AN EVALUATION ON THE INFLUENCE OF E-NAIRA AND SMALL BANKS SURVIVAL

CHAPTER ONE

INTRODUCTION

1.1       Background of the study

A bank is a financial organization that collects deposits and puts those deposits into lending activities, either directly or through capital markets (Uremadu, S. 2012). Customers with capital shortages are linked to customers with capital surpluses by a bank holding funds in trust for them. Because of their critical position in the financial system and the economy as a whole, banks are extensively regulated. The majority of banks operate a fractional reserve banking system, in which they hold just a small percentage of the money deposited and lend the rest for profit. They are normally bound by the Basel Accords, an international set of capital laws, which set minimum capital requirements. As a result, academics are wondering if there are any ways to assess the health of banks before they fail due to their strict regulation.

Following the global economic recession of 2008/2009, when many multinational firms and financial institutions need government bailouts to stay afloat, some Nigerian banks were revealed to be in difficulties, according to Bhattacharyya, and Sahoo (2011). The financial crisis was inescapable because many banks have a high risk-to-asset ratio and are increasingly unable to meet payment commitments to both depositors and creditors when they become due. Bank hardship is not a new problem in Nigeria. Banking crises have shown that financial system instability has far-reaching financial and societal implications throughout history. In truth, when banks collapse, it causes financial hardship for the broader population since consumers and businesses invest their money in these organizations. As a result, bank failure has an impact on not just the financial sector but also the general public. Explanatory variables in prediction survival models, also known as early warning models in the literature, are frequently represented by financial ratios. Banking operations were handled manually prior to the introduction of the modern banking system, which may have hindered transaction settlement. This system demanded that transactions be manually transferred from one ledger to another. Money was hand tallied, which was occasionally imprecise and might have resulted in errors. Most banks used just one or a few analog computers to execute transactions at the time, which added to the sluggishness of financial operations. However, despite the introduction of electronic banking, most account holders continue to be dissatisfied with banking services such as ongoing charges, reductions without reversal, and poor customer service, highlighting the need for the adoption of digital currency, which does not require the use of a bank account.

The usage of digital currencies is typically regarded as a complement to traditional financial transactions rather than as a required or beneficial replacement.

According to Gilbert, Scott, and Loi, Hio. (2018), digital currencies have properties similar to traditional currencies but, unlike printed banknotes or minted coins, do not often have a physical form. The lack of a physical form allows for near-instantaneous online transactions and removes the costs of sending cash and coins. As a consequence, as long since both parties recognise the currency's legality, digital currencies will continue to be useful for inter-party transactions, as they provide the benefit of speedy settlement, particularly in online communities. Although cryptocurrency is the most popular form of digital currency, there are thousands of them in the modern world, each of which operates and enjoys security thanks to the mutually adopted encryption codes by the parties in such transactions, especially since most governments around the world have shied away from conferring any form of endorsement or legitimacy on transactions conducted through such channels. With the benefits of security, speed, minimum transaction fees, ease of storage, and relevance in the digital era, digital currencies have the potential to drastically revolutionize payments, banking, central banking, and the balance of economic power.

Taking advantage of fast technical advancement and financial market growth, international economies have begun to transition from paper to digital money, with Nigeria not far behind. In his study, Emmanuel O. (2021) stated that approximately central banks around the world are delicately working on their digital currency by gradually weaning themselves off rapidly-declining cash payments, which is why the Central Bank of Nigeria joined the fray so that Nigeria is not left in the lurch, which led to the launch of her e-Naira. Fast transactions, low diaspora remittances, direct government help, easier local payments, and secure banking are all promised by the e-Naira. However, many financial institutions are apprehensive about this new creation, to the point that they are fearful of losing consumers and questioning their long-term viability and existence.

1.2       Statement of the problem

Prior to the introduction of the electronic naira, the paper naira in Nigeria had a severe foreign currency crisis, and the naira's pace of depreciation aroused widespread worry among citizens, necessitating the need to test an alternate legal tender. Furthermore, as advised by the CBN earlier this year, cryptocurrency is prohibited, necessitating the transition of the country's currency from paper to electronic. Adolphus Areban Aletor (2021) noted that since the publishing of the e-Naira guideline in Nigeria, some small banks have expressed their reservation by how the new innovation can make them lose their relevance, accompanied by the exposed risk of bank failure thus gasping for survival in the face of a cashless economic policy.

In a bid to counter their anxiety of financial institutions, CBN through a  publication on nairametrics.com (2021),  assured  financial institutions that eNaira is not a subtle scheme to take away bank customers. Kalu (2021) asserts that  integral to the establishment of eNaira is the necessity to build more synergy with financial institutions as the framework of eNaira is such that it entrenches many pipelines of collaboration and further strengthens financial institutions' core service delivery. Therefore by its very nature, with regard to its mandates, eNaira will enhance the structures of these institutions instead of replacing them especially the small banks. The existing gap in literature on how digital currency affects bank survival has prompted the researchers to delve into this study, upon this premise that this study seeks to evaluate the influence of the e-naira on small banks' survival.

1.3       Objective of the study

The broad objective of this study is to evaluate the influence of eNiara on small bank survival. Specifically the study seek to:

1. Examine the promising importance of eNaira currency in Nigeria

2. Investigate if the development of eNaira will facilitate banks’ loss of customers.

3. Determine if the invention of eNaira will influence bank exposure to distress or failure.

1.4       Research Hypothesis

HO1: The development of eNaira will not facilitate banks’ loss of customer.

HO2: The invention of eNaira will not have any significant influence small banks survival.

1.5       Significance of the study

Findings from the study will be of great significance to policy makers, development experts, financial institutions, SMEs and the general public. The study based on its findings will be useful the professional bodies regulating the eNaira platform, hence will keep them informed about public perception of the newly launched platforms. Additionally, the study will serve as a source of information to researchers, students and other academic inclined individuals who may be carrying out research on a related topic.

1.6       Scope of the study

The scope of this study is to evaluate the influence of eNiara on small bank survival. The study will investigate if the development of eNaira will facilitate banks’ loss of customers. It will also determine if the invention of eNaira will influence bank exposure to distress or failure. However the study is delimited to Sterling Bank and Wema Bank in Abeokuta Metropolis of OgunState.

1.7       Limitation of the study

Like in every human endeavour, the researchers encountered slight constraints while carrying out the study. The significant constraint was the scanty literature on the subject owing that it is a new discourse thus the researcher incurred more financial expenses and much time was required in sourcing for the relevant materials, literature, or information and in the process of data collection, which is why the researcher resorted to a limited choice of sample size. Additionally, the researcher will simultaneously engage in this study with other academic work. However in spite of the constraint all these constraint were downplayed to give the best.

1.8       Definition of Terms

Bank Distress: This is a condition when the Banking system as a whole has negative capital and current profit are insufficient to cover losses to such an extent, that the banking system is unable to generate internally positive capital.

Digital Currency: Digital currencies are monies that exist not in physical form but only as electronic data, but perform the basic functions of money being unit of account, store of value and means of exchange.

eNaira: eNaira is the name given to the CBN's first proposed digital currency. eNaira is a central bank digital currency (CBDC) issued by the Central Bank of Nigeria as a legal tender. It is the digital form of the Naira and will be used just like cash.