Buying Money with Money: The Hidden Cost of a Cash-Driven Economy

There is a phrase that captures a peculiar reality in many developing economies: “We are buying money with money.” At first, it sounds contradictory. How can we buy money with money? Yet anyone who has operated a business, managed an office, paid suppliers, or moved funds in a cash-dependent economy understands exactly what this means. It describes an environment where accessing, moving, withdrawing, depositing, transferring, or even confirming money often requires additional money, time, effort, and risk. The irony is that money - created to facilitate exchange - can itself become an expensive commodity to access.

When Cash Becomes the Infrastructure

In an ideal financial ecosystem, money should move efficiently. A customer pays a supplier electronically. The supplier receives confirmation. The transaction is recorded. Goods or services are delivered. The business continues. But where electronic banking infrastructure is unreliable, internet connectivity is unstable, point-of-sale systems frequently fail, and digital transactions are sometimes delayed, cash becomes the dependable alternative.

The problem is that cash is not free. Someone has to withdraw it. Someone has to transport it. Someone has to count it. Someone has to secure it. Someone has to reconcile it. And someone bears the risk of theft, loss, fraud or error.

Consequently, what should have been a simple ₦100,000 (NGN) transaction can become a chain of additional costs.

You may pay:

• A withdrawal or transaction charge.
• Transport costs to access cash.
• Banking or agent fees.
• Staff time spent collecting or depositing cash.
• Security costs.
• Reconciliation and administrative costs.
• The opportunity cost of time spent waiting in queues.

The money may not have changed in value, but the cost of accessing it has increased. That is buying money with money.

The Paradox of Financial Inclusion

There has been significant progress in digital financial inclusion across developing economies. The World Bank reports that digital payments among adults in developing economies increased from 35% in 2014 to 57% in 2021. Yet millions of adults continue to make or receive everyday payments in cash. (World Bank)

This creates an important distinction: Having a bank account is not the same as having a reliable banking system. A person may have a bank account, debit card and mobile banking application, but if the network is unavailable when payment is needed, the practical value of those tools is immediately reduced. This is particularly important for small businesses.

A trader cannot tell a supplier, “Please wait until the network comes back.”

A customer cannot always tell a transport operator, “The payment is pending.”

A supplier cannot always accept “I have initiated the transfer” as payment.

Commerce requires certainty. And when digital systems cannot consistently provide that certainty, people revert to cash.

The Cost Is Bigger Than the Transaction Fee

One of the biggest mistakes we make is measuring the cost of cash only by visible charges. Suppose a business needs ₦500,000 (NGN) in cash. The obvious question is: “How much did the bank charge me?” The better question is: “What was the total cost of obtaining and managing that cash?”

Consider:

Cost                            Possible Impact

Bank/agent charges    Direct financial cost

Transport                    Additional expense

Staff time                   Lost productive hours

Queuing                     Lost opportunity

Security                     Increased operational risk

Cash handling            Administrative burden

Errors                         Reconciliation and financial losses

Theft                          Potentially significant loss

Delayed payments     Supplier/customer disruption

The transaction fee might be only a few hundred naira (NGN). But the economic cost could be thousands of naira (NGN) or considerably more.

This is why an economy can appear to have inexpensive banking transactions while businesses and households are actually paying a substantial hidden cash tax.

Cash Creates a Productivity Problem

Cash does not merely create financial costs; it consumes time. Imagine a business owner spending two hours travelling to withdraw money, another hour waiting, and additional time transporting and reconciling the cash. Those three or four hours could have been spent:

• Meeting customers.
• Negotiating contracts.
• Managing employees.
• Developing the business.
• Finding new markets.
• Improving operations.

Therefore, unreliable financial infrastructure imposes a productivity penalty on society. The issue is not simply: “Can I transfer the money?” It is: “Can I move money reliably, securely, quickly and affordably?” That is the standard a modern economy should aspire to.

The SME Suffers the Most

Large corporations often have multiple banking relationships, treasury departments, alternative payment channels and sophisticated financial systems. Small businesses usually do not. The informal trader, small retailer, contractor, farmer, artisan and emerging entrepreneur are much more exposed to the weaknesses of a cash-driven system.

