Ending the sale of foreign exchange to Bureau De Change operators will help curb arbitrage and improve transparency in the market, writes Obinna Chima
Ben Bernanke, a two-term former Chair of the Federal Reserve of the United States, in his memoir, ‘The Courage to Act,’ gave an in-depth account of his actions during his eight years reign at the regulatory institution.
In the book, Bernanke pointed out that central bankers must always have the courage to do the right thing first and thereafter, “the second thing would be to explain to the public and politicians why what we did was the right thing.”
“If we acted, nobody would thank us. But if we did not act, who would? Making politically unpopular decisions for the long-run benefit of the country is the reason the Fed exists as a politically independent central bank.
“It was created for precisely this purpose: to do what must be done—what others cannot or will not do,” he wrote further.
Clearly, this was the situation the Central Bank of Nigeria (CBN) was faced with following its last week’s decision to end its age-long practice of selling the United States dollars to Bureau De Change (BDC) operators.
The CBN Governor, Mr. Godwin Emefiele, while briefing journalists at the end of the Monetary Policy Committee (MPC) meeting in announcing the decision to end foreign exchange (FX) sales to BDCs said the apex bank took the decision because the currency dealers had deviated from the reasons they were licenced.
According to the central bank chief, the BDCs turned themselves away from their objectives.
He said the BDCs abandoned their role in the financial system and now act as agents that facilitate graft and corruption in the country.
“We cannot continue with the bad practices that are happening at the BDC market,” a visibly angry central bank governor said.
Furthermore, he said the decision to eliminate the BDC operators from the FX market was also necessitated by their dubious and unwholesome practices, adding that the operators have gone beyond their primary role of being retail dealers of FX to wholesale dealers.
The CBN governor stated that rather than catering for the retail users, who required about $5,000 to meet their FX needs, the BDCs were transacting in millions of dollars.
Emefiele said it was no wonder that BDCs had risen, “from a mere 74 in 2005 to 2,786 BDCs today. In addition, the CBN receives close to 150 new applications for BDC licenses every month.”
Emefiele added that there was evidence of prevailing ownership of several BDCs by the same promoters to procure multiple FX from the apex bank.
He said, “Several international organisations, embassies, patronise BDC through illegal forex dealers to fund their institutions. We will deal ruthlessly with Nigerian banks that deal with illegal BDCs and we will report foreign organisations patronising them.”
Following the decision to ban the BDCs, Emefiele therefore directed all commercial banks to immediately create designated branches for the sale and disposal of FX to customers who deserve it for legitimate purposes.
He said the CBN will no longer process or issue new licences for BDC operations in the country, adding that all licences being currently processed, regardless of the stage, had been suspended.
He said the CBN would now channel weekly FX allocations hitherto meant for BDCs to commercial banks.
Emefiele said commercial banks are now permitted to begin accepting FX cash deposits from their customers.
He explained that the measures were to ensure that the apex bank was better able to carry out its mandate in an effective and efficient manner as well as to guarantee preservation of the commonwealth and financial system stability
Emefiele added, “The public should note that once a customer provides basic documentation to purchase FX, all banks must immediately meet that on demand or within a stipulated timeframe sell foreign exchange to the customer.”
Refund of Pending BDCs’ Licencing Fees
Due to the decision to end FX sales to BDCs, the CBN said it would immediately commence the refund of capital deposits and licencing fees, where applicable, to BDC promoters who had pending license applications with the bank.
The CBN in a circular to BDC promoters and all banks, dated July 29, 2021, and signed by the CBN Director, Financial Policy and Regulation Department, Mr. Ibrahim Tukur, advised the affected promoters to forward their requests for refund in writing to the Director, Financial Policy and Regulation Department.
It added that the requests should be accompanied with telex copy of initial deposit of N35 million and account details of the refund, which should be the same as the account from which the capital deposited originated, including bank name, account name and number, as well as copy of the bank draft/telex for payment of licensing fee of N1 million, if any.
CBN further directed all deposit money banks to henceforth stop accepting instructions from customers to transfer capital deposits of N35 million to the designated CBN account for the purpose of applying for BDC licenses.
Similarly, the banking sector regulator, in another circular, directed all banks to set up teller points at designated branches across the country to fulfil legitimate FX requests for Personal Travel Allowance (PTA), Business Travel Allowance (BTA), tuition fees, medical payments, and SMEs transactions, among others.
The Director, Monetary Policy Department, CBN, Dr. Hassan Mahmud, noted that unlike the temporary ban of FX sale to BDCs in 2016, the central bank was taking a tougher stand this time.
He said going forward, the bank would only supply the greenback to banks to meet genuine retail needs of Nigerians.
According to him, “This time around, there is going to be stricter monitoring and the banks themselves know what is on their shoulders now, looking at where we are coming from in terms of taking it off the BDC segment because of distortion and irregularities and arbitrages we saw in that market.
“So, the banks know that this is a more serious burden on them and it is something that has to do with their reputation and the fact that the CBN has enough tools within its purview to monitor those banks and also penalise those that fall off the line.”
He added that the policy would help curb arbitrage related to FX malpractices and improve transparency in the market.
“One big area that was a major issue is the behaviour in the BDC market. We got to a stage that you could not differentiate between the BDC market rate and the parallel market rate, whereas BDCs are supposed to be formal institutions licenced by the central bank with a licencing guideline with what to do.
“It was supposed to be the retail end to moderate prices at that level because of the shocks. We always regard that market as very little and insignificant so it is not going to really impact on the other parameters of the exchange rate,” he lamented.
