Gauging the Forex Market

The Central Bank of Nigeria has been suspending forex allocation to bureau de change operators and adopting weekly supply to commercial banks for more than two weeks in order to save the naira’s value and maintain its integrity. Using customer experience to gauge the forex market shows how well the apex bank has done in achieving the system’s desired goals and objectives. Kunle Aderinokun contributes to this report.

Customers have been turning to commercial banks to meet their forex needs after the Central Bank of Nigeria suspended forex allocation to bureau de change (BDC) operators for more than two weeks.

The apex bank released $200 million to commercial banks as soon as it cut off supply to the BDCs and has continued to provide them with weekly forex liquidity. This was part of an effort to meet legitimate end-user dollar demand in the country.

With the CBN’s mandate to accept cash deposits of foreign exchange from customers, banks have already taken on more responsibilities to open forex desks in their branches across the country to serve end-users.

As business picked up, however, some banks began to break forex rules by actively conspiring with unscrupulous customers to defraud the system. Customers and banks in this group have been warned to stop engaging in such nefarious behavior or face stiff penalties from the banking regulator.

Following the 357th Bankers Committee meeting, which took place virtually last Thursday, bank CEOs stated that they would use digital means to detect fraud in the forex system, citing unwholesome practices by some customers.

On behalf of the banks, Yemisi Edun, Managing Director of First City Monument Bank (FCMB), and Segun Agbaje, Group Managing Director of Guaranty Trust Holding Company (GTCO), spoke.

Customers who visited the banking hall to obtain forex for various needs under the new forex regime have a mixed bag of stories to tell.

Mr. Tope Fasua, Chief Executive Officer, Global Analytics Derivatives, described his experience as a bank customer, saying, “All banks have implemented the policy to create FX tellers, and initially queues have disappeared.” On Monday, I was in a bank and saw people depositing dollars into their DOM accounts, which is a sign of trust in the system.”

“As someone who uses forex so much for my business, because I import gold and other jewelry, this CBN suspension of forex to the BDCs has only made it more difficult for me to access dollars at a reasonable rate,” another bank customer, who requested anonymity, said. As can be seen, the price has risen since the suspension; from the N420 I used to get to N515-N520 today. That’s not right!

“The CBN’s policy has only served to frighten the market, making the dollar far more expensive than it was prior to the new directive.

“So, what’s the advantage now?” When you go to the bank, they tell you that they don’t have any dollars, but if you don’t mind, they can arrange some other options for you; which always leads to the Mallam on the street selling dollar.

“With BDCs, the business was always direct, easier, and less expensive, plus you could get it at any time. They have their own offices and are members of an organization called ABCON or something similar.

“So, if I have a problem with one of their members, I know who to call and where to go without all the red tape and jargon that banks used to use when you complained to them. Why can’t the CBN simply collaborate with that body to resolve the issue?”

Furthermore, a bank customer in Lagos, Mr. Jide Thomas, suggested that the CBN collaborate with the BDCs group to effectively regulate and refine their operations by developing guidelines for them to follow.

The apex bank, according to Thomas, has the authority to discipline erring members of the forex traders’ body, as well as to impose sanctions on the association if its members commit infractions that endanger the system. Suspending allocation to BDCs, he believes, is not the answer. The way to go is to work with the BDCs association to reduce their excesses.

For some, the CBN’s decision to suspend allocations to bureau de change (BDC) operators was a welcome development, while for others, it was a rude awakening. The CBN’s intended consequence, however, is to save the naira, the national currency, regardless of how it is taken or viewed, even though, as with any decision, there are unintended consequences.

The Central Bank cited a number of regulatory violations and other unethical practices as reasons for ending the forex sale to BDCs.

Following the decision, which was announced by the apex bank’s Governor, Mr. Godwin Emefiele, the apex bank stated that it would no longer process or issue new BDC licenses, and that all current licenses, regardless of their stage of processing, would be suspended. He stated that the CBN would channel weekly BDC allocations to commercial banks.

These measures, according to the apex bank, were taken to enable it to carry out its mandates more effectively and efficiently, as well as to ensure the preservation of the commonwealth and the hard-won financial system stability for the benefit of Nigerians.

