How CBN forex ban to BDCs will affect you

By EMEKA OKOROANYANWU and BABAJIDE OKEOWO

The Central Bank of Nigeria (CBN) in a move that jolted the finance market last week banned the sale of foreign exchange to Bureau de Changes (BDCs) in the country, saying the action was aimed at cleaning the rot that had allegedly occurred in the trading of foreign exchange by the operators. The CBN alleged that the BDCs had abused the regular sales of foreign exchange to them by selling at rates above the agreed guidelines, thereby engaging in rent seeking.

At a press briefing on July 27, 2021, the CBN Governor, Godwin Emefiele stated that the apex bank would also no longer approve new BDC licence applications, even as it suspended the ones still under processing. The CBN was miffed that BDCs had contrary to their mandate, become wholesale dealers conducting large FX transactions above their sales limit of $5000 per person and instead concluded single transactions worth millions of dollars.

Emefiele, who announced the ban after the Monetary Policy Committee meeting noted that there had been an astronomical rise in operators who now number 5,689 as of June 2021, a significant rise from 74 dealers in 2005. He further noted that the regulator received an average BDC application of 500 monthly, saying that BDC operators disregarded prevailing rates and spurred the gradual dollarization of the domestic economy.

According to the Governor, before the bank’s decision, the CBN sold $20,000 weekly to over 5,000 BDCs amounting to over US$100m weekly and US$1.57bn annually. In a bid to reduce the pressure on the market, the Governor directed all commercial banks to set up FX Teller points in all branches to ensure the direct sale of FX to buyers.

Emefiele said the BDCs were abusing the privilege given to them and sabotaging efforts to ensure naira stability in the country. Expressing the displeasure of the MPC, he said, “The facts abound that BDCs have turned themselves into agents that facilitate graft and corrupt activities of people who seek illicit fund flow and money laundering in Nigeria and we will go after all of them.

“Throughout this meeting of the MPC, we extensively debated this matter, and independently with each member of the committee exhibited an accurate and deep understanding of the issue at stake,” Emefiele added that the CBN would henceforth channel a significant portion of its weekly allocation currently meant for BDCs to commercial banks, to meet legitimate forex demand for ordinary Nigerians and businesses, whether for small-scale imports, medical bills, educational expenditure, personal and business travels or any other legitimate needs as prescribed by the CBN’s foreign exchange manual.

He said by this, all commercial banks in the country would with immediate effect create a designated teller point in designated branches, for sale and disbursement of foreign exchange to customers who deserve forex for legitimate purposes.

He said, “For emphasis, the public should note that once a customer provides the basic documentation to provide forex, all banks must immediately pay that on-demand or within a stipulated time frame sell foreign exchange to the customer.

“Any customer who does not receive foreign exchange must report this to their bank and where they are unsatisfied with the resolution, they are required to contact the CBN.”

While the ban does not stop the operations of the BDCs, it means operators will have to source forex from other suppliers — not the central bank. The CBN will be selling directly henceforth to commercial banks, from where customers who have legitimate and applicable transactions will be able to buy.

Shortly after the announcement, the Naira closed at 505.00/$1 on the street representing 0.20 per cent devaluation from the N504.00 that it traded on Monday. At the official Nigerian Autonomous Foreign Exchange Rate (NAFEX) window, it closed at N411.67, from N411.50 the previous day.

The naira slumped further to 523/$ at the parallel market on Wednesday, a day after the Central Bank of Nigeria stopped the allocation of foreign exchange to Bureau de Change operators in the country.

The naira, which exchanged to the dollar at 503 on Monday, fell to 505 on Tuesday, few hours after the CBN announcement. According to naijabdcs.com, the official website of the BDCs, the dollar was bought at N515 and sold at N523 on Wednesday. At the Investors & Exporters forex window, the naira hit a high of 413/$1 but closed at 411.60/$1. The CBN, however, maintained the official rate of N410.16/$1 on its website. Before the new regulation, the CBN had been supplying each BDC $10,000 twice a week at the rate of N393.