This is particularly significant because digital payments can do more than simply replace cash. They can create transaction records that help businesses demonstrate cash flow and potentially improve access to credit.

Recent World Bank research involving firms across 101 economies found that firms receiving electronic payments were significantly less likely to be credit constrained, particularly in environments where information and financial infrastructure are weak. (World Bank Blogs)

This means that moving away from cash can potentially create a virtuous cycle:

Digital payments → transaction records → greater financial visibility → better access to finance → business growth.

But We Must Not Blame the Consumer

It is tempting to ask: “Why don't people simply use digital payments?” The answer is more complicated. People use what works. If a merchant has experienced failed transfers, delayed confirmations, reversed transactions or network outages, cash becomes rational.

Interestingly, the World Bank's 2025 Global Findex data for Nigeria found that among surveyed respondents who used cash only for in-store merchant payments, 44.9% cited being accustomed to cash, while 21.3% said merchants only accepted cash and 12.6% cited lack of trust in card or phone payments. (Microdata World Bank)

So the transition to a digital economy cannot simply be achieved by telling people: “Stop using cash.” The digital alternative must first become more reliable, accessible, trusted and convenient than cash.

We Need to Move From Cashless Ambition to Reliable Digital Infrastructure

The objective should not be to eliminate cash overnight. Cash remains important, particularly where digital infrastructure is weak. The real objective should be to build an ecosystem where people choose digital payments because they work, rather than because they are being forced to use them.

That requires investment in:

1. Reliable Internet Infrastructure

Digital banking cannot function reliably without dependable connectivity.

2. Resilient Banking Platforms

Banks and FINTECH companies need systems capable of handling high transaction volumes with minimal downtime.

3. Interoperability

Customers should be able to move money easily between banks, FINTECH platforms and payment systems.

4. Consumer Confidence

When transactions fail, customers need rapid resolution and transparent communication.

5. Affordable Digital Transactions

Digital payments should not become so expensive that cash remains economically attractive.

6. Digital Literacy

People need to understand how to use digital financial services safely and effectively.

7. Merchant Adoption

Digital payment acceptance must extend beyond major businesses into markets, small shops, transport, agriculture and informal commerce.

The Bigger Economic Question

The real question is not whether cash is good or bad. Cash has legitimate uses. The bigger question is:

How much economic value is a country losing because money cannot move efficiently?

• When a supplier waits for payment because the network is down, production may stop.
• When a business cannot access working capital, employees may remain unpaid.
• When a farmer receives cash instead of a secure digital payment, financial records may remain invisible.
• When a customer spends hours trying to access money, productivity is lost.
• When businesses hold large amounts of cash because they do not trust digital channels, capital becomes less efficient.

These are not merely banking problems. They are economic development problems.

From Buying Money to Making Money Work

A mature financial system should make money move, not make people struggle to move money. The purpose of financial technology is ultimately not to make banking look modern. It is to reduce friction in economic activity. The World Bank's Global Findex 2025 emphasises the relationship between financial inclusion, digital connectivity and the ability of people to make payments, save, borrow and manage financial risks. (World Bank)

That is the transformation developing economies should pursue. We should move from an environment where Money requires money to move to one where Money moves efficiently so that people can create more money, value and opportunity.

Conclusion: The Cost of Friction

“Buying money with money” is ultimately a story about friction. Every unnecessary journey, queue, withdrawal fee, failed transaction, delayed transfer, security risk and manual reconciliation represents friction in the economy. Individually, these costs may appear insignificant. Collectively, they are enormous.

A developing economy cannot afford to spend its scarce resources merely moving money around. The ultimate goal should be an economy where financial infrastructure is sufficiently reliable that entrepreneurs can concentrate on what they do best: creating products, providing services, employing people, investing capital and generating wealth.

Because the real measure of a financial system is not simply how much money exists. It is how efficiently that money can work. When we spend money to access money, we are paying the price of financial friction. When we build systems that allow money to move efficiently, we release capital, time and human productivity for economic growth.

That is the journey from buying money with money to making money work for the economy.

