FOREX: Are banks closing gaps created by BDCs ban?

 On Tuesday, July 27, 2021, the Central Bank of Nigeria (CBN) banned the sales of foreign exchange (FOREX) to the Bureau de Change operators (BDCs) in the country. The apex bank said it took the decision because the BDCs have become a conduit for illicit FOREX flows and graft, adding that it would also no longer process applications for BDC licences in the country.

To this effect, therefore, henceforth, it said, “banks are mandated to immediately and transparently” sell FOREX to customers who present the required documents. “All banks are to immediately create dedicated tellers for the same purpose,” said the CBN Governor Godwin Emefiele. Therefore, according to Emefiele, weekly sales of FOREX by the CBN will henceforth go directly to commercial banks which have been mandated to sell to Nigerians.

Customers not attended to by the banks are to report to the CBN through a toll free number: 0700 22 55 226 or email: cbd@cbn.gov.ng.“This measure is not punitive on anyone, but it is to ensure that the CBN is able to carry out its legitimate mandate of serving all Nigerians,” Emefiele said.

In summary, the apex bank justified its action on BDCs on the following grounds:

• Avalanche of rent-seeking operators who are only interested in widen margins and profits from the foreign exchange market regardless of prevailing rates in the market.
• The gradual dollarisation of the Nigerian economy, with tandem adverse consequences on the conduct of monetary policies and subtle conversion of the cashless policy initiative of the CBN.
• Prevailing ownership of several BDCs by the promoters in order to illegally procure foreign exchange multiple times from the apex bank.
•  Numerous and repeated financing of unauthorised transactions with foreign exchange procured from the CBN.
• Several international organisations, embassies, and institutions operating in Nigeria patronise BDCs through illegal forex dealers to fund their local operations.

According to the CBN, these actions have placed a significant financial burden on the apex bank, and hence necessitated the halt of FOREX sales to the BDCs and suspension of new license issuances.

Surprisingly, Naira plunged to N570 against the dollar, immediately after the CBN’s new directive, from about N520 it sold two weeks before at the parallel market. The currency has fluctuated at the official market with an average of N411.

The fall at the black market followed the stoppage of FOREX sales to registered money changers who the CBN has accused of fraud and round-tripping, and consequently, fuelled price instability as many businesses rely on the black market for dollar sales, even though the CBN has said banks have been asked to meet all legitimate requests.

Addressing journalists in Abuja on the issue, two months later, Emefiele said CBN took too long to move against the BDCs. According to him, “The only exchange rate market is the Investors and Exporters window, which is the market that we expect everybody that wants to buy or sell dollars, should use.”

“I am sorry to say: I do not recognise any other market. We have asked ourselves at the CBN, why did we have to wait so long? CBN remained the only central bank in the world to dip its hands into our commonwealth mad pack dollars to BDCs all in an effort to stabilise the exchange rate.”

“For me, it’s a wrong decision. It has stopped for good. The Bank of England or U.S. Federal Reserves do not sell dollars to BDCs even though they exist.”

Already, commercial banks like Keystone Bank, Fidelity Bank and Zenith Bank, have since complied with the directive to set up dedicated teller points for the sale of FOREX and have been selling to Nigerians. The banks were selling dollars at an official rate of N412, with a maximum of 4,000 dollars for personal travels and 5,000 dollars for business travels.

As at Monday, November 8, 2021, the exchange rate between the Naira and the US dollar closed at N414.55/$1, at the Investors and Exporters window, where FOREX is traded officially. Naira depreciated against the US dollar to close at N414.55/$1, representing a 0.06% decline compared to N414.3/$1 recorded at the close of trading activities on Friday,  November 5, 2021.

On the other hand, Naira remained flat against the US dollar at the parallel market on Monday to close at N570/$1, the same as recorded at the close of trading activities on Wednesday, 3rd November 2021. The exchange rate has remained flat at N570/$1 since 1st November 2021. This is according to information obtained by Nairametrics from BDC operators in Lagos.

Nigeria’s foreign reserve continued on a decline on Friday, 5th November 2021 with a 0.06% drop to close at $41.7 billion. This represents a $24.34 million decline compared to $41.73 billion recorded as of Thursday, 4th November 2021.

Four months into the ban of BDCs, the Naira has yet to gain strength. On Friday, November 19, it depreciated against the dollar at the parallel section of the foreign exchange market.

Bureaux De Change (BDC) operators in Lagos said that the Naira exchanged for N545 per dollar at the street market, representing N15 or 2.8 per cent depreciation when compared to the N530 it traded last week.

Also ,at the close of the market on Friday, November 19, figures from the FMDQ OTC Securities Exchange, a platform that oversees official foreign-exchange trading in Nigeria, also showed that the local currency fell at the official market by 0.2 per cent to N414.40/$1.

Against this backdrop, the question that has been on the lips of many concerned Nigerians is: are banks adequately filling the gaps created by the absence of the BDCs? The value of Naira has continued to depreciate against other major currencies, raising questions as to the capability of the banks to handle the situation. 

Some Nigerians have expressed worries that the CBN move may further devalue the Naira but that is even as experts have submitted that the policy was necessary to curtail the illegal activities at the BDCs.

An economist, Mr Tope Fasua, commended the CBN for the decision to restrict FOREX sale to commercial banks only. Fasua, who is the Chief Executive Officer of Global Analytics Consulting Ltd. said though the measure was a shock to the system, it was a necessary step to sanitise the forex market.