As a result of the panic caused by the policy change, the naira-dollar exchange rate on the parallel market rose to N525/$1 from N495/$1 twenty-four hours after the announcement. But that did not last long, as the naira rose after the greenback was exchanged for N510. The naira, on the other hand, remained under pressure as manufacturers and forex end-users maintained their demands.

The BDC operators assured their customers and the general public that they were still in business as soon as the CBN announced its decision. The Association of Bureau de Change Operators of Nigeria (ABCON), which represents BDCs, said in a statement that they were still providing foreign exchange services.

The assurance was given by ABCON’s President, Dr. Aminu Gwadabe, who stated that the recent CBN pronouncement did not prevent BDCs from providing foreign exchange services as permitted by their operating licenses and operating guidelines.

Since then, the CBN has been supplying commercial banks with foreign currency. The value of the naira improved as a result of the CBN’s intervention, but the national currency has remained under pressure, losing N5 on the parallel market last Tuesday as the dollar, which exchanged for N505, rose N510 in the face of rising volatility.

While most analysts agreed that the CBN made the right decision, some said the new policy direction left a lot to be desired.

Prof Uche Uwaleke, an economist and Professor of Capital Markets at Nassarawa State University, Keffi, believes the parallel market’s forex rate will fall in the long run as long as the CBN ensures forex liquidity at the official end of the market. He emphasized that, in light of other anticipated developments, the CBN’s ability to intervene in the forex market would be strengthened.

“As a matter of fact, the downward journey of the parallel market rate has commenced,” Uwaleke, a former commissioner for finance, believes. Speculators betting that the CBN will not be able to match the level of forex demand now redirected to Commercial Banks are to blame for the current volatility in that market.

“However, I believe they will be disappointed, given the recent gradual accretion of external reserves, particularly since the suspension took effect, the FG’s plan to issue Eurobonds on the international capital market, and the prospect of crude oil prices remaining strong in the near-to-medium term.”

Mr. Abiodun Sopitan, a retired CBN director in charge of commercial banking, believes that the CBN should work with the BDCs association to manage their affairs by monitoring their activities and ensuring that the BDCs complete proper documentation.

“Since the policy decision, the market has calmed a bit,” Fasua said. The naira has strengthened to around N510 per dollar, down from N525 previously, with promises of further cooling as the policy takes hold.”

“BDC operators are coming together to contemplate the future and organise themselves for mergers where necessary,” he said, adding that “the ‘Mallams’ on the road as we know them are doing business as usual because the banks cannot match their speed of service delivery and the drive thru advantage.”

“It’s also worth noting that some bank CEOs have expressed confidence in the policy and forecast further naira strength. Mr. Rewane, one of Nigeria’s leading economists, echoed this sentiment yesterday (Wednesday). As a result, the future appears to be promising. “At this time, all invisible trade transactions are being met seamlessly,” he added.

Dr. Obadiah Mailafia, the former CBN Deputy Governor, has a different viewpoint. According to him, the new CBN forex policy may depreciate the naira. He also warned the apex bank against entrusting dollars to commercial banks.

“If we are not careful, that decision will actually depreciate the naira because you can normally walk into any BDC, anywhere, and they will attend to you within five minutes, but with banks, you have to drive to your nearest bank and queue the majority of the time.

“The CBN hasn’t told us the rate; banks will want to make a profit over the official rate; we don’t know whether they will make a decent profit or profiteer,” he said, adding that “bankers were the biggest experts in round-tripping.” I don’t believe old habits change. Leopards aren’t known for changing their spots.”

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Mailafia also cautioned the CBN against entrusting forex allocations for customers to banks. “How can you put your faith in these commercial banks when most of them want to corner the dollar for themselves and then share whatever is left with the market at whatever rate they want?

“On the naira, it is not just the underlying economic fundamentals that matter, such as interest rate, inflation, and so on, these things matter, and the level of debt affects it, but there are also non-quantifiable elements like violence, instability, rural banditry, and terrorism, which undermine the economy’s productive capacity,” he added. They also deplete social capital, or the trust that binds a community together in order to conduct business.”