'Segun-Martins Ogunyemi, FCA

...creating & adding values with ICE (Integrity, Contentment & Excellence)

The Danger of Supermarket Economies without Manufacturing

A nation that experiences an explosion of supermarkets, hypermarkets, and massive shopping malls without a corresponding rise in manufacturing is heading toward a dangerous economic imbalance. It creates a society that consumes heavily but produces very little - a recipe for long‑term hardship.

Supermarkets and malls are not the problem by themselves.

The real problem is what fills their shelves.

When 80–90% of the goods sold in these retail giants are imported, the nation faces:

• Too much import pressure
• Very low export activity
• A widening trade deficit
• A weakening currency
• A shrinking industrial base
• A rising unemployment rate

This imbalance becomes even worse when citizens develop an overblown appetite for imported goods - food, clothing, electronics, household items, even basic consumables. When a nation prefers foreign goods over local products, its economy slowly suffocates.

Why this is dangerous

1. Imports drain national wealth: Money leaves the country faster than it enters. The nation becomes a marketplace for other countries’ factories.
2. Local industries collapse: Domestic manufacturers cannot compete with cheap imports. Factories close. Jobs disappear. Skills vanish.
3. Exports remain low: Without strong manufacturing, the nation has nothing significant to sell to the world. No exports means no foreign exchange earnings.
4. Currency becomes unstable: High import demand puts pressure on the national currency. Prices rise. Inflation increases. Hardship deepens.
5. Retail expansion becomes deceptive: Malls give the illusion of prosperity, but they are only distribution centres for foreign economies.

The result? A fragile economy.

An economy built on consumption rather than production is like a house built on sand. It looks impressive from the outside, but it cannot withstand pressure. When global supply chains shake, the nation collapses.

The cultural impact is equally severe

When everything we buy is imported, people begin to believe that foreign is better and local is inferior. This mindset destroys national pride, weakens cultural identity, and erodes heritage.

A nation that does not produce cannot preserve its heritage.

A nation that only consumes cannot secure its future.

This is why the influx of supermarkets and malls - without manufacturing - is not development. It is economic dependency disguised as progress.

'Segun-Martins Ogunyemi, FCA

...creating & adding values with ICE (Integrity, Contentment & Excellence)

The Market of Hope

Hope, as the Oxford Dictionary defines it, is a feeling of expectation and desire for a particular thing to happen. The archaic definition goes even deeper - a feeling of trust. Hope is not just an emotion; it is a currency. It is something people invest in, something they cling to, something they buy into when everything else around them seems to be failing.

Michelle Obama captures the power of hope beautifully when she writes:

“You may not always have a comfortable life and you will not always be able to solve all of the world’s problems at once, but don’t ever underestimate the importance you can have because history has shown us that courage can be contagious and hope can take on a life of its own.”  

Her words remind us that hope is not passive. It is active, contagious, and capable of shaping destinies.

In Nigeria today, hope has become a national commodity - something leaders sell and citizens desperately buy. The current Federal Government of Nigeria came into power on the mantra of “Renewed Hope.” This slogan was not accidental; it was strategic. It tapped into the deep longing of millions of Nigerians who have endured decades of economic decline, insecurity, unemployment, and hardship.

It is therefore safe to say that the political class presented Nigerians with a market of hope - a marketplace where promises were displayed like goods on a shelf, and citizens, weary from years of disappointment, reached out eagerly to purchase them. The President Bola Ahmed Tinubu (BAT) administration understood that Nigerians were standing at a crossroads of desperation and expectation. The people were ready to buy hope because the reality they were living in was already unbearable.

In other words, hope became the product, and the citizens became the customers.

But hope is not enough on its own.

Hope must translate into policy.

Policy must translate into action.

Action must translate into relief.

Relief must translate into progress.

When hope is sold without delivery, it becomes deception.

When hope is promised without structural change, it becomes noise.

When hope is offered without economic revival, it becomes frustration.

Nigeria today stands in a delicate place. The air is filled with expectations - stern, heavy, urgent expectations. People are watching. People are waiting. People are measuring every policy, every decision, every outcome against the promise of renewed hope.

The question now is simple:

Will this hope become reality, or will it become another chapter in the long history of unfulfilled promises?

Hope can take on a life of its own - but only when leaders breathe life into it through integrity, competence, and courage.

