Introduction
Digital methods of payment systems have changed not
only the payment channels but also peoples' everyday actions. We do not have a
very long history of such a system in Nepal; however, over the past ten years,
especially after the Covid-19 pandemic, Digital payment system and services have
been expanding exponentially. In Nepal, the use of bank cards, including debit
and credit cards, digital wallets, e-banking and mobile banking services, point
of sale (POS) services, and QR-based payment systems has increased in recent
years.
Transfer of monetary value is generally understood
to be payment. Digital payments are those that occur when money is transferred
from one payment account to another using a digital device, like a mobile
phone, computer, Point of Sale (POS), or credit, debit, or prepaid card, or a
digital channel of communication, like mobile wireless data or SWIFT, etc. The
term "digital payment system" refers to the channel and IT
infrastructure, or service, that permits such digital payments. Digital Payment
System accepts payments made electronically or digitally. Digital payment
system offers a payment gateway, makes it possible to process payments, manages
payment security and fraud, and manages transaction risk. Bank Cards, Digital
Currencies (like CBDCs, or Central Bank Digital Currencies), Digital Wallets,
E-Banking, M-Banking, POS, QR-Payments, etc. are common channels used worldwide.
The COVID-19 pandemic has accelerated the adoption
of digital payments, claims the Global Findex 2021. The global migration to
working from home, the refusal of some merchants to accept cash payments, the
growth of e-commerce, and the acceleration of digital person-to-person payments
were the main forces behind this shift to digital payments. During and after
the Covid-19 pandemic, there has been a noticeable increase in the volume and
frequency of digital payments both globally and in Nepal. The market for
digital payments worldwide was valued at USD 89.5 billion in 2021 and is
expected to reach USD 374.9 billion by 2030 with a CAGR of 17.25%
Money is any object or medium of exchange that
people accept as payment for goods and services. Money supply includes all
currencies and other liquid instruments in a country's economy as of the
measurement date. Broadly speaking, the money supply includes both cash and
deposits, and can be used just as easily as cash. The money supply is the total
stock of financial assets available to the general public to perform the
functions of money.
Currency outside bank (C) includes all banknotes and coins in physical possession at all times by households, businesses, and all other economic agents. Non-bank currencies are generally considered the most liquid currencies and
can be used upright for any
purchase without the need to use electronic media such as plastic cards or mobile wallets.
There are two main types of
money supply used around the world.
Narrow money (M1) and wide money (M2). M1 includes
currencies held by non-banks and demand deposits held by the monetary sector.
M2 consists of M1 and commercial bank time deposits. Both financial indicators
are used to see the impact on prices. Money multiplier (MM) refers to the ratio between various monetary
aggregates such as M1, M2, and the total monetary
base (MB). In fact, the money
multiplier represents the number by which base money is multiplied by successive savings and lending, a process formally known
as fractional reserve banking. It
can therefore be estimated by
dividing the sum of various currencies such as M1, M2, M3, etc. by the monetary base. Therefore, the value and interpretation of the money multiplier (MM) depends on the money aggregate used as the numerator in estimating the money multiplier. In this
study, we define and calculate two different money multipliers, the narrow money multiplier (MMn) and the wide money multiplier (MMb). They are defined as: MMn = M1/MB; MMb = M2/MB.
Looking at the study of Bangladesh, we can estimate
that huge number of unbanked deposits (10.93% in Bangladesh) are added to
the formal monetary aggregates of the country. The money thus entered into the
banking system will then be amplified according to the theory of money
multiplier. It has been observed that BDT 357 billion of narrow money and BDT
1662 billion of broad money have been created on the process during 2018-21 (3
years) in Bangladesh (Nizam, 2022).
Data from recent years shows that the amount of cash
circulating in the economy, as a percentage of the M1 monetary aggregate, has
declined in most countries. The smaller demand for cash as a proportion of M1
is explained mainly by the increasing use of Digital payment system (Digital
Payment Market Size US$ 374.9 Billion by 2030, n.d.).
