Cracks in the Vault

Designing a better financial system for Nigeria

This is a long read and so we have made it available in podcast version (NotebookLM generated). We live in the age of AI and we are always on the lookout for fun ways to incorporate them in the work we produce here. Enjoy the podcast version and let us know what you think!

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The financial system is the lifeblood of a modern economy. A competitive, innovative, and resilient financial system is a catalyst for unlocking inclusive prosperity for a growing economy. In Nigeria, the financial sector has seen a radical transformation in the last two decades, from cash withdrawal lines in a banking hall to instant money transfer at the tap of your phone. However, recent challenges like the currency redesign, the lingering cash scarcity it caused, and the rising incidences of fraud and security breaches have exposed the fragility of the system. This essay argues that restoring trust, promoting competition, and innovation are the better way going forward, and the regulatory framework must be guided by these basic goals.

TRUST OR RUN

On September 14, 2007, Northern Rock experienced Britain's first bank run in 150 years as panicked customers formed lengthy queues outside its branches to withdraw their savings. The preceding news cycle had been dominated by an escalating insolvency crisis spreading through the global banking system, originating in the American housing market. Rumours of Northern Rock's dangerous overexposure to toxic assets triggered a customer exodus that saw approximately £1 billion (roughly 5% of the bank's total deposits) withdrawn in a single day. The panic continued unabated until the British government intervened with emergency funding that effectively nationalised the bank's assets.

In October 2008, roughly a year after the Northern Rock debacle, in what was another episode in the continued infernal epic of the financial crisis, the small nation of Iceland (population of about 300 thousand people at the time) got a rude shock. Just like Northern Rock, the news cycle had been loudly whispering about the exposure of the country's three biggest banks to rapidly spreading illiquidity in the global banking system. On October 3, 2008, fearing the worst after an economics professor declared the Icelandic financial system "insolvent," customers besieged their banks. The scale of withdrawals was so massive that the Icelandic central bank nearly ran out of banknotes. The crisis ultimately culminated in the complete collapse of the Icelandic banking system, with overseas students unable to pay their school fees and citizens restricted to importing and consuming only essential goods like food and medicine.

THE CURRENCY REDESIGN FIASCO

Between December 2022 and February 2023, the Nigerian financial system experienced a version of the two episodes described above. In October 2022, the Central Bank of Nigeria announced a currency redesign policy that was meant to curb the flow of illicit cash in the economy. A deadline window was provided for old notes to be returned to banks before they ceased to be recognised as legal tender. The deadline was later extended, but individuals and businesses still raced to their banks to deposit their cash.

By December 2022, CBN rolled out the redesigned naira and authorised banks to start dispensing it. The problem was that the new notes were not nearly enough to meet the demands of an economy that still largely ran on cash. To further complicate matters, many businesses, fearing that the circulation of the new notes meant the old ones had functionally ceased to be legal tender, stopped accepting the old notes for payments.

What ensued was just like the Northern Rock and Icelandic episodes—customers besieged their banks to withdraw their cash. The CBN had created a "bank run," which is the term used when a majority of bank customers demand their cash deposits at the same time. Contrary to common assumptions, cash deposits are liabilities to banks. They are obligated to honour your request for your money back at any time of your choosing. When a business finds itself in a position where it has to honor all its liabilities at the same time without the ability to offset those claims with its assets (in the case of banks, assets are loans and other financial investments they make), crisis can ensue and the business might have to declare bankruptcy. This is what happens in a bank run. A bank run is a rare event that only happens during times of economic or financial crisis. The last bank run in Britain before Northern Rock was 150 years ago. This shows the severity of the crisis rocking the global financial system in 2007.

However, what was extraordinary was that in December 2022, the Central Bank of Nigeria had managed to engineer a bank run without an economic or financial crisis. A needless run if there ever was one.

SOCIAL AND ECONOMIC CONSEQUENCES

Over the following days and weeks, videos of angry customers disrobing themselves in banking halls to protest their inability to access their money circulated online. Old people who needed money to buy food and medicine were reduced to tears after being told by their banks that there was no cash. Businesses switched to accepting electronic payments, but the surge in demand soon resulted in network failures and failed money transfers. Sporadic protests soon broke out in parts of the country, and some banks had to close their branches because of threats to their staff.

