REFLECTING ON THE STATUS QUO
One of my earliest encounters of the cash dependent nature of commerce in Sierra Leone, was at the Lungi Airport, in January 2018, my first time ever in the country. In the usual manner, we had completed the arrival formalities at the airport and then had to buy a ticket for the ferry ride from Lungi to Freetown. The cost of the ticket was $40 or its equivalent in Leones. My host at the time had counted approximately Le300,000 in cash and paid for the boat ticket. “Surely, this cash payment by my host must be an exception”, I thought to myself, but within minutes, I had a change of mind, because everyone else at the airport was using cash to buy their tickets. At this point I concluded that this must be the norm. Or was this cash practice peculiar to the airport environment? Perhaps, Freetown, my ultimate destination would be different.
It was a nice sunny weekend and apart from visiting the beaches, it was also a perfect time to to replenish my stock of groceries at the supermarket. I selected items I needed and then headed for the checkout counter to make payment. Whilst in the queue to my utter amazement, I observed different customers settle their bills one after the other with large bundles of cash that ranged from Le250,000 to Le6,000,000. On the other hand, I was fortunate enough that the supermarket had a Point of Sale (POS) terminal and settled my bill with my Mastercard debit card, albeit with some costs, a point we will focus on in more detail later.
At this point, it was ripe to conclude that commerce in the Sierra Leonean economy was transacted largely (up to 95%) on a cash basis and the major question that begs for an answer is - Why is this the case? Perhaps more concerning is the fact that similar sized economies within the West African sub region have made significant strides in promoting alternative payment channels and reduced the amount of cash, over the years, which is used in facilitating commerce. A few points will start to provide reasons for this discrepancy
- The level of literacy and awareness of alternative payment channels in the country is rather low and there needs to be a massive educational campaign to sensitise the people of the available alternative payment methods and its benefits for personal and business use thus encouraging a “cash-lite” society. The gap in education was the subject of a recent meeting I had with one of the Development Financial Institutions (DFIs), where I emphasised that educational initiatives will surely have the greatest impact towards achieving a cashless Salone economy.
- Financial inclusion is another factor that has impeded the growth of a cashless system. There are approximately 700,000 unique bank customers in the country, when compared to a total population of 7.4 million which translates to approximately 9.4% of the population having bank accounts. Unfortunately, we cannot begin to realise the objectives of a cashless system until the majority of the adult population (circa 50% of the total population) have and operate their bank accounts. On the other hand, the combined subscriber base of the TelCos is approximately 6.2million; unique subscriber base, probably 5.2 million after eliminating double counting of subscribers with 2 SIM cards (out of which 406,000 subscribers currently have mobile wallets). This clearly indicates that there are more mobile phone subscribers (with every likelihood of having mobile wallets) than the bank customers. But, interestingly the bulk of cash transactions are routed through the banks, implying the need to increase the number of bank accounts, if the country is to achieve significant mileage in financial inclusion. The Bank of Sierra Leone (BSL), launched its financial inclusion drive in 2009 which involved working closely with local banks to promote this initiative. Although, I will continue to reflect on the possibility of beneficial partnerships between the Commercial banks and the TelCos as a means of achieving this objective, on the presumption that both parties can work in unison and focus on economic development.
- The unavailability of robust and relevant technology infrastructure has also contributed to the pace at which the country can achieve a cashless system. If we focus on achieving our financial inclusion objectives by way of ‘brick and mortar’ expansion this will prove an uneconomical approach for the commercial banks and should rather explore technology enabled expansion programs, which seems the only practical means of getting banking services to the unbanked areas of the provinces. Unfortunately, unreliable network and internet services accompanied by lack of investments in technology by some of the commercial banks have all contributed to the stunted growth of alternative payments we are witnessing today.
