The 137th monetary policy meeting which was held on 27th July 2021 concluded with the Central Bank of Nigeria taking an aggressive stance to discontinue the supply of FX to Bureau De Change operators (BDCs) to clampdown on what Godwin Emefiele (CBN Governor) termed illegal activities being perpetrated by BDCs when foreign exchange is supplied to them.
Monetary meetings are held between the CBN and other key players in the banking sector of Nigeria. This hard decision started a “war” between the CBN, Bureau De Chane Operators, and the Forex itself. Only in Nigeria does Central Bank sells forex to a third party like the BDC and the deposit banks at the same rate, and the banks are forced to sell at CBN approved rates and the BDCs sell at their concocted rates. This gave rise to what is called Black Market and the ‘black market’ rate. Unbelievable! Even CBN recognizes the ‘black market’ rates.
According to the CBN, there are about 5,500 licensed BDC operators in Nigeria. This is about the same number of total branches on commercial bank branches in Nigeria. The CBN advertently operates two FX banking systems in Nigeria. One is the sheep the other is the dragon.
A total of $5.7 billion is allocated to the BDC annually. Each of the 5,500 BDC operators receives $20,000 per week amounting to about $110m per week. The FX are sold (not allocated because they pay fees for it) to the BDC operators. All in all, as of today, it would have amounted to N3,192,000,000,000 (N3,1tr) per annum. No economy would survive such an uncontrolled volume of commerce.
It is important to note that the origin of BDC could be traced to the period Alhaji Abdulkarim Ahmed was the governor of the Central Bank of Nigeria. Hence, the legal backing they enjoy from the CBN. There are several sources of FX in Nigeria. They include the Central Bank of Nigeria (CBN), the Investor and Exporter (I&E) FX window, commercial banks, and Bureau De Change operators (BDC). The CBN mostly gets foreign currency from our crude oil exports, while exporters and investors get FX from business dealings with foreign counterparts. The commercial banks mainly acquire theirs from domiciliary account deposits, and they also buy foreign currencies from the CBN.
But the BDCs have three sources. The first is through limited forex sales allocation from the CBN. Second is supply from local businesses with revenues in foreign currency and finally from recipients of remittances who get it from family and friends in the diaspora. The licensed BDCs and their street traders are the major suppliers of foreign currencies to individuals and small businesses. The long processes, complicated forms, and poor service quality from the commercial banks created huge opportunities for the BDCs in Nigeria.
REASONS FOR THE BAN
The CBN governor outlined that the main angst with the BDC operators was that the BDCs continued to create artificial FX scarcity in a bid to seek “abnormal” profits thus introducing risks to the Nigerian financial system.
He further noted several behaviors which were unhelpful to CBN’s price stability objectives such as rent-seeking BDC operators only interested in large margins, dollarization of the Nigerian economy, subversion of the cashless policy, common ownership of several BDC by the same owners to obtain multiple FX, and ‘regrettably’ international organization and embassy patronage of illegal FX dealers.
IMPLICATIONS OF THE BAN ON RETAIL FX TRADE
The new policy is received with mixed reactions with different degrees of concern regarding the likely impact of this new policy on the Nigerian economy.
The immediate implication would be the instant reduction in the number of retail outlets for the supply of dollars coupled with more logistical issues which are likely to create a semblance of scarcity unless the banks can automate the way FX requests are handled. Specifically, the Governor mentioned that there are about 5,500 BDCs, this is in addition to the various bank branches all supplying FX to Nigerians.
Therefore, simply eliminating BDCs automatically puts more pressure on existing bank branches to meet the uptick in footfall. The move is the right one and was long overdue, the tardiness may expose huge gaps that could create unintended consequences. This should have happened years ago.
Nevertheless, Nigerian banks have a branch network to facilitate retail FX sales and with the advent of mobile technology. Suffice to say that the usefulness of BDCs to the economy is immaterial. In other words, the BDCs are providing a service that banks can easily subsume. Therefore, re-routing transactions to bank branches instead of the BDCs should not cause any long-term ripples effects, except with two Caveats:
The first caveat is timing. This is the beginning of the summer holidays when covid-related travel restrictions have been eased so we expect an increase in demand by retail users for FX which the banks now need to deal with.
The second caveat is perception. There is already an FX squeeze where many consumers have been in queues waiting for FX supply and so the market sentiment is skewed against the Naira.
FRUSTRATION ON CUSTOMERS
Bank branches therefore will experience a sharp rise in demand from customers as orders previously placed with BDCs now get re- routed to Bank tellers/ FX desks who will need to be adequately staffed to cope with the increased retail administration required. Therefore, clients should expect to experience some inconvenience as they place FX orders and go to pick them up from their branch.
FORCED DEPRECIATION OF NAIRA
CBN says it is not ready to devalue the Naira, but the Naira can self-devalue by force or push. Any perceived reduction of supply may lead to the deprecation of the naira, as speculators may take this as a sign that FX inflow challenges are worsening. I think whatever challenges faced by the BDC in terms of speculation and graft would be moved to the commercial banks rendering the policy ineffective. What we need is an increased FX supply, not a reduction.
