In October 2021 Nigerian president Muhammadu Buhari launched a central bank digital currency (CBDC), saying it made the country the first in Africa and one of the few globally to do so.
The eNaira, as it is known, comes months after the Central Bank of Nigeria (CBN) ordered banks to close accounts transacting in cryptocurrency.
Cryptocurrencies are virtual currencies that are beyond state and central bank control. There are hundreds of them, with Bitcoin and Ether among the most well known.
How does the eNaira work? How could it affect banking in Nigeria? Can it be traded like cryptocurrencies? We answer these and other questions in this factsheet.
What is the eNaira?
According to the International Monetary Fund (IMF), a CBDC is “a digital form of cash that you can hold on your phone, in an app called a digital wallet”. It can be used by individuals and businesses to pay for goods and services.
To start using the eNaira, you have to download the app from either the Google Play Store or Apple Store. You then enter identification details and after these are validated your account is activated.
Those with simpler phones will be able to create a digital wallet using unstructured supplementary service data – or USSD – by dialling a short code on their phone. But this feature for the eNaira is still in development.
Businesses and government departments can also use the app.
Nigeria’s central bank has said the currency will be used alongside notes and coins and be “as good as having cash in your pocket”.
It will have the same value as the physical naira, so 100 naira will be equal to 100 eNaira. It will, just like cash, also not bear any interest.
How will eNaira wallets work?
According to the eNaira website, a person can pay for a service using physical naira and eNaira at the same time. Traders will be able to put up signs to show they accept the digital currency.
You fund a wallet by direct transfer from a bank account, cash payments through an agent or bank and transfers from another wallet.
The eNaira wallet can be used for transfers between individuals and businesses. The central bank also said the wallet will in future allow social welfare government transfers to individuals.
There are different tiers of the eNaira wallet:
|
Tier |
Category |
Registration requirement |
Daily limit (in naira and US$ at official exchange rate) |
Cumulative limit (in naira and US$ at official exchange rate) |
|
0 |
No existing bank account |
Phone number verified with the national identification number |
N20,000 ($48) |
N120,000 ($291) |
|
1 |
No existing bank account |
Phone number verified with the national identification number |
N50,000 ($121) |
N300,000 ($729) |
|
2 |
Existing bank account |
Bank verification number and means of identification |
N200,000 ($486) |
N500,000 ($1,215) |
|
3 |
Existing bank account |
Tier 2 requirement and public utility bill |
N500,000 ($1,215) |
N5 million ($12,156) |
Nigeria 1st country outside Caribbean with CBDC
At the launch, Buhari said the use of physical cash was on the decline, in part due to the growth of the digital economy. He gave the example of the Bahamas as one of a handful of countries that had issued digital currencies.
US thinktank the Atlantic Council, which maintains a CBDC tracker, has said that Nigeria is the first country outside the Caribbean region to launch a digital currency.
To build its currency, Nigeria’s central bank partnered with Bitt, a financial software company which focuses on digital currencies and is based in the Caribbean country of Barbados.
Promise of faster transactions with reduced charges
Nigerians have in recent years protested against high bank charges. The central bank in December 2019 updated its list of approved bank charges but high costs remain a sore point for many in the country.
In August 2021 the banking regulator said it had recovered N89 billion (about US$216 million) in excess charges after more than 23,000 complaints from customers.
The new digital currency aimed to make payments “faster, safer, easier and cheaper”, Buhari said.
In an interview with local media company the Cable, Bitt chief executive Brian Popelka said the digital currency could cut costs of sending and receiving money and promote financial inclusion for Africa’s unbanked.
“We have already formed local partnerships and are in discussions with several other African countries. We look forward to going live with additional deployments across the continent over the next two years,” he said.
The IMF and Nigeria’s central bank say other benefits of the eNaira and other digital currencies include more financial transparency and reduced illicit activity, easier diaspora and tax remittances, reduced costs of maintaining currency notes and better cross-border payments.
eNaira blockchain-enabled – like cryptocurrencies
How is the central bank’s digital currency different from making payments online?
The eNaira is only stored and accessed through the eNaira wallet, unlike other electronic forms of money accessed using banking apps, mobile money and automated teller machine (ATM) cards.
