Nigeria sets up a committee to study Bitcoin penetration

The Central Bank of Nigeria (CBN) and the Nigeria Deposit Insurance Commission (NDIC) have set up a committee to investigate the growing trend of bitcoin use, according to the government-owned broadcasting station, the Voice of Nigeria. The news was revealed on Friday by NDIC Managing Director Alhaji Umaru Ibrahim at the 2016 Workshop for Financial Correspondents in Kaduna.

“We have constituted a committee together with the central bank to have an in depth study of this phenomenal bitcoin.” - Alhaji Umaru Ibrahim, NDIC Managing Director

With a current population of 182 million people, according to the National Population Commission, Nigeria is the most populous country in Africa. More than half are under 30 years of age and the country expects to grow to 210 million people within five years.

The NDIC is an independent agency of the Federal Government of Nigeria, established in 1988 following a recommendation by the CBN Board. Its primary purposes are to protect depositors and guarantee the settlement of insured funds when a deposit-taking financial institution can no longer repay their deposits. This ultimately helps maintain financial system stability, but NDIC currently faces an uphill battle.

NDIC 19 Dec 2016 2The International Monetary Fund (IMF) named Nigeria Africa’s largest economy last year, with GDP of US$493.831 billion. However, the country lost the top spot in August, to South Africa, according to the Fund's latest estimates.

The country is currently in the middle of its worst recession in decades. Banks have significantly scaled down lending, shifting the focus from growing loan books and customer bases to survival. “Customers are struggling and not making profit. Any new loans are more likely to go bad,” the head of a Nigerian bank told the Financial Times.

April’s annual IMF Consultation with Nigeria found that the country's economy is facing substantial challenges. A drop in exports pushed the current account from a surplus to a deficit and substantially slower foreign portfolio inflows sank the country's reserves, which the CBN responded to by introducing exchange restrictions. However, the CBN's efforts have been "hampered by the monetary easing and a de facto fixed overvalued exchange rate," the IMF states, adding that monetary easing also failed to spur economic activity.

Lower oil prices have also decimated government revenues and doubled its deficit. In addition, fuel shortages in the first half of the year and lower investor confidence have reduced the country's growth sharply, dropping from 6.3 percent in 2014 to 2.7 percent in 2015. Inflation jumped to 9.6 percent in January, which was above the CBN’s medium-term target range of 6 to 9 percent. The slowdown in the economy also weakened corporate balance sheets and lowered asset quality in the banking system.

“In Nigeria, economic activity is now projected to contract in 2016, as the economy adjusts to foreign currency shortages as a result of lower oil receipts, low power generation, and weak investor confidence.” - International Monetary Fund

Within the Nigerian financial services sector, commercial banks are “under significant pressure,” according to an August report by PricewaterhouseCoopers (PwC). It is also facing “the omnipresent risk of disruptive innovation” mostly led by non-banks targeting key areas such as payments and small-term lending which account for nearly 80 percent of daily customer interactions, the firm described. “Nigerians are becoming increasingly aware of and adopting digital services,” PwC noted, adding that they are also aware of the opportunities being connected creates.

E-commerce is growing rapidly in Nigeria. In August, then-Minister of Communications Technology, Dr. Omobola Johnson, reportedly estimated the worth of the e-commerce sub-sector in Nigeria at $10 billion and estimated that over 300,000 online orders are made on daily basis.

NDIC 19 Dec 2016 1In September, McKinsey Global Institute published a report stating that low-income countries such as Nigeria have the largest economic potential to benefit from digital financial services. The firm found that they have “the opportunity to add 10 to 12 percent to their GDP, given low levels of financial inclusion and digital payments today.” Meanwhile, Nigeria's e-commerce revenue has already doubled each year since 2010. Out of the seven focused countries the firm studied, including India and Brazil, the largest impact is found in Nigeria.

In Nigeria, mobile money, such as Safaricom’s M-Pesa, has lagged far behind other African countries, where it has become the main payment method for people in Kenya, Uganda, and Tanzania. According to the UK’s Institute of Economic Affairs (IEA), the country’s mobile money adoption has been greatly stunted due to laws and regulations targeting mobile money. Less than one percent of the country was using phone-based money from any source by the end of 2014 while almost 60 percent of nearby Kenya uses mobile money.

The IEA point to laws that favor the banks over the telecom industry, giving them fewer incentives to develop mobile money infrastructure in the country. Subsequently, banks never had the incentive to develop good mobile money platforms due to the lack of competition since those could compete with their existing products.

“The main blame for the slow take up of Mobile Money falls on the Nigerian Central Bank (NCB). The NCB has followed a ‘bank-led’ model where they have licenced banks to operate Mobile Money rather than the telecommunication companies.” - UK Institute of Economic Affairs

Given the lack of mobile money options in Nigeria, bitcoin’s usage has been growing. “A lot of Nigerians had already started patronising bitcoin,” NDIC Managing Director Alhaji Umaru Ibrahim said in Friday's announcement, adding that “it had started to creep in and nobody could stop it.”

In BNC’s live currency pair rankings, which shows the volume of the world’s currencies traded for bitcoins, the Nigerian naira is currently the top African currency and 12th among all currencies. The South African rand is in the 15th spot, while the Kenyan shilling, which rarely sees any bitcoin trade at all, ranks 30th.

Ibrahim noted that in addition to examining the advantages and disadvantages of Bitcoin in Nigeria, the committee will study the impact of the digital currency on the payment system, as well as the safety and security of customers. The impact on money laundering, anti corruption, crime and as a money surrogate for the economy will also be considered. The CBN briefly previously stated, in August 2015, that “in order to curb money laundering, virtual currencies should be regulated.” However, no action was taken at the time.

Bitcoin users “do not need any central bank; they do not need any physical bank,” Ibrahim stated. “You can make payments with it because it has been recognised.” The financial service industry “is not spared in all of this,” the Managing Director said. “Some of the central banks have also adopted it and are seriously doing everything possible to bring in the emergence of this invisible products,” he claims.

Outward signs of bitcoin adoption are clear. In January 2015, bitcoin startup IceCubed X launched the naira market on its ICE3X trading platform. The company secured an exclusive agreement with Nigerian payment processor VoguePay to allow clients to trade bitcoin in their native Naira using their existing VoguePay wallets to fund their transactions.

“With over 40 million people connected to the internet in one way or another, it’s only natural that Nigeria is looking to take part in the opportunities that the internet affords everyone around the world.” - Gareth Grobler, ICE³ Founder

In July 2015, digital currency exchange BitX started offering services to buy, sell, send and receive Bitcoin in Nigeria using naira. “We’ve been inundated with requests for Bitcoin products and services from consumers, developers and businesses in Nigeria,” said Werner van Rooyen, Business Development and Growth Head at BitX at the time.

The company has been working with a number of partners to bring services and new products to the Nigerian market. He noted that Nigeria has a “vibrant, diverse and growing online population.” However, the market is full of “inefficient and expensive online payment methods” ripe to benefit from Bitcoin’s potential for faster and cheaper settlements, he conveyed.

In November last year, the Kenyan bitcoin startup BitPesa launched in the Nigerian market, allowing anyone outside the country to make payments to Nigerians using bitcoin, receiving naira for a flat three percent fee. As a major remittance destination, the service can save a lot of money in fees over traditional remittance solutions. According to the Overseas Development Institute, Nigeria has some of the highest remittance fees in the world.

“The world’s top ten remittance transfer charges are all to be found in sub-Saharan African countries. Ghanaians sending money, for example, to Nigeria can pay as much as 39% in fees.” - Overseas Development Institute