Nigeria’s eNaira: A Promising Step Towards Financial Inclusion

In a recent interview, Jack Ree, an Economist from the International Monetary Fund (IMF), shed light on Nigeria’s Central Bank Digital Currency (CBDC) experiment known as eNaira. The Nigeria’s eNaira was introduced in October 2021, making Nigeria the first African country and the second in the world to launch its own CBDC. The move aimed to address financial inclusion, reduce remittance costs, and bring the informal economy into the formal banking system.

“From the customer’s point of view, the utility that the existing mobile money provides is very similar to the utility that CBDCs can potentially provide, and there are already like 25 mobile money operators… So somehow the CBDC might not mean a game-changing value edition”. – Jack Ree

One of the primary motivations for introducing eNaira was to tackle the issue of financial inclusion in Nigeria. Shockingly, about 38 million adults, nearly 40% of the population, do not have access to a bank account. However, the country boasts high mobile phone penetration, indicating that many people have access to basic mobile phones. By introducing eNaira, the hope was to bridge the gap between digital penetration and banking services, making financial access easier for the unbanked population.

Another significant factor driving the introduction of eNaira was remittances. Nigeria is one of Sub-Saharan Africa’s largest recipients of remittances, with close to $25 billion received annually before the pandemic hit. Unfortunately, the pandemic caused a sharp decline in remittances, impacting the country’s economy. The central bank believed that a CBDC could offer a cheaper and more efficient alternative for remittances compared to traditional methods like Western Union, where costs can be as high as 7 to 8% per transaction.

The informal economy in Nigeria also played a role in the decision to launch eNaira. About 80% of employment in the country comes from the informal sector, which means many financial transactions take place outside the formal banking system. This makes it challenging to track and regulate these financial activities. The use of an account-based CBDC, unlike untraceable cryptocurrencies like Bitcoin, could potentially bring more transparency to such economic activities.

“The next two, three years will be very important. They will need to make the right strategy in terms of setting relationships with mobile money, so that either compliment or substitute. Probably in Nigeria’s case it’s going to be a complimentary model that makes sense.” – Jack Ree

However, despite these motivations, the acceptance and usage of eNaira have been somewhat mixed. According to Jack Ree’s research, after a year of its launch, the number of eNaira wallets downloaded was less than one million, which is less than 1% of the total number of bank accounts in Nigeria. Furthermore, about 98.5% of these wallets were not used more than once in any given week, suggesting a slow uptake of the CBDC.

Despite the modest adoption rate, the eNaira experiment has been successful in terms of operational resilience. Unlike some other countries where CBDCs experienced outages and disruptions, Nigeria’s system remained stable, establishing itself as a reliable and operational platform.

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The big question now is how eNaira will complement existing mobile money services in Nigeria. The country boasts a diverse market with over 25 mobile money operators. Integrating eNaira with these services is essential for driving mass adoption. However, this integration will require cooperation from both the central bank and mobile money providers. Regulations may be necessary to ensure seamless integration and enhance the attractiveness of mobile money to consumers.

Going forward, Nigeria’s eNaira experience will serve as an important case study for other countries in Sub-Saharan Africa considering their own CBDCs. The successful operation of the eNaira system shows that CBDCs can be implemented and maintained effectively. However, achieving mass adoption will require careful strategy, especially in relation to mobile money services and remittance solutions.

So, Nigeria’s eNaira has taken a significant step towards financial inclusion and digital innovation in Africa. While challenges remain, the experiment has shown promising results in operational resilience. For other African countries looking to adopt their own CBDCs, Nigeria’s experience offers valuable lessons and insights into the potential benefits and complexities of implementing a digital currency system. The next few years will be crucial in shaping the future of eNaira and its impact on Nigeria’s financial landscape.