- Perhaps one of the major drawbacks in the prominence of electronic payments is the absence of a National Switch. A national switch essentially interconnects all the banks operating in the country which facilitates instant settlement of any payment from one bank to another. For instance, if a customer of Bank A initiates an electronic payment from, say a phone, to another customer in bank B, the national switch ensures that the account in Bank B is credited instantly. It would not be incorrect to say that the reason merchants opt for cash in their commercial transactions is because of the immediate value effect, but with immediate value also achieved through electronic payments where a national switch operates, the propensity for cash as a means of payment reduces drastically and becomes less attractive. Over the years, there have been disappointments and delays in the establishment of a national switch but with the dedication and commitment of the current Bank of Sierra Leone (BSL) management coupled with the international support of The World Bank, we are anticipating that the national switch will become operational by the end of this year. This will exponentially grow electronic and cashless payments, with a caveat, I must admit. With thousands of transactions occurring by the minute, the country’s cashless objective would only be met when the national switch, in question, is professionally managed to support the demand. Anything less, could create room for merchants and consumers losing confidence in the system and from experience across Africa, the efficiency of any National switch is as good as the experience and technical know-how of its operator, which is a key point I will focus on in a subsequent paper.
THE CASHLESS JOURNEY SO FAR
Having carefully examined some of the challenges that were faced over the years in eliminating cash from the system, we can now review some of those successes that have been achieved in the electronic payment space in the country.
i) In terms of numbers and value, the players in the forefront would be the TelCos with their mobile wallets that are accessible to majority of their subscribers. With the integration of these wallets to some merchants, they enable electronic payments from subscribers’ phones directly to the merchants. This has to a large extent eliminated the use of cash for such payments. The percentage of these payments to the total payments within the system continues to witness tremendous growth. Needless to say, if the country is to make significant strides in a cashless system, the banks have to be at the forefront as they collectively control the bulk of the cash transactions in the ecosystem. But it would be right to state that if the banks do not immediately put in place measures and systems to promote cash less transactions, the Telcos would in the next 5 years further increase their market share of the payments within the ecosystem with their mobile wallets.
ii) There has been reasonable success in deploying Point of Sale (POS) Terminals to the merchants (but mainly the highbrow restaurants, supermarkets, pharmacies and entertainment centres). The largest suppliers of these terminals are United Bank for Africa (UBA), Eco Bank and Guaranty Trust Bank (GTB). Statistics of payments in this space would show that payment through foreign debit cards are prevalent. The simple reason is that payment through local debit cards attract prohibitive charges due to the absence of a national switch meaning settlement will need to be through costly international gateways. The establishment of a national switch should therefore expectedly bring down transaction costs.
iii) Online payment methods through internet banking platforms are also an alternative means that have been less explored mainly due to the cost and epileptic nature of the internet service as well as the lack of investment from the Banks to facilitate the internet-based payments. However, those in the forefront of this space would include Standard Chartered, Ecobank, UBA, GTB and more recently, Sierra Leone Commercial Bank (SLCB) and Zenith Bank. The gradual improvement of the internet service across the country and the reduction in the cost of data will result in exponential growth of cashless payments within the next year.
iv) Over the last few years, the unreliability and cost of the internet had propelled some banks to develop payment solutions that are more SMS (short messaging service) dependent giving way to the possibility of customers to make payments from one bank account to another bank account or indeed to pay bills through their phones. Key players in this initiative have been GTBank with GT Simpay and more recently Rokel Bank, with Simkorpor.
Despite these milestones to achieve this “cash-lite” endeavour, statistics shows that the cashless payments represent an insignificant amount (8%) of the total payments within the banking system and more needs to be done by the banks to improve the level of cashless payments. It will however take the collaborative effort of the banks coupled with the conscious effort of both the private and public sector to achieve cashless payments of at least 50%.
The country’s level of cash transactions is perhaps the highest in sub Saharan Africa and is supported by the recent Sierra Leone economic report produced by the World bank in June 2019, which indicates that cash payments are significantly lower in other African economies.
MEASURES TO PUT IN PLACE
Undoubtedly, it will be almost an impossible task to achieve a 100% cashless payment system in Sierra Leone or indeed any African country but a “cash-lite” system is largely achievable with the objective of limiting cash payments to a maximum of 40% of total payments within the system. Towing the line of other related African economies, that have achieved “cash-lite” payment systems, certain measures
would need to be in place before significant mileage can be made in this direction. Some of these measures includ
1. The cash culture is deeply entrenched in the system and the first step towards achieving a “cash-lite” system is creating the proper awareness through education at all levels of the consumption chain. The regulator has to be in the forefront of this campaign but should also be in joint venture between the public and the private sectors. Once the foundations have been established, we can then achieve a seamless paradigm shift in thinking.
