CHAPTER ONE

1.1         Background Information/Statement

The payment system consist of institutions, set of instruments and procedures through which financial obligations are discharged by economic agents. An efficient payment system ensures that financial with minimum delay and cost to the economy. It is therefore, imperative for the financial architecture to be developed to engender and efficient payment system that guarantees that transaction are concluded efficiently and at minimum risks.

The payments system is an important anchor for economic and social development in any economy. An efficient payments system enhances the operation of a market economy and assists in the maintenance of monetary and general economic well-being though the transmission of money that over time, it has become a core function of central banks worldwide to ensure the efficiency, integrity and safety of the payments system by instituting, in collaboration with other key stakeholders in the payments process, sound operating policies and practices.

Malosh (2004) sees payments system as a mechanism that facilitates intermediation through the transfer and the processing of the value of money from the payer (buyer) to the payee (seller) in the process of exchanging goods and services. The system invariably includes not only the instruments, such as cheques, money orders, wire transfers, electronic transfers and other payment instrument, but also organization, operating, procedures and information, and communication agreement that are used in initiating and transmitting payment instruction from one party to another in settling obligation. The payment system enables the financial sector to serve the real sector, and there for its development sophistication is a necessary precondition for the business development both domestically and internationally. Payment instrument are of many forms such as cash, cheques, traveler‘s cheques, money orders, debit and credit cards, wire transfers, mobile phones, automated clearing house transfers, point of sales and automated teller machines (ATMs)A stable financial system is a prerequisite for growth and development. Some of the major criteria for a stable financial system are the existence of efficient financial markets and financial instruments as well as efficient payment and settlement system. A well functioning payment system is of primary importance, especially in the implementation of monetary policy, particularly, in liquidity management.

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Typically, banks are better equipped to play the rule of payment intermediaries because they hold account of those who engaged in economic activates, and also provide the liquidity for the entire economy. In most developing economies, effort are geared towards improving the payments system in order to expedite the processing of payments, reduce the risk and uncertainty associated with non-cash payment, facilities the adoption of indirect instrument of monetary policy, and depend financial market. In Nigeria the central Bank of Nigeria (CBN), has taken giant steps to ensure the smooth running of the payment system. Some of the action taken includes the establishment of clearing houses across the country and sponsoring of legislations aimed at ensuring the soundness and stability of the banking system. The legislation includes the promulgation of dishonored cheques offences Act and Failed bank financial Malpractice in banks Acts. In order to reduce the settlement circle, the CBN introduced the Magnetic Ink Character Recognition (MICR) processing, fully automated the cheques clearing system for the Lagos clearing zone and most recently, introduce a new clearing and settlement arrangement that segregated banks into ―settlement and non-settlement banks‖. The introduction of the wide area network in the banking system has also reduced to cycle-time for intra-bank settlement

In Nigeria today, cash is the more popular form of payment for consumers but cash is the most costly and list profitable payment instrument. The use of cheque as a payment instrument is not a widespread practice due to a number of reasons, including back of trust in, and dishonesty on the part of the issue of the cheque and the non-enforcement of the Dud Cheques Acts, which criminalize the issuance of cheque on unfunded accounts in Nigeria. The challenge to the central Bank of Nigeria and other stakeholders in the financial industry is how to enhance the use and acceptance of other forms of payment instrument in Nigeria. Efforts must be made to enhance the use of wire payments, debit and credit cards other electronic instruments, in order to reduce the over reliance on cash as the major means of payment.

1.2         Statement of the Problem

While remarkable improvements have been made to date to improve and develop a viable and reliable payments system, the system is still bedeviled by several problems which have continued to militate against its optimal operational, growth and development. The economy is predominantly cash based, reflecting the preference of economic agents and the weakness of the legal system to enforce contracts. The unintended social and economic cost are the

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risks and inconveniences associated with cash transactions such as armed robberies use of counterfeit banknotes as well as the inconvenience of carrying large quantities of currency notes. For individuals, the cost of cash transaction lies in the frequently trips to banks as well as time lose as a result of long period of waiting. For the monetary authority, the cost lies in frequent printing of bank notes arising from the short life circle of note and the cost of moving large amount of cash to banks around the country. Vanguard Nigeria had reported new economy policy that will help to save Nigeria over N192bn. According Vanguard, CBN said, that the cost of processing, handling and managing cash, if not checked, will cost Nigeria about N192 billion by next year.

CBN‘s Deputy Director, Currency Operations, Mr. Albert Ikmseedun, who disclosed this at a sensitization programme on the proposed cashless economy policy for the Muslim community in Lagos, said it was high time Nigerians embraced the new cashless policy due to the high cost of cash to the financial system.

He said the disadvantages of transacting businesses with cash, outweighs its advantages, noting that in 2009, the total cost spent on cash-in-transit was N27.3 billion, while cash processing stood at N69 billion.

He appealed to residents of Lagos State to embrace the new policy when it becomes functional in the state, adding that the new policy would in the long run, help to bridge the gap between lending and deposit rates in the country. According to Ikmseedun, the policy does not mean that cash would no longer be in existence in the country, but that it was aimed at moderating the volume of cash in the system. He identified robbery, high cost of processing cash, revenue leakages, and inefficient treasury management, among others, as some of the negative side of a cash-based economic system.

He said: ―If there is reduced cash in the system, banks would be able to compete favorably. There are so many alternative payment systems in Nigeria which are even more convenient and safe, but people are not using them. With the improvement in communication in the country, there have been a lot of improvements in the payment system. Cashless Lagos does not mean there would not be cash in Lagos again, but it is an industry collaborative effort aimed at executing the payment transformation plan of the state. We are going to significantly increase the amount of Point of Sale (PoS) terminals in the state. We chose to start from Lagos because over 50 per cent of the money supply in the country ends up in this

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state. If it works here, then it can work in any other part of the country. The market is in Lagos and Lagos is mini-Nigeria‘‘.

1.3         Objectives of the Study

The general objective of the study is examining payment system and financial intermediation as it affects economic growth, bearing in mind with the following specific objectives:

i.             To establish a relationship between payments system and economic development in Nigeria.

ii.             To examine the structure and development of the Nigeria payment system.

iii.             To evaluate the role of the central bank of Nigeria in the payment system.

1.4         Research Questions

Some of the pertinent questions the study will find solution to are:

I.            Does any relationship exist between payment system and economic development in Nigeria?

II.What are the structures and development of the Nigeria payment system?

III.Does the central bank of Nigeria have any relationship with the payment system?

1.5         Research Hypothesis