A day after the CBN announcement, Chief Executive Officers of banks apparently happy at the development, quickly held an emergency meeting on how to ensure compliance with the new forex directive of the Central Bank of Nigeria.

Speaking during a webinar after the meeting, the banks’ CEOs assured the public that banks would make forex available to customers in accordance with the CBN’s directives.

Group Managing Director/Chief Executive Officer, Access Bank Plc, Herbert Wigwe, said, “The banking industry as a whole was willing and ready to carry out this function. The banks have very strict compliance measures, in terms of verification and making sure that people who do apply are eligible. “All Nigerian banks will be able to meet these requirements. If you look at all the branches nationwide, you will know that the banks have more than enough capacity to do this.” He said if the banks saw any compliance issues, or people attempting to do things cunning, they would be reported to the CBN because the banks would ensure full compliance with the order,” he said.

Also, the Group Chief Executive Officer, Guaranty Trust Holding Company Plc, Mr Segun Agbaje, said the banks have the capacity to meet customers’ demands. He said: “It is not only the CBN that has the ability to fund the market; the banks also have the resources to meet the demand, and we have agreed collectively that it will start immediately.”

The bank Chief Executives also warned against the presentation of fake documents for foreign exchange purchase, saying that anybody that attempts to purchase forex with fake documents will be reported to the CBN and the Police for possible prosecution.

They said the banks have started implementing the directives of the CBN by deploying the needed infrastructure including dedicated tellers in the branches to sell forex to customers. They noted that given the number of bank branches, the banks have more than enough capacity and the reach to implement the directive of the CBN.

We’ll source forex-BDCs

On their own, the Association of Bureaux De Change Operators of Nigeria said that Bureaux De Change operators are still providing foreign exchange services.

ABCON said while the dollar sale from the Central Bank of Nigeria had helped in enhancing supply, the fact remained that BDCs were empowered to source forex from other sources and also to provide various services to members of the public.

The President, ABCON, Aminu Gwadabe, said in a statement that the recent pronouncement of the CBN did not stop BDCs from providing forex services as allowed by their operating licences. He said the association would engage with the CBN to address and resolve all the issues that led to the stoppage of foreign exchange sales to BDC operators.

“BDCs are licensed to provide retail FX services, including buying from the public and also selling to end-users for allowable transactions, namely personal travel allowance, business travel allowance, payment of medical and school fees,” Gwadabe said.

The ABCON president said, “While the CBN has stopped dollar sales to BDCs, it has not cancelled their operating licences or banned them from providing FX services to members of the public. At ABCON, we urge our members to see the CBN pronouncement as a wake-up call and opportunity to widen their customer base and deepen their business.

“ABCON has always worked with the CBN to ensure proper working of the FX market and in line with this principle, we will engage with the apex bank to address and resolve all the issues that led to the recent action, including identification and sanctioning of earring BDCs, where necessary.

“In addition to this, and in view of the fact that BDCs have been very effective in ensuring stable exchange rate, ABCON will work with relevant stakeholders including law enforcement agencies to develop a National BDC Policy with the aim of enhancing the contribution of the BDC subsector to the nation’s economy.”

The policy may decrease the standard of living of Nigerians if not well implemented- Expert

However, following the announcement, a financial analyst, Ayodeji Ebo, Head, Retail Investment at Chapel Hill Denham expressed worries that the policy if not well implemented may increase inflation and also decrease the standard of living of Nigerians while advising Nigerians to brace up for harder times in the medium term.

“We expect an initial reaction in terms of scarcity because when the margin of supply reduces, the BDCs will only rely on forex from autonomous sources and that depends on the inflow,” he said.

He said a lot of items that are not on the CBN list will find it difficult to access forex through the bank as a result will push the demand to the parallel market. This, he noted, would cause pressure at the parallel market because the demand will be very high.

“If not properly implemented, there will be a major increase in inflation rate because the cost of goods and services will move up, because a lot of them are dollar-based,” he said.

He advised that Nigerians should brace up for harder times in the medium term.