With elections approaching in February 2023, some states, feeling that it had become a political crisis, approached the Supreme Court, challenging the actions of the CBN. The court overrode the powers of the apex bank and declared that the old notes can continue as legal tender till December 2023. There is a whole book waiting to be written about this regrettable episode. Some people have claimed that the currency redesign was targeted at the elections and meant to curb vote buying. It remains baffling that there has been no inquest or accountability, and we can only speculate. Economist and former statistician-general of the country, Dr. Yemi Kale, estimated the cost to the economy at about 10 to 15 trillion naira.

THE IMPORTANCE OF TRUST

The story I have told so far has an underlying theme: a financial system survives and thrives on trust. This is an underrated feature of money and the financial system. Money has multiple functions. Money is a medium for us to exchange goods and services. Whenever I sell you anything or provide a service you need, I get money for it, which I can also exchange for goods and services. Money can be a way to preserve my future purchasing power. If I need certain goods and services in six months, then I can save some of my money today towards that. This is money as a store of value. In the past, the value of money was often tied to the precious materials it was made from, such as gold or silver.

However, in the modern economies of today, money is issued by countries (usually printed in finely cut and strangely coloured paper) with the authority and legal backing of the government to be used for all its functions. Money can also exist in many forms. The cash you paid for gala in traffic, the cheque you issued to your landlord for rent, and the electronic transfer you made at the supermarket are all different forms of money. The reason we can cope with the complexity of money is shared trust. When you undermine the trust in money, you undermine its forms and functions. If your landlord is unable to cash or deposit your cheque into his account, then he is unlikely to accept your future cheques as a medium of exchange and payment. The mismanagement of the currency redesign by the CBN undermined trust in the naira. There was not nearly enough of the new notes to replace the old notes that had already been seized, so depositors could not get their money out of the bank. There was also confusion about the status of the old notes as legal tender. Businesses switched to electronic money, but the infrastructure started creaking under the weight of massive demand. There were widespread incidents of failed and even fake electronic transactions - some businesses had to rely on personal relationships and IOUs with their suppliers and customers, and some had to close shop altogether. Nigerians in many of the border communities started conducting business and trade in foreign currencies. When you undermine trust in your money, people turn to what they can trust.

ADDRESSING THE AFTERMATH

Despite the reprieve provided by the intervention of the Supreme Court, the after effects remain. The demand for cash still outstrips supply in an economy that is still very dependent on cash. The unpleasant experience of the bank run also means people will want to keep their cash out of the banking system as much as possible. Traditional and agency banks have become the villain because empty ATMs and paying POS operators to get cash is now the norm. But this is misguided. Price is an efficient way of allocating scarce commodities, and sadly, Nigeria's cash scarcity might persist for a while. The solution is to drive the widespread use of other types of money in the economy. For that to happen, policy must shift towards an unbundled, competitive, and innovative financial system (more on that below).

In the meantime, we must restore the credibility and trust of the financial system. The rule of the game must be protected from the whims of erratic singular or syndicated actors. Some have argued that the ruling of the Supreme Court challenges the independence of the CBN as the main regulator of the financial system. Regulatory agencies are an extension of the executive, and their independence is subject to interference by the executive. Secondly, the laws prescribing the functions of regulatory agencies are so loosely and vaguely written in ways that they enable those agencies to take the broadest interpretations of their functions and exert tyrannical powers on the industries they regulate. The legislative arm of government must rise to its oversight and accountability functions. It was both strange and undemocratic that the CBN, in cahoots with the executive, could get away with the level of recklessness and poor communication that plagued the currency redesign without the elected representatives of the people having a say in the matter. Committees and subcommittees responsible for the financial industry at the National Assembly must work with independent industry experts and hire knowledgeable staffers so they can properly perform their oversight functions.

UNBUNDLING MONEY, PAYMENTS, AND BANKING

In 1998, Bill Gates famously remarked that "banking is necessary, banks are not." At the time, this statement seemed like hyperbole—the kind of Silicon Valley hubris that underestimated the complexity and resilience of established financial institutions. Yet, two decades later, this prophecy has materialised in unexpected ways. The unbundling of financial services - separating money storage, payment processing, and credit provision - has become not just possible but inevitable.

