Internet-based. It uses blockchain technology. A common example is bitcoin. Both virtual currency and cryptocurrency do not fall within the scope of discussion in this article.
Regarding the trending issue about the scarcity of Liberian dollars, and the attendant adverse impact on transactions in the economy, two hypotheses have been beaming through my mind. The first I will call the “Collective Stance Hypothesis: (HO1); and the second I will call the “Manipulative Stance Hypothesis” (HO2). Let me explain below.
For the “Collective Stance Hypothesis” HO1: If Two Million Five Hundred Thousand persons (about half the population of Liberia) including owners of businesses hold on average L$8,000.00 (Eight Thousand Liberian dollars) outside of the financial system, that will total L$20,000,000,000.00 (Twenty Billion Liberian dollar)! This is a little more than the total LRD in circulation outside banks as reflected in the official statistics. This is plausible. L$8,000.00 is less than US$40.00 (Forty United States dollars) and may not even be enough for the weekly expenses of some families. Also, during a period of economic uncertainty, the cash holdings of individuals increase relative to their deposit balances. Economic agents would prefer holding more cash to either speculate and/or to meet their spending needs as prices rise. Additionally, there is a negative reinforcement mechanism. As people queue up for cash (in this case LRD) and struggle to withdraw, they aspire for getting most, if not all their cash out of the banks, being doubtful of their chance of successfully withdrawing the next time. The commercial banks become overwhelmed and look to the lender of last resort, the Central Bank for rescue.
Under the “Manipulative Stance Hypothesis”, HO2: This is where few individuals, motivated by shared objective/cause, purposefully hoard a very high amount of the currency. With the assumption that this group is awash with cash, in this case the LRD, they can flood the market with LRD and cause rapid depreciation given their motive at the time (either economic or political), or they can dry out huge LRD also given their desired objective at the time. To appreciate the plausibility of this having profound impact, consider the following: around L$2,000,000,000.00 (Two billion Liberian dollars) is enough to swing the foreign exchange market. As the CBL hit the $2,000,000,000.00 (Two Billion Liberian dollar) line during the US$25,000,000.00 (Twenty-five Million United States dollar) mop-up exercise in 2018, complaints about shortage of LRD soared. Customers went to commercial banks and could not get LRD. So, any entity or group that has cash of about L$2.0 billion (which is less than US$10.0 million) can cause serious disruption to the foreign exchange market. Anecdotes abound that some businesses in certain sectors are known for managing huge sums of banknotes outside of the banking system.
I need not say, we may live in a state of the world wherein there is a mixture of the collective and manipulative hypotheses. In any of the foregoing cases, management of the monetary sector is extremely challenging. The good news is that the solution is right with us. We must cultivate digital consciousness, acceptability, and affordability. We cannot sustain an increasingly cash-based economy. Below, I shall shed light on how financial digitization can curb a “cash scarcity” and unlock other opportunities.
Before turning to the next subtopic, let me point out that financial digitization is not just about the above perspectives on the local currency. There are implications for the United States dollars cash holdings as well. Consider this, if the public has circa L$20 billion outside of the financial system, and the USD has a share of about 70% of the money supply of the country, it can be extrapolated that about quarter billion USD is held outside of the financial system. This estimate is even conservative as the 70% share that USD constitutes of the total money supply is derived from the exclusion of USD cash outside the banking system. This hard-powered foreign currency of such magnitude when brought into the financial system, would provide the footings for much needed foreign transactions and help facilitate the move towards de-dollarization. We can digitize our way out of a dual-currency system at least for the currency substitution piece (the use of the foreign currency for transaction). I shall reserve further thoughts about (de)dollarization for another article and keep the focus here on digitization.
What really matters to the average consumer is getting goods and services – the basics of life. Whether it is done using cloth, paper or digits, bills must be paid, groceries must be bought, the utility of entertainment must be gained, etc. Once there are convenience, security and affordability, the average consumer should not really care to swap, push a button or press a thumb! Over the last few years, strides have been made to improve the digital infrastructure in the financial sector of Liberia. POS terminals, mobile and Internet banking, Unstructured Supplementary Service Data (USSD) and Quick Response (QR) banking codes, among others have been introduced. Notably, the advent of Mobile Money has been a pathbreaking event in the financial landscape of the country. Very importantly, Liberia has been part of the West African Monetary Zone (WAMZ) payments system modernization project, which among other things seeks to integrate the payment systems of Anglophone West Africa. Notwithstanding the foregoing, there is no doubt that the utilization of the non-cash means of payments has been low.
An important element in ensuring a broader utilization of digital payments is awareness. Given the monumental benefits that we stand to reap as a country, all of us should see ourselves as campaigners for a digital revolution in Liberia. We must advocate for digital payments in various aspects of our lives involving financial transactions. Perhaps due to the lack of awareness or “digital phobia” someone will stand in a crowded banking hall to withdraw cash when the intended transaction could have been effortlessly consummated by swapping a card in a store, or even pressing some buttons at an Automated Teller Machine (ATM) if a little cash was necessary.
Shouldn’t we embrace the digital age? We should as it has much to offer. When you put cash in a physical wallet and the wallet gets missing, your cash is gone. If you put your cash in the digital wallet, with the right security, even if your gadget (phone, etc..) gets missing, your money will be untouched. To buy with cash, obviously there must be physical contact, on the other hand, we can transact digitally without seeing each other. The physical cash counter closes, but digital counters don’t close; that is why in the middle of the night and in the comfort of your room, you can pay your bills for LEC, DStv etc.
