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The impact of electronic payments and cash-less policy on the shadow economy
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Agbi, S. E. & Yusuf, I

THE IMPACT OF ELECTRONIC PAYMENTS AND CASH-LESS POLICY ON THE

SHADOW ECONOMY IN NIGERIA

AGBI ENIOLA SAMUEL

Department of Accounting and Management
Faculty of Arts and Social Sciences
Nigerian Defence Academy, Kaduna

and

ISMAILA YUSUF
Department of Accounting
Faculty of Management Sciences
Federal University Dutsin-Ma
Katsina State

Abstract

Electronic payments have been suggested as useful tools to reduce if not eradicate shadow economic
activities, especially in developing economies were the passive shadow economic activities are
prevalent. The Federal Government of Nigeria (FGN) adopted ePayment in 2009 while the CBN
introduced Cash-less Policy in 2011 in order to encourage electronic payments. These interventions
are expected to impact on the level of shadow economic activities in the country. The study is aimed
at assessing the difference in shadow economic activities before and after the FGN ePayment and
cash-less policies. The descriptive study design was adopted using a longitudinal data for the period
between 2003 and 2015 on the level of the shadow economy and t-Test for paired sample was
conducted to compare shadow economic activities before and after the introduction of ePayment and
cash-less policies. The study concluded that a larger portion of the shadow economic activities in
Nigeria relates to the committed shadow economic activities, thus, increased use of electronic
payments may not lead to a significant reduction in shadow economic activities. From the findings,
it is, therefore, recommended that the FGN should put in place adequate mechanism to reduce
unreported economic activities while the CBN cash-less policy should be vigorously pursued,
especially in areas where large unbanked citizens reside. This can be done by creating awareness of
electronic payment media especially mobile money.

Key Words: electronic payments, cash-less, shadow economy, Nigerian economy.

1. Introduction
Decreasing shadow or underground or informal economies have been an important policy goal all
over the world during recent decades (Feld & Schneider, 2010). There are two main reasons studies
have focused on shadow economy. First, shadow economy is directly linked to large budget deficits
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 The Impact of electronic payments and cash-less policy on the shadow economy in Nigeria

and hence, lowers investments in public goods. Besides being of general interest from an economic
point of view, this means that the effects may differ significantly depending on the level of
development of a country. Second, studying shadow economy creates the opportunity to investigate
the decision-making process related to the underground economy at the individual level (Agbi,
2014a). It has been observed that most cash-dominated economies hardly have enforceable
regulations regarding how much physical cash can be carried. The dominance of cash transactions
and the narrowness of the financial sector has made these economies more prone to shadow
economic activities and also made it easier to integrate such laundered funds and proceed of crime
into the economy (Koker, 2013; Humphrey, 2012). Over the years, researchers and policymakers
have recommended various ways of reducing the level of shadow economy in countries, especially
as it cannot be eliminated. One of the most preferred solutions to curbing the shadow economic
activities involves the obligation to settle by an electronic payment instrument any transaction whose
amount exceeds a certain threshold(Raus, Flügge, & Boutellier, 2009).

According to ACCA (2017), Nigerian shadow economic activities stood at 48.7% of GDP in 2016
representing about N49.67 trillion of unreported income. This is against the global average of 22.5%.
Studies have documented corruption, per capita GDP and administrative quality as factors
contributing to the high rate of the shadow economy in Nigeria (ACCA, 2017; Agbi, 2014b).In line
with the Federal Government Public Financial Management Reforms (FGPFMR), e-Payment was
introduced in 2009. Through a Federal Treasury Circular, the Federal Government of Nigeria (FGN)
directed that all financial transactions of government should henceforth be paid into beneficiaries’
bank accounts. This policy effectively commenced the electronic payment policy of the FGN. The
policy was complemented by the Central Bank of Nigeria (CBN) National Payment Systems (NPS)
initiated in 2005, aimed at moving the banking system from cash driven to the cash-less economy.
This initiative brought about the introduction of cash-less policy by the CBN in 2011 (Yusuf, 2016).