Consider the case of M-Pesa in Kenya. Launched in 2007 by Safaricom, a telecommunications company with no banking license, M-Pesa transformed Kenya's financial landscape by allowing millions of previously unbanked citizens to store, send, and receive money using nothing more than basic mobile phones. Within a decade, over 90% of Kenyan adults had access to mobile money services, effectively leapfrogging traditional banking infrastructure. This movement was not merely a technological revolution - it represented a complete reimagining of what money and payments could be, independent from the traditional banking model.

BARRIERS TO FINANCIAL INNOVATION

Nigeria finds itself at a similar crossroads—but without the flexibility of the Kenyan experiment. Its financial system remains tightly bundled, dominated by traditional banks that enjoy both regulatory preference and infrastructural monopoly. Fintechs and other non-bank innovators cannot operate freely without securing expensive licenses, often in the billions of naira, or forming partnerships that embed them into the very banking structures they seek to disrupt. For example, payment service providers are required to operate under restrictive switching licenses, while even the use of USSD channels - vital for rural outreach - is limited to CBN-licensed entities or mobile operators acting through banking intermediaries.

These constraints are not just a matter of policy—they are structurally embedded. The Nigeria Inter-Bank Settlement System (NIBSS), the core payment infrastructure, is jointly owned by the Central Bank and the very banks it is meant to regulate. This effectively gives banks privileged access to critical payment rails like NIP, BVN, and the NQR system, while non-banks must plug in through secondary channels. The result is a highly asymmetrical playing field. Payment fintechs, even those with full regulatory licenses, remain structurally dependent on the very institutions they aim to compete with.

The current regulatory model, grounded in BOFIA and shaped by frameworks that bundle activities under "Other Financial Institutions," exacerbates the issue. Capital requirements, such as ₦2 billion for switching or ₦5 billion for PSBs, serve as high walls of entry. Innovation is confined within a maze of overlapping categories - MMO, PSSP, PSB - with ambiguous operational scopes and inconsistent enforcement. These burdens seem like they protect consumers, but they protect incumbents.

WEAKNESSES OF A BUNDLED FINANCIAL ARCHITECTURE

The drawbacks of this bundled system were glaringly exposed during the currency redesign crisis described above. As banks failed to supply new cash, consumers were left stranded with few functional alternatives. A genuinely unbundled system would have enabled a range of interoperable providers to keep financial flows running, be it through mobile money, wallets, or peer-to-peer systems. Instead, the centralisation of payment and deposit functions meant that one systemic shock brought the entire edifice to its knees.

What Nigeria needs is a more radical approach - one that acknowledges the distinct regulatory needs of payment providers versus credit institutions. A new framework could entail a "new payments charter" that allows non-bank entities direct access to payment systems and settlement accounts, while implementing targeted regulation focused on operational resilience and consumer protection rather than solely on capital adequacy and credit risk.

This is not about dismantling banks, but about creating a modular, resilient architecture. Banks can remain key players in credit intermediation and complex financial services. But payments—fast, cheap, inclusive—should be open to new entrants, especially those willing to serve rural, informal, and low-income segments with simpler technology and more agile business models.

OVERCOMING VESTED INTERESTS

The challenge, of course, is the political economy. Incumbent banks benefit from the status quo. They are not only entering the payments space aggressively, but doing so from a position of strength: they control infrastructure, dominate data collection (via BVN and customer records), and shape standards through entities like NIBSS. When banks are both players and referees, genuine market dynamism becomes difficult.

Nevertheless, this evolution is necessary. Just as electricity generation was unbundled from distribution to improve efficiency and reliability, so too must money, payments, and credit be treated as distinct layers within the financial stack. Regulatory frameworks must recognise this and adjust accordingly.

In sum, the goal is not to weaken the financial system, but to strengthen it through diversification, inclusion, and resilience. Trust in the financial system is not only about deposit guarantees or legal tender—it's about choice, robustness, and fairness. In a world where digital trust competes with institutional inertia, we must redesign finance for both performance and access.