'Segun-Martins Ogunyemi, FCA

...creating & adding values with ICE (Integrity, Contentment & Excellence)

Timing: Crucial to Business Success

There is no one-size-fits-all formula for ensuring a startup's survival, but it is critical to understand which aspects are most significant in predicting a company's success. I saw a video on TED where an entrepreneur named Bill Gross gave a fantastic presentation about why firms survive, which he presented as the outcomes of his research.

According to him, the most important aspect in forecasting start-up success is timing; it is critical that a company enters the market at the correct time. Team and Execution is the second most critical component, because a brilliant business idea is worthless if it isn't carried out by the right people. The next consideration is the originality and uniqueness of the business idea – while having a brilliant company idea is advantageous, it is not the only consideration. Because a business model can be built later in the start-up phase if necessary, it is the fourth most influential aspect. Bill says that it is not difficult for a business to secure finance after it has gotten enough traction, hence funding, also known as capital, is the least crucial aspect.

We typically devote a significant amount of time to worrying about capital (i.e. money), but the truth is that if you have the right timing, team, idea, and business model, you can simply obtain funding.

The bottom line is that if you want your startup or business idea to succeed, you must do the following. When your idea takes off, look for perfect timing, a wonderful team, and everything else will fall into place.

Highlights of Nigeria's 2022 Budget

Highlights

The 2022 budget has a deficit of about N6.25tn, approximately 3.39% of GDP. This is slightly above the 3% ceiling set by the Fiscal responsibility Act 2007 (FRA). However, the president alluded that the expenditure level was necessary to assist with overcoming current security challenges and accelerate post-recession growth. The President insists that Nigeria only has a revenue challenge and not a debt sustainability problem.

The deficit is expected to be financed by new borrowings, privatisation proceeds and drawdown on loans secured for specific projects.

Non-debt recurrent expenditure of N6.83tn is the largest expense item, with 60% relating to personnel costs at N4.11tn.

The capital expenditure budget of N4.89tn represents an increase of 18% compared to 2021, and about 30% of total 2022 expenditure.

Debt service expenditure is estimated at N3.61tn, representing about 35.6% of the projected revenue for the year.

The President highlighted that the loans would be directed at financing critical development projects and programmes, and highlighted plans to grow the revenue-to-GDP ratio from currently about 8%, to 15% by 2025.

The President has indicated intentions to strengthen frameworks for concessions and Public-Private Partnerships (PPP). He also made reference to exploring innovative approaches for sustainably raising infrastructure financing, such as implementing the Sovereign Green Bond Programme and debt-for-climate swap mechanisms.

Revenue mobilisation

The President underscored 4 strategies to improve revenues, including:

enhancing tax and excise revenues;

reviewing the effectiveness of policies for tax waivers and concessions;

increasing customs revenue through technology; and

preserving the revenue derived from the oil and gas sector.

Petroleum Industry Act

The President commended the National Assembly for the passage of the Petroleum Industry Act (PIA), highlighting his hopes of attracting investments in the sector.

2021 Finance Bill

The 2021 Finance Bill would subsequently be forwarded to the National Assembly after completion of consultations. The Bill is intended to support the realisation of the 2022 fiscal projections. Below are some of the changes.

A. Capital Gains Tax Act (CGTA)

1.     Section 30 of CGTA - Capital gains from the disposal of shares and stocks in Nigerian companies, for aggregate proceeds amounting to N100 million or more in any 12 consecutive periods is subject to CGT at 10%, provided that the proceed is not reinvested within 12 months.

B. Companies Income Tax Act (CITA)

2.     Profits of companies engaged in educational activities are no longer exempt from tax under Section 23(1)(c)of CITA 

3.     The profits of companies from the exports of goods produced in Upstream, Midstream and Downstream Petroleum operations are no longer exempt from tax under section 23(1) (q) of CITA;

4.     Section 30 of CITA is amended to empower FIRS to assess a non-resident company liable under the Significant Economic Presence (SEP) rule to income tax on a percentage of the profits it earns from providing digital services to Nigerian customers.

5.     Section 31 of CITA now provides that Capital allowance on qualifying capital expenditure incurred in generating exempt income is no longer deductible from the assessable profit of non-exempt income under CITA, provided that joint QCE shall be pro-rated where the exempt income constitutes more than 20% of the total income of the company.