The introduction and implementation of the FG e-payment policy and the CBN cash-less policy are
expected to reduce the level of cash powered economy. The ease of undertaking cash-based
transactions in an economy has been documented as a major driver of the shadow economy. Thus, it
has been argued that increased non-cash based transaction should reduce shadow economic activities
(Cretu, 2009; Kearney & Schneider, 2011; Denecker, Istace, & Niederkorn, 2013).
The introduction of cash-less policy in Nigeria, however, has unique features. First, while the use of
cash for a transaction in the banking system above a threshold is charged, there is no such policy for
retail outlets. In effect, the cost of cash transactions is borne by the consumer through increased cost.
Second, electronic transactions such as electronic transfers are not free of charges, although
electronic transfer charges are lower than that of a cash transaction. Thus, the question arose if these
peculiarities are likely to undermine the gains expected from cash-less economy. As argued by
Becker (1968), people usually do a cost-benefit analysis to know whether or not to engage in shadow
economic activities. This study, therefore, assessed the difference in shadow economic activities
before and after the FGN electronic payment and cash-less policies.
Several studies have been carried out on shadow economy activities in both developed and emerging
economies. Some of the studies have studied the link between shadow economy and tax evasion,
others have studied shadow economy and corruption (Agbi, 2014b; Agbi, 2010; Buehn & Schneider,

ICAN Journal of Accounting and & Finance (IJAF) Vol. 7 No. 1 September, 2018
155
Agbi, S. E. & Yusuf, I
2009; Buehn & Schneider, 2007; Katsios, 2006; Schneider, Raczkowski, & Mróz, 2015; Osmani,
2015). Other studies have examined the relationship between shadow economy and electronic
payments (Dybka, et al., 2016; Kearney & Schneider, 2011; Cretu, 2009). However, no study to the
best of our knowledge has examined the shadow economy and cash-less policy and electronic
payments in Nigeria, the study fills this gap.
The rest of the paper is organised into six sections as follows; literature review, research
methodology, results and discussion of findings, limitation of the study and areas of further research
and conclusion and recommendation. In the literature review section, the study defines shadow
economy, the types of shadow economy, theories relating electronic payments and cash-less to
shadow economy and a review of relevant and related empirical literature. The research
methodology section explains how the research was carried out, it includes the type of data
collected, sources of the data and data analysis techniques adopted. The data collected were analysed
and the results were discussed under the results and discussion of the findings section of the paper.
Limitations and areas of further research were highlighted. The conclusions derived from our
findings were made and recommendations, as it relates to our conclusion, were provided under the
conclusion and recommendations section.

2. Literature Review
The term ‘shadow economy’ refers to a broad phenomenon, which includes tax evasion, all illicit
financial flow of fund, productive activities violating government regulation, illegal activities, and
hidden employment (Agbi, 2014a;Schneider, 2012a). Research usually focuses on any one of these
in isolation, even though they are often directly or indirectly related to each other. Shadow economy
is described as the production of and trade in legal goods and services that are deliberately and often
illegally concealed from public authorities. Hence, the goods are typically undeclared for purposes
of tax (Schneider, 2012a). Therefore, shadow economy activity creates considerable practical and
ethical issues for both business and government (Agbi, 2015).

Schneider (2012b) defines shadow economy to include those economic activities and income derived
thereof, that circumvent or avoid government regulation or taxation. The major component is
undeclared work, which refers to the wages that workers and business do not declare to avoid taxes
or documentation. The rest is represented by business under-reporting profits to avoid tax regulation.
This definition of the shadow economy is all-encompassing as it includes all economic activity
(including criminal activity such as the sale of contraband cigarettes and drugs, the fencing of stolen
goods, prostitution and so on) which “circumvents or avoids government regulation or taxation”
(Agbi, 2014c; Agbi, 2015).