According to him, the purpose of BDCs has been defeated with most of them falling short of their mandates. “The CBN has done the right thing, even though it is a shock to the system. We have about 7,000 BDCs in Nigeria, which is a world record in itself. “All of them are meant to sell FOREX to travellers, but they do not do that,” he said.

Dr Boniface Chizea, a top-notch economic and business development consultant, who shared similar sentiment with Fasua said “But you know it can never be the same. There are no protocols in dealing with BDC operators whilst despite all attempts dealing with banks could never be as seamless. The BDCs also made themselves into veritable vehicles for money laundering; the size of which can never be approximated by the banks.”

In an email exchange, the Managing Director, Chief Economist, Africa and the Middle East, Global Research of the Standard Chartered Bank, Razia Khan, who spoke with ThisDay, said the financial authorities must ensure that the new policy does not fuel the growth of more parallel markets in the country.

She however warned that “Unless the supply of FX improves meaningfully, this is likely to remain a risk. However, a meaningful improvement of FX supply to the I&E window would be the best hope of halting parallel market trading for larger transactions,” adding however that, “Much will depend on the extent to which the authorities are also willing to tolerate price discovery on the I&E window.”

But a past President of the Chattered Institute of Bankers of Nigeria (CIBN), Mr Okechukwu Unegbu, advised the apex bank to reconsider what he described as “blanket ban” on BDCs.

Unegbu said that the ban would create some challenges in the market as commercial banks might not be able to meet the FOREX demands of importers. “Not all the BDCs are bad, but as it is now CBN has banned both the good and the bad.”

“This punitive measure by the CBN can negatively affect the FOREX trading market. Most businessmen, when they cannot access FOREX from commercial banks, rush to the BDCs. “Banks are not perfect, they also bend the rule sometimes, but that of the BDCs became so obvious due to their large numbers,” he said.

“BDCs are licensed to provide retail FX services, including buying from the public and also selling to end-users for allowable transactions namely PTA, BTA, payment of medical and school fees,” he explained. He said that, while the CBN had stopped dollar sale to BDCs, it has not cancelled their operating licences, or banned them from providing FOREX services to members of the public.

He called on Association of Bureaux de Change Operators of Nigeria ( ABCON) members to see the CBN pronouncement as a wakeup call and an opportunity to widen their customer base and deepen their business. In the midst of the controversy, however, Nigerians are concerned about policies that can impact positively on the economy by strengthening the Naira, reducing inflation and generating employment. Many are, therefore, waiting to see how this new policy would positively impact the nation’s economy and their personal incomes and earnings.

Emefiele said that the Bank of England or U.S. Federal Reserves do not sell dollars to BDCs even though they exist. These countries he cited are advanced economies which are completely different from Nigeria. They BDCs in these countries operate within the law because on like in Nigeria , they have efficient ways of selling FOREX. Besides , they have diverse sources of FOREX inflows which make it easier for the BDCs in the countries cited by the CBN governor. Nigeria does not have a FOREX market. CBN is the only source of supply in the country.

Meanwhile, there seems to be a consensus among economists on the need for the regulators to create an additional avenue for the sale of FOREX.

The fear is that unless the CBN looks beyond banks for the sale of FOREX to the end-users, undue pressure may be brought to bear on the local currency, which may depreciate further and eventually make the new policy backfire.

Industry watchers said there is a need to learn from the past when officials of commercial banks made a kill from FOREX sales by giving all manner of excuses to disqualify customers from forex sale while some bank officials indulge in FOREX round tripping.

This was the fear raised by the Group Managing Director, Cowrie Assets Management Limited, Mr. Johnson Chukwu  who  told ThisDay  that “The concern is that the new policy may bring about more problems than the CBN intends to solve. The fact is this. You have a commodity that is in short supply. You have further constricted the supply channels, so it follows that unless you expand the supply channels you are going to have an increase in the arbitrage, so it’s expected.”

He said “There is need for administrative control, but the problem is that the moment you stop things administratively, you now create a certain black-market premium. People are going to be inconvenient. “The CBN says go to the bank. I agree with the CBN Governor, but you and I know that walking into a bank and coming out in five minutes is something else. It is easier to put 60 flies in a matchbox than to go into a bank and come out in five minutes.”

Bismarck Jemide Rewane, Managing Director/CEO of Financial Derivatives Co Ltd is not unaware of the challenges of transacting business in Nigerian banks.  He was reportedly said to have called for close monitoring. 

 He was quoted  as have said “So, anything that is cumbersome, that is inconvenient will drag people away further from the system. So, people will suffer. The ultimate solution, which I will like to recommend, is that the CBN should encourage everyone to go to the bank but it should sell to Bureau de Change at the parallel market rate by five per cent, in other words, if the parallel market is N500, you can sell to the bureau de change at N490. The N10 margin is way lower than the N100 margin.”

He however warned that the efforts of the apex bank to instil discipline in the FOREX market will be counterproductive unless a market solution is put in place.

He insisted that “Nothing is cast in stone. The truth is that administrative solution has its limits. It will be abused one way or the other, so the best thing to do is to have a market solution and they can work together.”

Before filling in this story, efforts were made to get the opinions  of the CBN and banks but there was no response from them.