The Nigerian banking sector has long operated as an oligopoly - a small club of powerful institutions that have enjoyed the privileges of limited competition and captive customers. This concentration of power has yielded predictable results: high fees, poor service, and a persistent exclusion of millions from the formal financial system. When 36% of Nigerian adults remain completely unbanked, we cannot speak of a financial system that serves the nation.

But the issue is not just exclusion - it is entrenchment. Banks not only dominate deposits and lending, but also data, infrastructure, and market access. Fintechs, even when fully licensed, often require banks to act as custodians, settlement agents, or access intermediaries. In a digital economy, whoever owns the pipes and the data owns the future.

PUSHING BEYOND COMPLACENCY

History teaches us that monopolies rarely innovate unless forced to do so. The telegraph companies saw no reason to improve their technology until the telephone arrived. Taxi companies maintained the same business model for decades until ride-sharing apps disrupted their complacency. Similarly, our banks have had little incentive to reach the unbanked, reduce transaction costs, or improve customer experience when competition remains limited and profits are secure.

Open banking represents perhaps the most promising avenue for disrupting this inertia. Banks in Nigeria continue to resist meaningful data sharing, often citing vague security concerns while imposing onerous terms on data requests from smaller fintechs. By requiring banks to share customer data (with consent), through standardised APIs, open banking breaks down the information monopoly that has long protected incumbent institutions.

India offers a powerful counterexample. Its Unified Payments Interface (UPI), built on public infrastructure and accessible to both banks and non-banks, processed over 50 billion transactions in 2022. This was not merely a success in technical design- it was a policy decision to foster open, nondiscriminatory access to financial rails. Similarly, Brazil's PIX system shows how a central bank-driven platform can reduce transaction costs and include previously marginalised users.

Nigeria's Regulatory Framework for Open Banking, introduced in 2021, was a step forward. But it remains an unfinished journey. Recent progress suggests that the journey is now gathering pace. In March 2023, the Central Bank of Nigeria issued detailed Operational Guidelines for Open Banking, which formalised key components of the ecosystem: defining roles for API providers and consumers; establishing a consent management framework tightly integrated with the Bank Verification Number (BVN) system; and launching an Open Banking Registry (OBR) to ensure transparency and compliance. Critically, CBN has set a clear timeline, mandating that all banks and licensed financial service providers begin secure customer-permissioned data sharing by August 2025. If executed effectively, these measures promise to unlock the kind of standardised, competitive environment necessary for open banking to thrive in Nigeria’s context, though, as always, vigilant enforcement and continuous regulatory refinement will be essential to translate the framework into real impact.

REGULATORY REFORM

However, the CBN's licensing regime continues to inhibit participation. High entry thresholds - such as ₦5 billion for PSBs - effectively exclude lean, innovative startups. Even licensed providers like Flutterwave or Opay must constantly navigate overlapping frameworks, ambiguous enforcement, and institutional inertia from regulators still wired for a bank-centric model. The cost of compliance and negotiation too often substitutes for the cost of innovation.

More inclusive design is essential. For example, digital products must work on feature phones, not just smartphones. Authentication must allow for non-digitised IDs. Fees must be rationalised for micro-payments and low-value transactions. Without these considerations, digital finance becomes yet another tool for exclusion.

Competition and innovation matter not for their own sake, but for what they enable: broader inclusion, deeper resilience, and a healthier economy. When money flows more freely and affordably, informal businesses can access credit, savings can be pooled and mobilised, and households can build financial buffers.

However, the promise of digital inclusion comes with a warning: trust and safety must scale with access. The rise in fraud and data breaches - often from compromised fintech or telco interfaces - demands robust governance. Nigeria's Data Protection Regulation (NDPR) is a start, but enforcement is spotty, and fines are arbitrary and opaque. Stronger consent frameworks, encrypted infrastructure, and clear liability for breaches must be the norm.

SECURING THE FUTURE

India's Account Aggregator model offers inspiration: a consent layer that gives users granular control over what data is shared, with whom, and for how long. Open banking risks becoming a surveillance tool rather than an empowerment strategy without such mechanisms.

Ultimately, breaking the bank-centric bottleneck requires coordinated regulatory courage. It means unbundling services, enforcing open standards, and holding powerful incumbents to account. It means putting consumer access and economic participation above institutional comfort. If we succeed, we won't just fix financial access, we'll redefine it.