Nevertheless, the definitions of the shadow economy by Agbi and Schneider may be difficult to
operationalize as it necessitates knowledge of all illegal activities, including criminal activities to
produce a quantitative estimate of the size of the shadow economy. Therefore, an alternative and
narrower definition used by Schneider (2012a). For Schneider, shadow economy includes all market-
based legal production of goods and services that are deliberately concealed from public authorities
so as not to conform to various regulations and laws; pay taxes (income, valued added, other) and
social security contributions; and comply with certain administrative obligations, such as completing
statistical questionnaires or other administrative forms.

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 The Impact of electronic payments and cash-less policy on the shadow economy in Nigeria

Most of the definitions of shadow economy, however, tend to exclude economies that are
predominantly cash-based. Most cash-dominated economy has large unreported economic activities
which are not necessarily illegal or aimed at concealment. Thus, shadow economy in these
economies like Nigeria can be referred to as unreported economic activities. The most appropriate
definition that can adequately capture the phenomenon in a country like Nigeria is that of the
European Commission. The European Commission defines shadow economy as the non-observed
part of the economy, comprising illegal activities, legal, but concealed activities and unrecorded
informal activities (EC, 2016). Shadow economy is also referred to as an underground economy and
the informal economy. These terms are used interchangeably but both of them refer to one
phenomenon.

The shadow economy related to unreported cash transactions can be divided into passive shadow
economy and the committed shadow economy. The passive shadow economy is caused by cash
payments where one or both sides of the transaction do not benefit from not reporting the
transaction. The committed shadow economy, on the other hand, is influenced by the motivation of
both sides of the transaction to benefit from not reporting the transaction. The passive shadow
economy can, therefore, be reduced by promoting electronic payments (Dybka et al., 2016).

The Federal Government of Nigeria through a treasury circular on 22nd October 2008 directed that
from the 1st of January, 2009 all payments from government funds should be electronic payments.
Electronic payment is described as the process of making payments through the use of a computer
(Dankwambo, 2009). With electronic payment government contractors and other payment
beneficiaries hitherto paid in cash or cheque have their account in banks credited directly. Thus,
eliminates physical contacts between account officials and beneficiaries (Dankwambo, 2009).
Kumaga (2010) defines electronic payment as a financial exchange between buyer and seller with
the aid of an electronic communication network. While Kumaga’s definition is from the point of
view of retail electronic payment, that of Dankwambo is more aligned to large-scale electronic
payment found in government.

The CBN introduced cash-less policy in 2011 to reduce the dominance of cash transaction in the
economy. The policy was first named “Cashless” but was later renamed “Cash-less” to reflect the
idea of cash reduction and not total elimination of cash (Yusuf, 2016). Thus, the CBN Cash-less
policy is aimed at a banking system and economy where physical cash transactions are reduced
through the use of electronic devices and other non-cash instruments (Osazevhabru & Yomere,
2015). With the cash-less policy, banking and other financial transactions are encouraged to be
carried out using cheques and electronic devices. Thus, bank customers are encouraged to carry their
cash in electronic cards or on their mobile phones while merchants are encouraged to receive
payments through bank electronic transfers, Point of Sales or Mobile money.

Electronic payment and cash-less are activities relating to electronic banking. Electronic banking is
referred to as banking transactions carried through an automated process or with the aid of electronic
devices driven by information and communication technology (ICT) (CBN, 2003). Thus, some

ICAN Journal of Accounting and & Finance (IJAF) Vol. 7 No. 1 September, 2018
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Agbi, S. E. & Yusuf, I
authors have used the term electronic payment and electronic banking interchangeable. However,
some authors have also argued that electronic payment and electronic banking are distinct. This is so
as electronic payment includes transactions carried out on electronic/mobile money platform for
unbanked individuals. Electronic money allows the store of value in an electronic device to make
future payments where the holders do not necessarily have a bank account (Fullenkamp & Nsouli,
2004; ECB, 1998). While electronic payment policy, in this case, might refer to payment to bank
customers cash-less policy, on the other hand, incorporates the unbanked through the use of
electronic/mobile money.