6. Section 31(1C) - QCE incurred by small companies shall be regarded to have been fully utilised.

7. Any company that claims the reduced 0 25% rate under the minimum tax rule in section 33 of CITA but filed a late tax return under section 55, will be liable to a penalty which shall be an equivalent to the benefits or reduction claimed;

8. Further to the amendment to Section 33 of CITA by Finance Act 2020, granting a reduced minimum tax rate from 0.5% to 0.25% to companies for two years, taxpayers may now elect to apply the reduced rate in any two accounting periods falling within 1 January 2019 to 31 December 2020 or 1 January 2020 to 31 December 2021.

9.    Taxpayers now have absolute discretion, under section 77 of CITA, to pay their taxes in instalment, provided that the final instalment shall be paid on or before the due date. 

10.     Section 78 of CITA is also amended to provide that WHT deducted from payments to a unit trust shall be the final tax on such income.

C. Customs Excise Tariff Etc. Consolidation Act.

11.     Section 21 of the CETCA is amended to introduce a N10 tax on a litre of non-alcoholic, carbonated and sweetened drinks.

D. Federal Inland Revenue Service (Establishment) Act (FIRSEA)

12.     Section 25 of FIRSEA now makes it a punishable offence for any person who fails to grant FIRS access to its systems to deploy its automated tax administration technology after a 30 days’ notice or such extension granted by the Service.

13.  Every bank that fails to prepare and submit returns or submit incorrect returns as required by section 28 of FIRSEA shall now be liable to a penalty of N1m for each return or information not provided or incorrect returns or information provided.

14. Section 68 of FIRSEA – the supremacy of the extant tax laws in the first schedule of the FIRSEA over any other law; and the role of the FIRS over any other agency in respect of tax administration is emphasised under the law and enforceable;   

It is also an offence, punishable by a fine of N10m, imprisonment or both, for any agency of government (other than FIRS) or any of their staff or consultant, to demand books or returns for the purposes of tax, or carry out the function of assessment, collection or enforcement of tax, or pay any portion of tax revenue to any person or into any account, other than the relevant accounts designated by the constitution or relevant laws of the NASS. 

15.    Section 68(5) now mandates other Agencies of the Federal Government to report cases requiring tax investigation, enforcement or compliance, encountered in the course of performing their function, to the Service for necessary action.

16.    Section 50 of FIRSEA places a strict legal obligation on any person employed by the FIRS or otherwise who has access to taxpayer information to keep such information confidential. Leakages of taxpayer information by such a person may lead to criminal prosecution.

E. Tertiary Education Trust Fund Act (TETFA)

17.  The rate of tax under Section 1(2) of the Tertiary Education Trust Fund Act has been increased from 2% of assessable profits to 2.5% of the assessable profit.

F. National Agency for Science and Engineering Infrastructure (NASENI)

18.  Section 20 of the NASENI Act imposes a tax of 0.25% of profits before tax of companies engaged in the business of banking, mobile telecommunication, ICT, aviation, maritime and oil and gas, with a turnover of N100 million and above.

G. Nigeria Police Trust Fund (Establishment) Act

19.  Section 4 of the PTFEA empowers the FIRS to assess, collect, account and enforce the payment of a levy of 0.005% of the net profit of companies operating a business in Nigeria.

H. Value Added Tax Act (VATA)

20.  Section 15 - Companies engaged in Upstream Petroleum operations will continue to have obligation to withhold VAT, even when they have not commenced commercial operations or have a turnover of less than N25 million.

Minimum Tax vs Finance Act 2020

Overview

Income tax is payable on taxable income or profits generated by companies from their activities. There are situations where a company’s tax computation results in no tax liability. In such a situation, the company will be liable to tax based on minimum tax. Section 33 (1) of Companies Income Act, Cap C21, LFN 2004 states that “Notwithstanding any other provisions in this Act where in any year of assessment, the ascertainment of total assessable profits from all sources of a company results in a loss, or where a company's ascertained total profit results in no tax payable or tax payable which is less than the minimum tax, there shall be levied and paid by the company the minimum tax as prescribed by subsection (2) of this section.” By implication, Minimum tax applies to all companies in Nigeria, especially the small and medium enterprises (SMEs), who in any year of assessment have no taxable profit or whose tax payable is lower than minimum tax computed.

