Enforcing Sanity in the Financial Sector

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Penalising banks for unhealthy practices in the foreign exchange market will help enforce sanity in the system, writes Obinna Chima

Standard Chartered Bank Nigeria recently joined an ever-growing list of financial institutions that have been found guilty and fined for breaking the Central Bank of Nigeria’s (CBN) foreign exchange (FX) rules.

THISDAY reported last week that the CBN fined Standard Chartered Bank N2billion for FX infraction. The bank, according to the source, drew the central bank’s anger for buying $25million at the official rate and selling same way above the inter-bank market rate.

Apart from the hefty fine, the commercial bank’s treasurer was also said to have been suspended by the CBN that has been battling to rein in unwholesome banking industry practices that have engendered a huge differential between the inter-bank and parallel market rates.

The central bank had ditched its 16-month old peg on the naira in June and introduced a flexible exchange rate regime to allow the currency to trade freely on the interbank market. The move was expected to enthrone transparency and help bridge the gap between the different segments of the FX markets.

Unfortunatelely, as a result of failure of most operators in the market to comply with laid down rules, the disparity between the different FX markets have continued to affect the market.
There has been strong suspicion that some banks and other end users that purchase FX from the interbank market divert some of the dollar cash to the parallel market because of the wide gap between the official and parallel markets.

Forex round-tripping or arbitrage refers to a process whereby funds obtained from the official forex market (at lower rates) are diverted to other markets and sold at a higher rate by forex dealer, banks and end users.

But in its reaction, Standard Chartered has said it remains committed to complying with all local laws and regulations.
The bank had said: “In all countries, where Standard Chartered operates, the bank remains committed to complying with all local laws and regulations. In this matter, the bank continues to engage with the Central Bank of Nigeria officials in an effort to reach a resolution.

“As is the case with all our FX transactions, we believe this transaction is compliant with the applicable FX regulations and policies. We continue to engage with the Central Bank of Nigeria officials on this matter in an effort to reach an amicable resolution.”
President Muhammadu Buhari recently warned that banks, importers and individuals involved in round-tripping of dollars they buy from the CBN’s official market and resell in the parallel market will be made to face the law when caught.

In his response to a question on alleged round-tripping in the FX market, in a recent interview, the president had said: “We are going to check that and we are going to apply sanctions to anybody that is given dollars by the central bank for the importation of essential raw materials, for example pharmaceutical products, and because he can make N100 more, goes to the parallel market to sell it. We will pursue them and obviously would punish them.”

The CBN Governor, Mr. Godwin Ifeanyi Emefiele, recently said the central bank was on the lookout to penalise banks found in such unhealthy practice. He had also warned that if any bank was caught in the act, it is not just the institution that would be penalised, its management would also be severely punished.

The sanction on Standard Chartered Bank, which came less than four months after the central bank also imposed heavy fines on some banks as well as excluded them from participating in the FX market for failing to return a total of $2.334 billion of Nigerian National Petroleum Corporation (NNPC)/Nigerian Liquefied Natural Gas (NLNG) Company dollar deposits to the federal government’s Treasury Single Account (TSA), was a reflection of the determination of the CBN to ensure that financial institutions fully comply with extant rules and regulations.

Curbing Speculation

Emefiele recently argued that the reintroduction of a flexible exchange rate system has helped to increase transparency in the FX market, reduce arbitrage and speculative opportunities, and created a more predictable structure for businesses to prioritise their FX demand.

This policy has led to a gradual but steady inflow of new FX into the market. All of these have largely met the bank’s expectations in the short term. We believe that these benefits will become magnified as the policy’s sustenance improves the credibility of the CBN and investors trust us more to return more forcefully as active participants in Nigeria’s FX market.

“Obviously, the reintroduction of the flexible exchange rate system immediately led to a depreciation of the naira in the interbank market, and helped close the significant spread with the parallel market. Also, this policy encouraged movement of FX demand from the parallel to the interbank market,” which also brought the two rates closer.

“Finally, new foreign portfolio inflows into the interbank market and our recent policy of allowing commercial banks to transfer some share of diaspora remittances to bureaux de change have also helped moderate rates in both markets,” Emefiele noted.

For now, however, a lack of hard currency is continuing to squeeze economic growth. Businesses, particularly those that must import goods, are bearing the brunt of this, as are Nigerian banks. However, the policy has been beneficial to the economy.
Furthermore, Emefiele said the central bank will pursue price stability as an anchor for economic growth as well as attract foreign investors as the country battles recession and rising inflation.

Ensuring Compliance
Also, in an attempt to ensure strict compliance with all extant regulations, particularly those relating to FX transactions, Financial Action Task Force (FATF) and Anti-money Laundering/Combating the Financing of Terrorism (AML/CFT), the CBN recently enhanced the minimum qualification for the position of Chief Compliance Officers (CCOs) of commercial banks.

According to the CBN, going forward, banks are required to appoint not only a CCO who must not be below the rank of a General Manager, regardless of the category of the institution, but also an Executive Compliance Officers (ECOs) who must not be below the level of an Executive Director.

In a circular posted on its website, the central bank had stated that while the CCO was expected to report to the ECO, the ECO on the other hand would be reporting directly to the board of directors of the bank.

“The CBN will hold the ECO responsible and accountable for any breach of any extant regulation in the bank. For avoidance of doubt, the CBN shall suspend/dismiss any ECO and CCO found wanting in the discharge of his/her responsibility,” the apex bank warned.

According to the circular, the DMBs are required to forward the names of their ECOs and CCOs together with their curriculum vitae to the CBN for approval on or before October 10, 2016.
The ECOs are however allowed to combine the responsibility with other functions while CCOs will focus only on compliance matters in the bank, the CBN added.