2. Hypothesis Development
In order to encourage the use of electronic payment media, on the 1st of January, 2009 the FGN
commenced electronic payment for all its transactions, this policy was complemented by the CBN
Cash-less policy in 2011. The Nigerian ePayment policy stipulated that all payments to contractors,
service providers, staff, and other government agencies be made electronically; thus, effectively
ending cash transactions in cash based or cash-dominated economy.
The CBN Cash-less policy is to move the economy to a non-cash based. To ensure the transition and
achievement of the cashless policy, incremental higher charges are imposed on cash withdrawals and
deposits after certain thresholds. The implementation of the policy was however done in phases. The
policy is expected to reduce transactions carried out in cash by using cheques and electronic devices
through cards, internet or mobile phones (Yusuf, 2016). At the introduction of the policy in2011, the
term ‘cashless’ was used by the CBN, this was, however, changed to ‘cash-less’. This was done to
correctly reflect the thrust of the policy, which was to reduce cash-based transactions and not
completely eliminating cash transactions as the earlier term implies. Cash-less banking system refers
to a system designed to reduce the quantity of cash transaction through encouraging the use of non-
cash based payment like cheques and electronic payment options (Akhalumeh & Ohiokha, 2012;
Osazevhabru & Yomere, 2015; Yeboah, 2017).
Dybka et al. (2016) analysed shadow economy in eight central and southern European countries. The
study measured the shadow economy using a combination of four different estimation methods:
currency demand analysis, labour market analysis, multiple indicators-multiple causes’ model and
sectorial structure analysis. The study found that the popularity of card payments, the ratio of taxes
to GDP and institutional and tax morale have a significant impact on the level of the shadow
economic activities. Denecker, Istace, and Niederkorn (2013) argued that the prevalence of cash
often allows an informal or shadow economy to grow or dominate. The study found a correlation
with international comparisons between cash usage and the size of the shadow economy.
A study was conducted by Kearney and Schneider (2011) explored the structure of the shadow
economy in Europe and identified measures to reduce it. Using the MIMIC (multiple indicators,
multiple causes) to measure the shadow economy, the study found a strong correlation between
electronic payments in a country and its shadow economy. Thus, countries with high levels of
electronic payment usage have smaller shadow economies than those with minimal levels of
electronic payments usage. In a study conducted in Romania, Cretu (2009) found a correlation
between the shadow economy and the number of electronic payments. The study found that the more
electronic payments the smaller the shadow economy. In line with Becker (1968) theory of crime
and punishment, people would usually compare the cost of using electronic payment against the
gains to determine whether or not to use it. Where the gains from using electronic payment outweigh
the cost, this will reduce shadow economy. On the contrary, where the cost of using electronic
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 The Impact of electronic payments and cash-less policy on the shadow economy in Nigeria

payments outweighs the gain, this will encourage the use of cash and thus increase shadow economic
activities.
In addition, the institutional theory explains how the institutional environment influences societal
beliefs and practices that influence actors within the society (Mallin, 2016). According to Williams
and Horodnic (2016)study, formal institutions based on defined law and regulations co-exist with
informal institutions or shadow institutions which has social and unwritten rules. The existence of
informal institutions is largely based on the asymmetry between formal and informal institutions
usually caused by lack of trust in the government. Thus, the higher the institutional asymmetry the
larger the informal or shadow economy.From the preceding, the study proposes the hypothesis that;
Ho1: There is a significant difference between shadow economic activities before and after the
introduction of the FGN electronic payment and cash-less policies.