2. In an economy like Sierra Leone, as indeed some other African countries, the Government body is the largest spender and if a “cash-lite” objective is to be achieved, the spending policy and pattern of the Government needs to be in line with this objective. All major forms of Government’s recurrent and capital expenditures incurred for instance in the payment of staff salaries or contractors should be done electronically or via cheques directly to bank accounts. Government bodies should discourage the issuing of cash cheques or making any form of cash payments to third parties. Electronic means of payments are not only safer but also more efficient in the sense that the beneficiaries have faster access to their funds rather than the practice of issuing cash cheques. This practice has largely been achieved by the Government bodies in the payment of salaries. Some other forms of payment, however, are still made in cash and there is a need to reverse this trend both for the cashless objective and also for financial probity within the system. A method, where both government revenues and expenditure are through electronic means and routed through the bank accounts would not only result in increased revenues in the Government coffers but will also facilitate the accountability and audit-ability of the Accountant and Auditor Generals of the federation.
3. The key private sector players also have a role in driving the economy towards a “cash-lite” system. These will of course include the large mining companies, financial institutions, insurance companies, international NGOs, manufacturing and trading companies, construction companies, key importers etc who occupy the highest position in the consumption value chain. These companies receive payment from the Government representing proceeds of executed contracts, international remittances from abroad and proceeds from the sale of either manufactured or imported goods. Being at the helm of the value chain, cash related policies that are imposed by these companies will trickle down the value chain towards the achievement of our overall adjective. Similar to the case of the Government institutions, these companies should discourage any form of cash payments either as salaries or to suppliers / contractors with all payments made either electronically or via cheques. Most banks now have specific online platforms that enable all forms of payments without the staff of these companies having to leave the office or even issuing cheques. Payments are more efficient without the need to carry cash from one place to the other. On the other hand, these companies should also ensure that cash sales proceeds are discouraged as practicable as possible, so consumers are encouraged to pay for their goods via electronic means. These will include:
- POS terminals to facilitate payments through debit cards. As I pointed out earlier, this requires significant investment by the banks to ensure most merchants have access to POS’ and a massive awareness campaign, also by the banks to create awareness of the possibilities of settling bills with these alternative forms of payments.
- USSD banking giving the consumer the ability to make payments from their phones but also, for this payment alternative to be effective, there needs to be proper awareness, heavy investment in technology by the banks and investment in notification systems to alert the merchants once payments are made into their bank accounts.
- QR Codes - unique scan codes that can be deployed by merchants to facilitate payments through phones that have been linked to unique bank accounts. Again, this method of payment involves significant investment in such technologies.
4. For the Government and private sector to effectively drive our “cash-lite” objective as described in 2 & 3 above, the critical success factor in achieving this, is the commissioning of the national switch as a catalyst to virtually eliminating cash transactions. A mechanism that will enable instant interbank transactions is the key to reducing the appetite for cash as electronic payments will also be able to play the role of cash in providing immediate value for both personal and business transactions. Additionally, electronic payments are currently very costly to the consumer which will be greatly reduced with the operation of a national switch. We commend the strides made by the management of BSL regarding the issue of the national switch and look forward to the end of this year when the switch will be commissioned.
5. Given the financial inclusion levels in the country, another critical success factor is the ability to make it relatively easier for consumers to open bank accounts which is a pre-requisite to performing cashless transactions (apart from the transactions via mobile wallets of the TelCos which is more restrictive than a proper bank account). A major obstacle faced by prospective bank account holders is the provision of relevant documentation such as Identity documents as part of the KYC requirements for opening bank accounts. GTBank has been pivotal in the discussions with the regulator in establishing a tiered KYC structure to ensure lower value accounts (which, considering the level of earnings in Sierra Leone, will probably constitute up to 40% of total bank accounts) can be opened with less stringent KYC requirements. Approval process for this tiered KYC structure is in the final stages with the BSL.
5. Agency Banking - To complement the role of technology in boosting financial inclusion is also the need of an agency banking structure which would ensure banks are able to reach and provide banking services to those remote areas through third parties with relatively lower operating costs.