Banks Pledge Support
Also reacting to the new FX measures, the Chairman, Body of Bank CEOs, Herbert Wigwe, said authorised financial institutions in the FX market would ensure full compliance with the CBN directives in order to ensure FX stability.
Wigwe said customers could walk into their banks to purchase dollars for legitimate transactions. He noted that the banks had agreed that the process would start immediately following a meeting with the CBN.
Wigwe, who is also Group Managing Director of Access Bank Plc, said the banks were ready to meet the mandate of the CBN, adding that they have more than enough capacity to deliver. He explained that the process would be centralised to avoid abuse.
The Access Bank GMD pledged that the banks would ensure that the measures that had been put in place were not disrupted and abused, saying, “We will also be doing verification of the Bank Verification Number (BVN).”
According to him, “The banking industry is willing and ready to carry out this function. As you are aware, the bank has very strict compliance measures in terms of Know Your Customer (KYC). For us at Access Bank, we will ensure that all our branches meet the requirements.”
Also, the Chief Executive Officer, Guaranty Trust Bank, Segun Agbaje, expressed the readiness of the bank to begin implementation of the mandate given by the CBN.
Agbaje assured customers that the banks had the resources to fund the process, adding that they have collectively agreed to start immediately.
He also stated that different banks had different processes, therefore, banks should examine their controls, and what worked for them.
Agbaje said, “There is a lot of abuse around FX, so you will find out that some of the better controlled systems are centralised, while some are decentralised. Customers should not panic, there would be availability of forex, and the banks will run a very transparent process.”
Analysts React
To the Financial Derivatives Company (FDC) Limited, by putting an end to the sale of FX to BDC operators, Emefiele, has “disrupted one of the juiciest gravy trains in the Nigerian economic racket,” Financial Derivatives Company Limited (FDC) has stated.
The firm stressed that, “Even though BDCs are licensed by the CBN, the point had been reached where the programme was no longer tenable and surely not sustainable.”
It stated that Nigeria was spending more on BDCs than debt service.
The firm wondered how a country whose total exports and receipts were approximately $59.8 billion, was spending $5 billion to subsidise “supposed Nigerian tourists during a COVID-19 year.
“In other words, spending more on tourism rather than debt servicing. Therefore, the structure of the forex market needed sanitisation,” the firm headed by Mr. Bismarck Rewane added.
Nonetheless, recommending solution to the problem, it stated, “The interim solution of substituting BDCs with banks is hardly going to achieve much. You are virtually handing over the yam barns to goats to secure. In the end, there will be no yams nor goats.”
It recommended, instead, that the CBN should allow banks to retail dollars as they had done in the past and make BDCs engage in retailing same but at a buy rate different from today’s subsidised rate.
That is, the BDCs would be allowed to buy dollars from the CBN at the parallel market rate less a N10 premium, the research company stated.
To the Chief Executive Officer, CFG Advisory, Adetilewa Adebajo, “BDCs were set up to serve retail markets with transactions under US$5,000. But this might not be sustainable, as consumers did not benefit from the official rates BDCs were given as they engaged in arbitrage with the parallel markets.
“This situation offers the banks an opportunity to create a viable FX interbank market with transparent bid and offer rates that Nigerians can access via the existing inter-banking platforms.
“How long this will last is yet to be seen, as we recall that CBN last year for separate reasons suspended sales to BDCs and resumed several months later.”
In his contribution, Africa Tax and Legal Services Leader, PwC Nigeria, Taiwo Oyedele, noted that the main purpose of creating the BDC market was to bridge the gap between the official and parallel markets.
“But there must be some lessons we can learn as country in running BDCs, even though our situation is always peculiar.
“In my view, this ban has to be a temporary measure because to me, the ban is not the solution to the problem.
“It should be that this ban is to think about structurally, how we address this problem,” he added.
On his part, the Head, Investment Management Group at Chapel Hill Denham, Ayodeji Ebo, expressed optimism in the ability of banks to meet the PTA/BTA demand.
He, however, noted the scarcity of the greenback in the market.
To Prof Uche Uwaleke, a former Commissioner for Finance at Imo State, said the decision by the CBN to stop forex sale to BDCs has merits and demerits.
According to him, the action by the central bank is consistent with its move to unify exchange rates in the country and improve the level of transparency in the FX market.
He said the CBN’s policy would slow down the rate of depletion of the external reserves as well as address the issue of round tripping.
ABCON to Engage CBN
Reacting to the decision of the central bank, the President, Association of Bureaux De Change Operators of Nigeria (ABCON), Aminu Gwadabe, said the association would engage the CBN.
Gwadabe said the planned engagement would, among other things, seek to identify and sanction earring BDCs.
He clarified that the association was still providing FX services, in spite of the central bank’s action.
Gwadabe said the pronouncement by the CBN did not stop BDCs from providing FX services as allowed by their operating licences and in their operating guidelines.
Gwadabe said, “BDCs are licenced 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 said while the CBN had stopped dollar sale to BDCs, it did not cancelled their operating licences, or ban them from providing FX services to members of the public.
According to him, “While the dollar sale from CBN had helped in enhancing supply, the fact remains that BDCs are empowered to source FX from other sources and also to provide various services to members of the public.
“At ABCON, we urge our members to see the CBN pronouncement as a wakeup call and opportunity to widen their customer base and deepen their business.
Conclusion
One of the roles of financial system regulators is to monitor evolving risks and potential dangers in the market place for timely intervention. That is why the action of the central bank must be commended.
The CBN action if properly implemented and effectively monitored would also be beneficial to the economy as it is expected to end arbitrage, bring about transparency in the FX market as well as result to exchange rate stability.