A very important thing to consider is having the cycle completed and by extension promoting a full-blown digital ecosystem. For instance, an employee gets digital value at the end of the month as his salary. This goes either to his bank account or his mobile wallet, using direct deposit, instant credit or other existing schemes. But the employee will have to pay his kids school fees, pay rents, buy food and other monthly supplies. Until the school, landlord, stores, etc. accept digital value, the cycle will be incomplete. The last mile will be miles away. Quite interestingly, in many cases, like the employee, the school, landlord and stores all have bank and mobile money accounts, sometimes they are all with the same bank and/or mobile money company. But the employee withdraws cash to pay the fees and bills while the school, landlord, and stores take some of the money back for deposit. This is inefficient. This leads unnecessarily to the banknotes being mutilated, posing huge cost to the country. It leads to security risk for the employee and the other parties involved as they play with cash. It leads to misallocation of resources including time. What could be done in few seconds digitally, takes several hours and several individuals to deal with the cash involved in the transaction.
It is time that we insist that those whose goods and services we consume should make payments more secured and convenient by introducing digital means of a transaction such as Mobile Money. Once we start to make this a precondition for continuing our relationship with vendors and other institutions, our country will see a big change that will bring efficiency gains thus contributing to enhanced productivity and economic growth and development. Businesses should take serious advantage of financial digitization as there are lots of benefits for them like their customers. Digital payments among other things will improve records of financial transactions. It will help build financial profile and make access to credit and other financial services easier.
Financial institutions do make huge investments in the infrastructure needed to facilitate digital transactions. As profit-maximizing entities, they do pass on the cost to the consumers. Once the number of users remains low, the cost per person will be high if the institutions are to recoup their investments. Pricing is a delicate issue and requires the collective efforts of all, consumers, regulators, financial institutions to ensure the right pricing models are employed and that these services are affordable - especially for people at the lower end of the income ladder.
I am deeply aware of numerous efforts being made by both national and international stakeholders to promote the digitization of the Liberian economy. I know of ongoing measures that would take financial digitization to a new level. I have deemed it necessary to pen this article to contribute to public awareness of the subject. I believe said effort is important to help achieve a critical mass of users that would propel the country to reap the desired benefits. The key message is that our overreliance on cash to conduct our financial transactions is unsustainable and inefficient. The infrastructure is already in place to begin to push most of our transactions to the digital sphere with emphasis on getting to the last mile – allowing people to buy stuff and pay for services with their digital value. Mobile Money presents an economical option to facilitate more digital transactions. We must insist that people we transact with, introduce and/or utilize digital means of payment as a precondition for continuing to transact with them. Below are few recommendations that need to be considered:
Develop a single mobile application for multiple payments – This means once I have my bank card/account or mobile money account on the app, I should be able to make several secured transactions as desired and affordable. I should be able to just click on my phone and select a school, hospital, restaurant, store, etc. and make payments. I see a great opportunity that Liberians with Information Technology (IT) expertise need to take advantage of. Let financial innovation be driven by ourselves.
Common Know Your Customer (KYC) / Customer Due Diligence (CDD) System / Platform – sometimes you visit a financial institution and you are asked to fill in a form. You must take the pains to repeat information about yourself that the institution already has since you are a customer. To make matters worse, you are sometimes faced with a situation wherein you must fill in more than one form with almost the same information for different products/services. These repetitions and inconveniences can be avoided by users of the financial system obtaining a unique user number. With a shared platform and the use of biometrics, a user of the financial system should just press his thumb or present his user number and all his details should be available. In Nigeria, a Bank Verification Number (BVN) is used, other countries have a similar system.
Digitize the Customer Service Process: Since we are moving to a realm of transactions that does not involve person to person contact, it is important for financial institutions to use technological innovations, to provide realtime responses to customers; for instance, the use of Artificial Intelligence (AI). Users should be able to quickly and conveniently report problems with their digital services/products, alert financial institutions of areas where services are down or being denied and file other complaints that they may have online.
Enhance National Cyber Capabilities- As we put more of our financial transactions on the digital platform, we attract cybercriminals who are very sophisticated and have operated for a long time in far-developed markets. We need to assess our national cyber capability and continuously improve our defense mechanisms.
We have dreamt of it, we do believe it, but most importantly, let us do those things that are necessary to achieve it. I wish you a MERRY DIGITAL CHRISTMAS AND A HAPPY AND PROSPEROUS DIGITAL NEW YEAR.
About the Author: Mr. Jay Brown is a Senior Financial Sector Expert in the Liberian financial sector. He is an Economist, a graduate of the Center for Development Economics (CDE), Williams College, Massachusetts, USA where he obtained a Master of Arts in Policy Economics. He is also an Alumnus of the African Methodist Episcopal University (AMEU) on Camp Johnson Road, Monrovia, Liberia where he graduated with a Bachelor of Arts degree in Accounting (Major) and Economics (Minor). He served as President of the AMEU Student Union (AMEUSU) in 2007/2008. He can be contacted on: +231886910240 / jayconic2007@yahoo.com.