“What the banks were able to achieve with the setting up of a remittance desk, they need that model across to sell forex too as to the legitimate demand,” he said.

Ebo was supported by another economist, Babatunde Moses. Moses predicted that Nigerians are likely to experience additional inflationary pressure in the short term because BDCs are major sources of forex to the general public.

“Prices of imported goods (which constitute a large share of our daily consumption) are likely to go up in the interim since USD is now more scarce,” he said.

On the policy effect, he said the CBN is likely to achieve its aim of reducing round tripping and illegal trading happening at the BDC level.

“The banks are more closely monitored so the extent of malfeasance is reduced at their level (though not guaranteed). The issue now is whether the benefit of curbing the BDCs will be greater than the possible attendant cost of depreciation of the Naira (even though just for the short term).

“The Naira is likely to depreciate in the short term due to the sudden shortage of USD in the market. That’s already happening as we speak. The long-term impact on the Naira is not very clear and depends on whether measures have been put in place at the banks to manage this policy. Similar policies restricting BDCs in the past have played out in a similar fashion but were eventually reversed ultimately. We might see the same thing happen again,” Moses said.

 

A welcomed policy- Experts

For Dr Uchenna Anyanwu, an Economist and Lecturer at the Department of Economics, Nnamdi Azikiwe University, Awka, Anambra State, CBN move was a welcomed development. He said that BDCs were originally meant to cater for retail end of the market, supplying PTAs, BTAs and sundry fees to customers, but gradually they changed their mandate and moved in to handle big volume transactions, hence sharp practices crippled in.

He said though the policy has short term negative implications, such as the dollar rate going up due to fears and panic, temporary scarcity which could lead to inflation because of high cost of importation since Nigerian is an import dependent country and temporary job losses as most BDCs will be working in less than optimal level. He, however, said that the ban was good for now.

According to him, if Deposit Money Banks (DMBs) are well monitored by CBN, making access and availability of dollar easy, in no long a distance time, a near single exchange rate could be achieved. This he said would happen when importers are aware and can access dollar easily and at good rate, import band will expand, there wouldn’t be need again to go elsewhere in search of dollar at a very high price when it is sold at banks at minimum stress. Hence, the SMEs who hitherto could not import what they need would now be encouraged, and much goods will be imported and competition will drive price down continuously. This could lead to reduction in inflation and some of those jobs lost could come back through increase in SMEs activities.

“Again with proper monitoring, the dollar will only be made available to legitimate users and not politicians who get them from BDCs and pack them at home and be heating up the system through unnecessary scarcity hence widening the gap between the official and parallel market rates. But if not well monitored, negative vicious circle will set in again,” Dr Anyanwu said. He urged the CBN not to consider political reasons to revert the policy.

Mr Tope Fasua, Chief Executive Officer of Global Analytics Consulting Ltd, also commended the CBN for its decision to discontinue the sale of forex to BDC operators. He agrees that the measure was a shock to the system, but, 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 travelers, but they do not do that. Many of them are not accessible; they do not have a customer base, so the money just round trips into the market.

“They are getting the dollar at N411 but most of them sell to the market at close to N500. It is a racket and has to be discontinued,” he said. Fasua also frowned at the proliferation of BDCs in Nigeria, saying it was not so elsewhere.

“I have never favoured it; about 7,000 BDCs? Everybody has a license, you do not have to be a professional; you do not even have to have an office.

“In the United Kingdom, as much as it is a tourist’s haven, they have 145 BDCs; in New York there are 40, the whole of United Arab Emirate has about 40, and they are known brands,” he said.

He added that BDC was not supposed to be a business for all comers, but for those serious with the business.

“They need to be regulated. Banks can actually do the work better, and the banks would understand that they cannot joke with their licenses,” he said.

The ban also received the support of the Chief Executive Officer of Financial Derivatives Co., Bismarck Rewane who lamented that BDCs have exploited the market by buying dollars from CBN at 390 naira and then selling them at 500.

“It will give the central bank enough time to sanitize the bureau-de-change space, leaving only the credible institutions,” he noted.