Change in currency outside bank as an eventual
consequence of digital payment-based transactions. Humphrey, Pulley and Vesala (1996) analyse the
payment systems of 14 developed countries and identify a substitution effect of
around 68% between cash and other means of payment. This means that a 10%
reduction in cash holdings is associated with a 6.8% increase in the use of
other means of payment (View of Digital Money, Liquidity, and Monetary
Policy (Originally Published in July 1997) | First Monday, n.d.). For this
study, we assume that such other medium is digital payment systems.
Data
Analysis
We assume that the change in
currency outside bank (C) and the monthly changes in narrow money and broad
money are because of Digital payment system-based transactions. On the basis of
this assumption, we analyse the changing trend of multipliers, changes in the
growth of the currency outside banking system and currency outside bank to
money supply ratios.
§ Money Multipliers: Narrow money
multiplier and broad money multiplier
(Source: NRB)
Above chart shows that the M1, M2 and M3 money
multipliers are in increasing trend. Particularly, after Covid-19 pandemic,
money multipliers are increasing in significant rate. From this, we can
conclude that due to increment of Digital payment transactions, money
multipliers are increasing, affecting positive growth in the money supply of
the economy.
§ Changes in growth of currency outside
bank
(Source:
NRB)
The growth rate of currency outside the bank is
declining since last few years, after significant increment in the Digital
payment system-based transactions.
§ Currency outside bank (C) to Money Supply
(MS) Ratio
(Source: NRB)
Particularly after Covid-19 pandemic, Currency
outside the bank to Money supply ratio is decreasing for few years, due to
increment in the Digital payment system-based transactions. However, such ratio
is again increasing for last year, which implies that the effect of Digital
payment system is not that significant to replace currency outside bank, may be
due to several reasons. Such reasons may be the preference of cash by
consumers, lack of internet (data) and required infrastructure, lack of
awareness and incentives etc.
Discussion
and Conclusion
We can present following statements from analysis
presented above: -
- When Cash withdrawal decreases due to use of Digital payment system, Bank deposits increases, which eventually goes multiplied by money multipliers and overall Money Supply increases in the economy.
- On the other hand, when Currency-to-deposit ratio (c) and reserve to deposit ratio (r) decreases due to Digital payment system, it helps to increase money Multipliers, which helps to increase Money Supply in the economy.
- Due to availability of Digital payment system, Velocity of such multiplication is also increased.
- If central bank launches Central Bank Digital Currency (CBDC) in the future or launch other new developments in Digital payment system, it may enhance the trust of general public in electronic/digital system-based transactions and thus reduce transaction cost and raise the velocity of money by the banking system.
In
contrary, there may be following facts which are negatively impacting the
predictability of money supply as well as growth of Digital payment system in Nepal:
-
- Velocity of money may become unpredictable for monetary authority due to rapid fintech development.
- Users may find difficulties in the case of Multiple transactions which has low volumes and huge frequencies.
- Money multiplier (m) and money supply (M) relationship will become unstable.
- Lack of internet, lack of awareness, lack of incentives, Complexity to use, cultural preference to hold cash are some reasons which is resisting for rapid and significant growth in the digital payment system and services in Nepal.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of Nepal Rastra Bank in this regard. This article is based on group discussion assigned during training on 'Macroeconomic Management' organized by Bankers' Training Center (BTC) on January, 2023. Some points in this article are extracted from combined efforts of the group during group discussion.
References
§ Nizam AM (2022) Impact of e-money on money
supply: Estimation and policy implication for Bangladesh. PLoS ONE 17(4):
e0267595. https://doi.org/10.1371/journal.pone.0267595
§ Digital Payment Market Size US$ 374.9 Billion By
2030. (n.d.).
https://www.precedenceresearch.com/digital-payment-market
§ View of Digital Money, Liquidity, and Monetary
Policy (originally published in July 1997) | First Monday. (n.d.).
https://firstmonday.org/ojs/index.php/fm/article/view/1512/1427
§ Data used in the graphs: from different reports published
by Nepal Rastra Bank
(नेपाल राष्ट्र बैंक कर्मचारी संघद्धारा प्रकाशित 'अरुणोदय' (अंक-२७, २०८०) बाट साभार)