There have been many misconceptions and controversies trailing the introduction of the minimum tax in Nigeria in the recent past. Taxpayers and authorities have differed on the concept and application in practice. These include the use of various and different parameters applied in the determination of minimum tax payable by companies which include turnover of the company, gross profit, paid-up capital and net assets of the company. This approach was cumbersome and in most cases, time-consuming. Arguments stressed that this tax is paid from the equity (paid-up capital) and net assets of the company even when the company is running at a loss; the exemption granted to companies with imported equity of 25% and above did not allow for a level playground when compared with companies with locally sourced equity and more. 

Before the amendments introduced by Finance Acts 2019 and 2020, subsection 2 of Section 33 of CITA Cap C21, LFN 2004 defined the basis for the computation of minimum tax in Nigeria as:

(2) For the purposes of subsection (1) of this section the minimum tax to be levied and paid shall- (a) if the turnover of the company is N500,000 or below and the company has been in   business for at least four calendar years be‐

(i)   0.5 per cent of gross profit; or      

(ii)   0.5 per cent of net assets; or      

(iii)   0.25 per cent of paid‐up capital; or      

(iv)   0.25 per cent of the turnover of the company for the year, whichever is higher; or  

(b)   if the turnover is higher than N500,000, be whatever is payable in paragraph (a) of this subsection plus such additional tax on the amount by which the turn‐over is more than N500,000 at a rate which shall be 50 per cent of the rate used in paragraph (a) (iv) of this subsection. 

The federal government in light of these controversies have amended the minimum tax regulation in the Finance Acts 2019 and 2020. Section 14 of the Finance Act 2019 amended Section 33 of CITA to introduce a new basis for computing minimum tax, moving away from a combination of equity, net assets and revenue-based approach to a complete revenue based-model. In the amendment, the minimum tax is to be computed at a flat rate of 0.5% of gross turnover less franked investment income. The amendment also deleted the exemptions granted to companies with imported equity of 25% and above and introduced a minimum tax exemption for small companies with a gross turnover of less than N25,000,000.

Section 13 of Finance Act 2020 introduced a further amendment to Section 33 of CIT by providing a 50% reduction in minimum tax rate from 0.5% of gross turnover less franked investment income to 0.25%. This amendment is effective for the Years of Assessment (YOA) commencing from 1 January 2020 to 31 December 2021.

Professional View

Companies that have no taxable profits for the 2020 year of assessment or whose tax on profits is below the minimum tax are expected to compute their minimum tax based on the amendments of the Finance Act 2020. This implies that companies that have filed their returns for the 2020 assessment year based on the 2019 financial accounting year may be expected to file an amended tax return where their minimum tax for this period is based on 0.5% of turnover. Also, companies that are in their first four calendar years of operation as well as companies engaged in agriculture business, or small companies are exempt from minimum tax. This is equally applicable to non-life insurance companies at 0.25% of the gross premium and to life insurance companies at 0.25% of gross income. Also exempted from the payment of minimum tax are small companies with annual turnover of below NGN25 million (twenty-five million naira),

However, it is pertinent to note that foreign equity is no more a basis for exemption. Businesses with at least 25% foreign equity and indigenous companies have the same exposure to Minimum Tax.

Note that dormant companies are not exonerated from payment of minimum tax in Nigeria. Usually, it is assumed that dormant companies are exempted from the payment of taxes because they are not yet involved in any money-making activity. However, this assumption is not supported by any provision in the tax laws and the tax authorities are making every possible effort to ensure that every registered company in Nigeria is made to comply with tax legislation. It is highly recommended that owners of dormant companies in Nigeria should seek the assistance of registered tax practitioners to ascertain their tax exposures. This is because a company is only exempted from paying taxes in Nigeria in the event of cessation of business.

Authorised & Issued Share Capital: Explained

 A share is the interest of a shareholder in a company, measured by a sum of money.

What Is Share Capital?

Share capital is the most common way of determining the ownership of a company. In relation to a company limited by share capital, the share capital will be issued to the shareholders when the company is first set up. However, further share capital can be issued at a later date if necessary.

What Is Authorised Share Capital?