4. Research design
A descriptive study designed was adopted to examine electronic payments and cash-less and the
related shadow economy. Longitudinal data on the level of the shadow economic activities and
electronic payments were used. Data on electronic payments were used to assess the trend in
electronic transactions before and after the introduction of electronic payment by FGN. While the
data on shadow economy for the period were used to test the difference between shadow economy
before and after FGN ePayment and CBN Cash-less policies. The period 2003 to 2008 is the period
before introduction while the period between 2009 and 2015 being period after introduction of
electronic payments. T-Test for paired samples was adopted and SPSS was used to carry out the
analysis.

Variable Measurement and Description

Table 1: Variables Measurements
Variables Description/Measurement
Shadow Economy Measured using the Multiple Indicator Multiple Causes model as contained in
the studies conducted by (Hassan & Schneider, 2016; Medina & Schneider,
2017).

Electronic payments Measured by electronic payments in the Nigerian banking industry, which
includes web payments, POS transactions, mobile money and inter-bank funds
transfers obtained from the CBN Annual Financial and Economic Statistics.
Electronic payments were deflated by GDP (obtained from the CBN Annual
Financial and Economic Statistics) to obtain electronic payment as a percentage
of GDP.
FGN Electronic Introduced by the FGN in October 2008, commenced on the 1st of January,
Payment Policy 2009 and applicable to all government funds.

CBN Cash-less Policy Introduced by CBN in 2011, the first phase implementation started in Lagos on
the 1st of January, 2012.

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Agbi, S. E. & Yusuf, I
5. Results and Discussion
The graph in Fig.1shows the trend in shadow economy and electronic payments over the period of
the study. The graph shows increased shadow economic activities which peaked in 2009. The year
2008 and 2009 recorded the highest shadow economic activities during the period of the study; these
years also coincide with the period of the banking crises that led to the takeover of some banks by
the CBN. The period is also characterised by a decline in public confidence in the banking system
leading to a run on banks, this might explain in part the reason for increased shadow economic
activities. Incidentally, the period 2008-2009 also witnessed an upsurge in electronic payments, this
increase continued until 2015. This implied that while the FGN introduction of electronic payments
may have increased electronic transactions, there is also the voluntary patronage of the products,
especially from the retail aspect.
The introduction of the CBN Cash-less policy in 2011 also showed a significant impact on the
electronic transactions, which can be seen from the increase in ePayment between 2011 and 2012.
This increase in ePayment continued until 2015. Of particular interest is 2014 and 2015, where
electronic payments as a percentage of GDP were greater than shadow economy as a percentage of
GDP. This indicates that more transactions are moving to the electronic payment platform while
cash transactions are reducing thus, the reduction in the shadow economy.

Figure 1. The trend in shadow economy and electronic payments in Nigeria 2003– 2015

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 The Impact of electronic payments and cash-less policy on the shadow economy in Nigeria

Table 2: Descriptive Statistics

Variables Min Max Mean Std. Dev.
SE 0.3286028 0.7942066 0.4819915 0.1364199
SEbf 0.3286028 0.7429376 0.4658336 0.1493303
SEaf 0.4089 0.7942066 0.4958411 0.1347329

Table 2explains the behaviour of the dataset in terms of averages, minimum, maximum and
deviations from the mean. The average value of shadow economy (SE)for the whole period which
represents the percentage of Shadow economy to GDP stood at 48.2%, within a minimum value of
32.87% and the maximum value of 79.42%.There is no wide variation from the average value as
indicated by the standard deviation; thus, indicating some form of stability in the data.This is
compared to the period before with an average of 46.6%, a maximum of 74.2% and a minimum of
32.9%. The period before showed no wide variation from the mean. The period after ePayment and
cash-less policies recorded the highest average, minimum, and maximum SE. Although, SE in the
period after continued to reduce, this indicates that the period after is characterised by more extreme
values of SE than the period before.