The central bank says “there are intermediaries for the typical online bank transactions, whereas for eNaira transactions, there are no intermediaries”.
“As for how the eNaira differs from the money in mobile banking apps, the difference is that the eNaira is blockchain-enabled,” said Kalu Aja, a financial analyst based in Lagos, Nigeria. A blockchain is a digital ledger, or a record-keeping system, of transactions which does not rely on a central authority such as a bank or a government.
“Users will not see any operational difference apart from the instant settlement and lower transfer fees,” Aja told Africa Check.
eNaira vs cryptocurrency
How then does the eNaira differ from cryptocurrencies given they are both digital currencies and use blockchains? There are key differences.
The eNaira is issued by a monetary authority and is the digital version of fiat currency, the currency issued by a central bank, that is already legal tender.
On the other hand, cryptocurrencies can be issued by anyone and are not under the control of any authority or backed by government assets.
Buhari described cryptocurrencies as “private currencies” that “seemed to have gained popularity and acceptance across the world, including here in Nigeria”.
Cryptocurrency is not legal tender in most countries although in November 2021 El Salvador, to much fanfare, became the world’s first country to make it so.
Companies like Visa, Coca-Cola and Microsoft also accept payments in certain cryptocurrencies. In March 2021, US investment bank Goldman Sachs said it would offer cryptocurrency investment opportunities to its customers.
CBDCs launched in Caribbean region
The eNaira is one of the first CBDCs to launch. According to the IMF, the Bahamas launched the first, the Sand Dollar, in 2020.
Other CBDCs in operation include DCash, launched by the Eastern Caribbean Central Bank. The bank covers four countries: Antigua and Barbuda, Grenada, Saint Lucia, and St. Kitts and Nevis.
Countries such as South Africa, China, Sweden, Malaysia and Hong Kong are investigating or testing their own digital currencies.
The Atlantic Council says 87 countries are considering a CBDC and seven countries have one fully launched.
How has the eNaira been received?
The reception to the eNaira has been mixed. The app download numbers have been interpreted as enthusiasm but there have also been user complaints.
The app was removed only 48 hours – and 100,000 downloads – after its release on Google Play, following negative reviews. It was restored after upgrades, Osita Nwanisobi, Nigeria central bank spokesperson, told Africa Check.
Omuli Iwere is a technology and venture capital lawyer with TechAdvance, a fintech infrastructure company. He told Africa Check the central bank would have to work harder to convince Nigerians about the eNaira, especially after it cracked down on cryptocurrency traders.
“Most individuals are not sure what it is about or what problem it resolves in today’s economy,” Iwere said. He said the eNaira had the potential to improve financial inclusion and reduce the number of the unbanked in the country.
But he added that “a solution which totally relies on a smartphone and the internet may not be the best for our largely unbanked citizens in the rural areas”.
Iwere said the USSD approach was one way of tackling this challenge. Another would be the eNaira app being able to work offline or use other technology such as near field communication.
Could the operation of banks be endangered?
Tunde Abidoye is the head of equity research at Lagos-based asset management firm FBNQuest. In an analysis note by his firm, Abidoye warned of risks for banks if they had significantly less money from customer deposits.
“In an extreme scenario, if the eNaira is widely accepted without restrictions, banks will have less money to generate risk assets, which will have the unintended consequence of raising interest rates on loans,” he wrote.
This could negatively affect banks’ funding and liquidity.
But the eNaira seems to have been “well thought out”, he added. “We see that in recognition of these risks, the central bank has limited the eNaira payment system to micropayments and imposed spending limits on individual digital wallets. As such, banks’ potential losses will be reduced.”
“Hypothetically, another [unlikely] scenario is where the central bank decides to grant loans directly to individuals..”
Financial analyst Kalu Aja was not as concerned as Abidoye about banks having less funds from customers.
“It will not reduce the funds in the deposit money banks because the eNaira does not pay interest. Thus banks will retain deposits,” Aja told Africa Check.
As for existing payment service platforms, Aja said the eNaira would make their operations more efficient as the digital currency will become the means of exchange and settlement for them.
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