Authorised share capital can be defined as the largest amount of share capital that a company can issue. This amount will be agreed on when the company is being incorporated. Again, this amount can be increased at a later date if the shareholders wish.

The authorised share capital does not all have to be paid. It is the maximum value of the share capital and in some cases much of this value may remain unissued. The authorised share capital does not impose an obligation on the shareholder to pay on the winding up of the company, hence why some see authorised share capital as something of limited importance.  

The authorised share capital will tell you the maximum amount of share capital that the company can have and will set out the nominal value of each share.

The articles of association of the company are important as they outline how much authorised share capital the company can potentially issue if changes need to be made down the line. It is common for companies to increase their share capital and if this change is required there are certain documents which will need to be filled out and submitted to the Corporate Affairs Commission (CAC).

It should also be noted that the authorised share capital can be divided into different share classes such as preferable or redeemable, each of which are subject to different rights.

What Is Issued Share Capital?

The Dictionary of Company Law describes issued share capital as “the nominal value of the shares actually issued.”

Issued share capital is the amount of capital that is actually paid by the shareholders. This will usually be a smaller amount than the authorised share capital and will be taken up by the shareholders of the company for money or another form of consideration.

If a company is winding up, the issued share capital will be the amount of money that the shareholders will be liable for; therefore, the issued share capital will equal the amount of money that the shareholders will owe if all or part of the shares are unpaid.

If the issued share capital has not all been paid up (paid for) when it is issued, i.e. if the shares are partly paid shares, each shareholder will be liable for the amount owed on any share that they hold if the company goes into liquidation.

The Difference between Authorised Share Capital and Issued and Paid up Share Capital

As explained above, there are different terms that describe the different types of capital that a company has. The term ‘authorised share capital’ refers to a company’s capital in the broadest terms possible. It refers to every share the company would be able to issue if it wanted to, or if it became necessary to. The authorised share capital is set by the company’s shareholders and it can only be increased with their approval.

The ‘issued capital’ and ‘paid-up capital’ is the proportion of the authorised share capital that has actually been raised by issuing shares to shareholders, and for which full payment of the shares has been made by the shareholders to the company. When a company decides to raise funds with capital contribution, it can convert as much of its authorised share capital as it would like into issued share capital by selling shares. Those who receive shares pay money to the company and then become shareholders.

The authorised share capital is therefore the maximum amount of funding that can be raised by issuing company shares. The issued and paid up share capital then refers to the amount of investment shareholders have made in the company.

Accounting for Authorised Share Capital and Issued and Paid up Share Capital

The authorised share capital does not have any monetary impact on the company until it’s issued. Therefore, it does not need to be recorded in the company’s bookkeeping. However, the issued and paid up share capital needs to be accounted for in the company’s books. This is because the selling of shares has had an immediate monetary impact on the company finances: the company has received money.

The authorised share capital of a company is only reported on the Statement of Financial Position (i.e Balance Sheet) for information purposes. It isn’t considered in the totalling of the Statement of Financial Position. The issued and paid up share capital however is accounted for on the company’s Statement of Financial Position and is considered in its totalling.

An Example of Authorised Share Capital

Imagine that you have a company which has an authorised share capital of 500,000 shares, all valued at N0.50 each. The total amount of authorised share capital for the start-up is therefore N250,000. However, the start-up’s issued capital may only be 50,000 shares, and so they will only have N25,000 in capital. It may seem strange for them not to have maxed their authorised share capital out, as they could have an additional N225,000 in capital. But, it’s actually sensible not to do this.

By keeping the shares in the company treasury, the company retains the controlling interest in the business. If the company was to sell all of these shares, then the shareholders would have more influence over the decisions the company makes.

Moreover, if this company was a start-up for example, by keeping the authorised share capital high while the actual issued capital remains low may allow for additional financing rounds from investors. Once again, shareholder approval may not be given if the company has already split stock. If however, the company has held a lot of its stock back, it won’t need to get shareholder approval to go for further funding. If it was then unsuccessful, it still has additional authorised capital it could potentially issue in the future to raise money.

'Segun-Martins Ogunyemi, ACA, ACTI | Principal Consultant, Pro Logic Ideas Consulting | URL: prologicideas.com