eNaira Threat to Financial Stability- CBN Report

A new report has raised concerns about Nigeria’s central bank digital currency, eNaira, indicating potential risks to financial stability despite its success in narrowing the country’s financial inclusion gap.

Launched nearly two years ago under the stewardship of former Central Bank of Nigeria governor, Godwin Emefiele, eNaira is set to mark its second anniversary in October.

While the CBN championed eNaira for enhancing financial inclusion and expanding the size of banks’ deposit base, its report, titled “Economics of Digital Currency” obtained by press, warns about stability risks due to the conversion of bank deposits into eNaira.

The report noted, “Since its inception, bank deposit conversion to e-naira has exhibited an average monthly growth of 78.3 per cent and totalled about N1.66bn [$2.1 million].

“Furthermore, eNaira in circulation as a ratio of average banking system liquidity has averaged 0.1 per cent, reaching highs of 0.2 per cent in each of May and August 2022,” the CBN report noted.

According to the report, the impact arises from the fact that funds converted by customers into eNaira are held within wallets domiciled with the CBN, rendering them unavailable for lending activities by commercial banks.

As of December 2021, the CBN minted a total of N2bn in eNaira. This milestone, coupled with the nuanced challenges faced by commercial banks due to the eNaira’s issuance and exchange processes, has sparked discussions within the financial sector.

It noted that the sluggish growth is attributed to the slow adoption rate among individual users, evident in the low number of active consumer wallets, totalling 10,420.

The report revealed that the number marked an improvement from previous months, reflecting 187,190 wallets activated for use as of July 2022.

Despite these efforts, challenges persist, hindering the broader adoption of the eNaira in Nigeria’s digital financial landscape.

Further, the apex bank noted that eNaira can also negatively affect banks’ overall profitability via reduced non-interest income. The CBDC also comes with increased cyberattack risks, the report said.