Burn the cash

Theoretically Algeria needs to reduce its reliance on a cash economy.

In its usual style, the Algerian government has just repealed a new rule before it even it became effective. The rule in itself was a good move, it required any payments above 50,000 DZD to be paid by cheque. Algerian economic activity is hugely dependent on cash. People pay for a car or a house with real notes. Imagine bags full of cash, literally! So people should be encouraged to ditch the cash in favour of alternatives. While the powers in charge were right in thinking that should happen, the decision was premature, which led to its cancellation in the end. Reducing our dependence on cash can bring many benefits:
1. Allow banks to build reserves for investment
2. Provide safety over funds
3. Reduce money laundering
4. Bring income from informal economic activity into the mainstream

So why don’t we do it? The primary reason for our dependence on cash, I believe, is the lack of trust in the financial system. That’s why on the day of “virement” (wage pay in), everyone rushes to withdraw their hard earned Dinars. After the long queues, the insults, the fights, and the heat, you get to a condescending agent who informs you that you have no funds, or that they don’t have the monies to pay you. Recent bank collapses like Khalifa and BCIA are not encouraging either.
Cheques have been very unsuccessful. Many issue cheques without funds, which bounce back, leaving the beneficiary in a delicate situation. Many have resorted to just not accepting cheques. Now, I understand why my auntie laughed every time I asked why she did not pay for her groceries with a cheque. I was young and naive!

I believe the solution is 4 fold.
1. At a macro level, we need to introduce a Deposit Insurance Scheme, where banks contribute to a fund that would compensate the customers in case of bank failures. This is practiced by many countries: England has the Financial Services Compensation Scheme, France has the “Fonds de Garantie des Dépôts”, Morocco ha the “Fonds Collectif de Garantie des Dépôts”…etc. Introducing such a scheme was a critical part of Russia’s recent banking reforms.

2. Localise and popularise payment cards. Certain measures should be considered for the success of such a scheme. These can include:
– picture of the user on the card- allow user to set the daily withdrawal/payment limit- allow customers to withdraw larger sums at a cashier’s with the provision of an ID
– locate cash machines in secure areas, preferably indoors, for example at post offices. as people become more accustomed to the system, outdoor locations can be added.
– cash machines should support Arabic, French and Tamazight
– reduce the transaction charges to reflect the reduced costs thanks to the automation, and to encourage people to favour using cash machines and direct payment
All of this has to be supported by an education programme through TV, printed media, and face-to-face communication to demonstrate the benefits of the system and to answer people’s concerns.

While initially, people might still prefer to get all their cash, over time the early adopters will become an example and attract a wider group to the system. A pilot should be run for a good period of time (at least 1 year) in a medium size town before a full scale implementation takes place. The results of the pilot can be showcased to encourage take-up.

3. Introduce a system for large sum transfers. For big-ticket purchases, we still need a system that allows such transfers in a secure and reliable manner. In the UK, a banker’s draft is used to guarantee payment. In France, a similar service is offered under the name “Cheque de Banque”. Such a transfer can also happen at the bank were both parties are present and can agree to the transfer. Carying around 10’s or 100’s of millions of Dinars is not a practical way to deal.

4. Introduce electronic payment for businesses. Businesses need a different setting for managing their funds. While electronic transfer can be offered to retail customers as well, because of current connectivity levels, it is not likely to take off. For business users, however, electronic fund transfer is a very efficient solution. To gain trust, the security of the system must be given priority. In addition, the system has to allow for firms business processes and control, such as multiple signatories. Given the lack of trust, the system should have robust records to avoid any repudiation. Finally, the system should enable the production of paper records. This would enable the wary to maintain a physical proof of the transaction. Such system already exist and are utilised heavily in developed countries.

As I mention all this, it brings to my mind an 2 infrastructural issues: the communication network, and the inter-bank connections. For such changes to take place, we need to develop a country-wide robust communications network on which the financial electronic systems can be built. All cash machines, payment terminals, and electronic fund transfer requires interconnections. Unfortunately, our network infrastructure is still shaky. There is talk that Algeria Telecom will be making significant changes, but how long will this take?
As for the interbank connections, officials claimed that it would be done in a record period of time, but we are still waiting.

Taking back the physical cash and operating electronically will not only make citizens’ lives easier and safer, but it will demonstrate the trust people should have in financial institution, which is vital to the success of an emerging economy.

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