Ultimately, whilst it seems a noble idea to centralize requests and sales of FX via banks, if the operational aspects of this initiative are abused, customers may resort to black markets to fulfill their needs thereby dissolving the intended benefits of the ban.
THE BIG QUESTION
Where Will Importers Get Their Dollars From? In other words, I suspect that supply constraints will continue to drive depreciation despite the change of distribution channel from BDCs to banks.
There is a risk that the impact of the announcement will be exaggerated and if market participants perceive this as a negative for supply, it could induce panic and drive rates up in the immediate term. Ideally, the CBN’s announcement to re-direct FX supply to banks rather than BDCs should have been preceded by CBN increasing supply to banks to bolster confidence and therefore, dampen the panic effect of the announcement.
Methinks the elimination of the BDCs should NOT be a major cause for alarm if the CBN and banks can get their acts together to ensure this announcement does not create administrative bottlenecks or cause panic buying. Albeit, that the elimination of BDCs may not be the silver bullet to halt the ongoing decline of the Naira which is partly attributable to ongoing FX supply issues in the overall economy.
OPTIONS THE CBN SHOULD CONSIDER
The CBN will need to move fast to remove administrative bottlenecks, as the ban is posed to create supply-chain challenges that may aggravate the FX crises. Interestingly, CBN in collaboration with Nigerian banks had recently shown capabilities of operational innovation for new policies. An example is the recent Naira4Dollar incentive which had a huge seamless implementation.
Perhaps, this is an area where FinTech solutions on retail FX orders and settlement delivery will come in handy as the banks will need to automate retail FX since they will have to deal with footfall uptick, ensure fulfillment and smooth out bottlenecks; especially, now that the CBN is mandating they implement that Automation. Furthermore, these options should be considered:
INCREASE DAILY LIMIT OF FX. CBN should as a matter of urgency, review the present maximum FX transaction of an average customer which is pegged at $100 in commercial banks. This should be a minimum of $1000. Nigeria is trading and importing country making the demand for FX very high. So long the $100 per day benchmark still subsists, good or bad, patronage to BDC shall remain and the customer will always buy at any rate because the FX must be changed to naira to meet their needs.
- FX AT THE BANKS. It is foolish to kill a snake by first hitting the tail. The BDC is the tail and dangerous people in the FX system are the head. Hit the tail and the head will strike. This is exactly what has happened in the last weeks of the ban. The dollar moved from N420/$1 to N560/$1 and Rand moved from N280/R1 to N370/R1. I just wonder how a Central Bank can be so careless in handling such a huge aspect of an economy as huge as Nigeria.
Onitsha Main Market alone controls the trade of over N1tr daily and part of this trade is in FX. The same with Aspanda Lagos, Alaba International Market Lagos, Ariaria Market Aba, Mandilas Lagos, Wuse Market Abuja etc. It is impossible, with the way the Banks operate, for the banks to meet the FX needs of these markets Therefore, before banning the BDC, the banks should have ensured it has simplified access to FX in the banks and make the FX massively available. It should be accessed the way naira is accessed over the counter.
What happens to the $110m weekly sales to the BDC? This same amount can be routed through the banks, but can it be accessed in the banks easily the way it would be accessed in the BDC? Certainly not, unless the protocols are streamlined and simplified
- WHAT HAPPENS TO the 5,500 BDC OPERATORS with a huge amount in their safe? Simply put, they will connive to cause artificial scarcity. If indeed CBN sells $110m weekly to the BDC, it means they may still have volume in their hands at the time of the announcement. This volume of FX will become a tool to trade with. As we all know, it is a mountain task getting FX from the banks, so customers will still go to the BDC and the BDC will hike the rate on the much still in their possession.
The CBN should consider the conversion of the approved BDC to official agents of the banks with stringent regulation and oversight on their activities. The success of the POS Agency banking should be a guide in achieving this. Agency Banking operators are paid a commission per successful transaction. The same can be done with the BDC Operators in the system. Doing this will not only normalize the situation but will keep the huge operators in their businesses. The operators should be allowed to buy from their agent banks and sell to customers at no extra charge rather the bank and its agent should share on the commission, just the way the POS Agency banking operates. This will still not stop the banks from trading over their counters.
LAST LINE
One would wonder why international FX traders, like Western Union and MoneyGram “exited” the Nigerian market? BDC “chased them out” Perhaps you never know this?
Nigeria CBN should be worried because there are so many businesses and offices that need FX on daily basis and they could be chased out too. Embassies, students, hospital patients, traders, tourists, etc. they all need a daily supply of FX, and queuing at the banks for hours will surely not work for them. So, the BDC cannot be banned out of business unless audacious steps are taken by the CBN to challenge these obstacles standing against easy access to FX by those that need the FX