6. If consumers are expected to carry out their transactions through electronic means then it should be at a reasonable and not a prohibitive cost. The steps so far taken by SALCAB in this direction should be commended but if the full effect of a cashless economy is to be felt, there needs to be further reduction in the cost of data even if that means a direct intervention of the government towards this goal.
BENEFITS OF A CASHLESS SYSTEM
Having examined some of the factors that need to be in place to reduce the cash transactions in our commercial space, It would be inconclusive if we did not assess some of the benefits practising economies have been able to achieve with the significant reductions in the economy’s cash transactions over the years.
1. One positive thing I have observed during my year in Sierra Leone is the relative peace and security in the country and as such the benefits of a “cash-lite” system would be less of addressing security concerns and more of moving commercial transactions from the informal system to the formal system. If the Government and major private companies are able to succeed in restricting the bulk of their revenues and expenditures to cashless means, then to a large extent, economic activity will be trackable and more accurate in measurement.
2. As a fallout of the accountability of such a system, the government is able to increase its taxable base with more revenues accruing to the government in form of taxes which would ultimately lead to the reduction of budget deficits. The Government has achieved significant mileage between 2017 and 2018 in reducing its budget deficits through increased tax revenues (mainly from an aggressive collection scheme and increasing the tax base through cancellation of existing tax concessions) and maintaining government expenditure at 2017 levels enabled by a tight fiscal policy. A “cash-lite” system will definitely accelerate this revenue drive sought by the Government.
3. The international community through various bodies such as the FATF, JMLSG and GIABA are tasked with ensuring that Anti Money Laundering (AML) practices are enhanced worldwide. A major deterrent in money laundering practices is the reduction of cash as a means of enabling commercial transactions, and a “cash-lite” system will therefore promote AML initiatives within the system. FATF is an international body that ranks the AML practices of all the countries and publishes on a yearly basis, rankings which are circulated internationally especially to the banking and finance communities. Having strong AML practices will improve the FATF ranking of Sierra Leone as a country, which will in turn boost international transactions with other countries based on the restoration of confidence that AML practices have improved. A major constraint the commercial banks face in Sierra Leone is the inability to establish correspondent banking relationships and a major reason for this is the low ranking of the country on the FATF list and the rather poor AML policies existing within the banking system in general. A situation where commercial banks do not have partnerships with offshore correspondent banks will hinder their ability to carry out cross border transactions such as wire transfers and establishing letters of credit which stifles the operations of the banks and restricts economic growth in terms of international trade.
4. Similar to promoting AML practices, perhaps another benefit of a “cash-lite” system is curbing to a very large degree, corrupt practices within the system. Without a doubt, proceeds of corruption, is largely transferred by cash and building a system that is not cash driven will minimise corruption. This is largely to be driven by the government by restricting all payments to electronic methods which ensures all payments are routed through the banking system.
5. Achieving the objective of a “cash-lite” system would need to be preceded by increasing the financial inclusion levels in the country. This would mean migrating more of the population to the banking system (opening bank accounts for those who currently don’t have one) and it is expected that over time such customers might be granted some form of credit facilities which would lead to creation of money and wealth which would ultimately lead to an increase in the country’s GDP.
Douglas McGregor, a foremost psychologist in his “theory X and Y” management theory postulated two types of human behaviour, one that is naturally motivated and the other that needs to be motivated. Concluding with this theory in mind, we should consider the possibility of the system not naturally gravitating towards the objective of a “cash-lite” one and perhaps a final measure that may be adopted would be for the regulator to implement a “cash-lite” policy that regulates the maximum amount of cash that can be withdrawn from or deposited into any bank account. This will usually apply to all forms of bank accounts whether individual or corporate accounts and punitive charges are usually imposed on any amounts withdrawn or deposited above the stipulated limits. Several countries have implemented cash less policies in the sub region and punitive charges range between 2% to 3.5% of amounts over stipulated limits.
It is the writer’s opinion that with Government support, the regulator’s will, proper education and the right investments by the financial institutions, the achievement of a “cash-lite” system in Salone is definitely more of a possibility than a hopeless endeavour.
The writer has made reasonable assumptions and employed acceptable methodologies in arriving at some of the conclusions in this piece but bears no responsibility whatsoever on any fallout for reliance on the information in this write up. It is purely an expression of opinion on the issue under discourse.