Table 3: Paired Samples Statistics

Mean N Std. Std. Error
Deviation Mean
SEbf .465834 6 .1493305 .0609639
Pair 1
SEaf .510331 6 .1414917 .0577637

Table 4: Paired Samples Test

Paired Differences T df Sig. (2-
tailed)
Mean Std. Std. Error 95% Confidence
Deviation Mean Interval of the
Difference
Lower Upper
Pair SEbf –
-.0444977 .2590982 .1057764 -.3164045 .2274092 -.421 5 .691
1 Seaf

Table 3 and 4 show that there is no significant difference in the shadow economy before
(M=0.465834 SD=0.1493305) and after (M=0.510331, SD=0.1414917) conditions; t (5) =-0.421 p =
0.691. This indicates that there is no significant difference between shadow economy before and
after the introduction of the FGN ePayment and cash-less policies. This might be connected to the
fact that the reduction in shadow economy during the period after ePayment were introduced was
minimal compared to the increase experienced in the period before. This could also mean that even
as ePayment policy was introduced by the government, cash-based transactions did not reduce

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Agbi, S. E. & Yusuf, I
significantly. This can be linked to the fact that the policy is targeted at government payments while
the private sectors are not affected by the policy. It also points to the fact that the CBN cash-less
policy has not significantly reduced cash-based transactions. This may be as a result of the
unavailability of electronic payments media in areas where large volume cash transactions take
place. It may also be that the bank charges imposed on electronic payment usage discourage usage,
thus, encouraging the use of cash for transactions.

6. Limitation of the study and Future Research Signpost

The study measured shadow economy using the MIMIC model, further studies are recommended to
examine shadow economy using alternative methods. This can be used to test the robustness of the
MIMIC method in the Nigerian context.

Shadow economic activities have multiple causes which are sometimes related, examining the
interaction between these causes and ePayment in relation to shadow economy is important. This can
provide insights into the moderating or mediating effect of ePayment and cash-less policy on the
causes and indicators of shadow economy.

7. Conclusion and Recommendation

Shadow economic activities have been found to be large in countries dominated by cash
transactions. While some of these activities are passive, that is, not involved in illegal activities, or
not intended for concealment. Electronic payments have been suggested as an effective tool to
reduce if not eradicates passive shadow economic activities.
Findings from this study have shown that electronic payments have not effectively reduced shadow
activities significantly. This contradicts results from previous studies, like (Dybka et al., 2016;
Denecker et al., 2013; Kearney & Schneider, 2011). However, it relates to the institutional theory
that there still exists some degree of institutional asymmetry pointing to the need for more
institutional interventions to change the tide. It can also be linked to the Berker's theory of crime and
punishment, as the cost of using cash seems less than the cost of electronic payments, especially for
the committed shadow economy. It, therefore, means that where the committed shadow economy is
large, electronic payment would not significantly reduce shadow economic activities.
The results from the study confirm that a larger portion of the shadow economic activities in Nigeria
relates to the committed shadow economic activities, thus, increased use of electronic payments
could not significantly reduce shadow economic activities in Nigeria. From these findings, it is
recommended that the government should put in place adequate mechanism to reduce the committed
shadow economy activities. This can be achieved by increased surveillance and monitoring of
economic activities in a bid to reduce unreported economic activities.
The CBN cash-less policy should also be vigorously pursued, especially in areas where large
unbanked citizens reside.This can be done by creating awareness in electronic payment media,
especially the use of mobile money.

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 The Impact of electronic payments and cash-less policy on the shadow economy in Nigeria

The gains from the use of electronic payments in reducing shadow economy can be hampered if the
direct and indirect cost of using electronic payment medium is more than that of using cash. Efforts
should be made to incentivize the use of electronic payments as a way of encouraging its adoption
by the populace, either by removing or reducing charges on electronic payments.
Increasing unemployment can also be a militating factor in reducing shadow economic activities.
This is evident from the findings from previous studies, which indicates that an increase in
unemployment will lead to increase in shadow economic activities through engaging in informal or
illegal activities. Thus, the authorities, in the public and the private sectors should devise and
implement policies that will reduce unemployment.

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Agbi, S. E. & Yusuf, I
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