Exchange Rate Stability: Dissecting The Implosion Of BDC

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In what hit Nigeria’s financial system like a bang, the Governor, Central Bank of Nigeria (CBN), Mr Godwin Emefiele, read out decisions taken by the country’s banking sector’s highest decision making body last week.

On July 26 and 27, 2021, the CBN’s Monetary Policy Committee (MPC) held  its 280th meeting where it held all policy parameters constant, but announced discontinuation of  sale of weekly foreign exchange (FX) to the Bureau De Change (BDC) segment of the money market.

As a result, Nigeria’s BDC market went into a tailspin at the beginning of the week as traders sweated under the CBN’s decision.

Ever since, fund managers, manufacturers, finance and economic experts and indeed Nigerian citizens home and abroad have been discussing the matter from different perspectives.

Be that as it may, analysts see the CBN’s decision as the smart way to go, given the depleted foreign reserves, oil price uncertainty, and rampant price gouging by brazen BDC traders.

They argue that the high BDC rates would soon slide as commercial banks begin to sell retail amounts of dollars to customers through various banking hall desks across the country.

Why the decision

The CBN’s decision was on the back of what it considered to be the wanton and reckless abuse of the terms with which foreign exchange (FX) was sold to the dealers.

“They have reneged [on their agreement] and become somewhat greedy, recalcitrant with abnormally high profits from these sales while ordinary Nigerians have been left to feel the pain and therefore suffer.”

These were the words of the governor of the Central Bank of Nigeria, Godwin Emefiele, as he announced the end of forex (FX) sales to BDC operators.

Emefiele said they had become a conduit for graft and corruption, and he even attacked embassies and international organisations for using BDCs for their transactions while operating in the country.

He promised to deal “ruthlessly” with the Nigerian banks that have facilitated these transactions. At the same time, the apex bank said it would report these international companies that “patronise” BDCs to their respective regulators abroad

The rates in the BDC market tumbled from N500.00/$ on Monday, July 26, 2021, when the CBN’s Monetary Policy Committee (MPC) commenced its 280th MPC Meeting to N520/$ on Tuesday, July 27, 2021, the day the CBN announced its decision to stop the sale of weekly dollars to the parallel market.

The policy move by the CBN was influenced by the alleged flagrant abuse of the sales and pricing rules that should have guided BDC transactions. The CBN saw the role of BDCs to be a channel for retail buyers to access FX for a variety of invisible transactions such as the payment of medical expenses, school fees and allowances, and other sundry activities. These FX buyers typically needed dollar amounts of $5,000 or less.

According to analysts from Proshare Research, “licensed BDC operators took a stab at the eye of the CBN policy by engaging in wholesale trading activities at rates that were a premium to those of commercial banks.

“This allegedly resulted in banks using BDCs as pipelines for arbitraging higher FX returns and starving the traditional bank-situated wholesale business of funds. The massive rewards of FX rent-seeking were like honey to a bee. It was overwhelmingly attractive leading to a rash of new license requests by high net worth individuals who saw the BDC market as a risk-free secondary string of cash flow.”


Managing Director/Chief Executive Officer, Financial Derivatives Company (FDC) Mr Bismarck Rewane, said that the CBN is right in its decision.

According to him, what happens is that the BDCs will buy dollars at N400 and within a space of an hour, sell it at N500 to a dollar.

He said that in the year 2000, there were 74 BDCs operating in Nigeria, but by 2010 they increased 27 fold from 74 to 2000 operators, just as the number in 2020 went up to 5,000.

Nigerian Tribune checks revealed that the number of licensed BDC operators as of June 30, 2021, was 5689. The governor also stated during the press briefing that 500 license applications are received every month, going forward no new BDC licenses will be processed or issued. This also applies to licenses currently being processed which the apex bank has started the process of refunding their minimum paid up capital and licensing fees.

Comparing the value of dollar demand with debt servicing, Rewane in a TV interview monitored in Lagos said that in  the last quarter, the Federal Government or CBN as it is spent more on tourism than debt servicing.

Nigeria he revealed spent $472 million on travels and tourism but paid out $173 million in debt servicing.

“No country in the world can survive this haemorrhage,” he said.

The CBN, Rewane observed, has to take steps because saying that they are licensed by the Central Bank is water under the bridge. What was happening is daylight robbery, he said, adding that the fact that the Naira has depreciated simply means that demand will fall.

On steps to be taken, the economist said the first thing to do is to stop everything as the apex bank has done which according to him, is administrative control.

“But the problem is that when you stop things administratively, you create another black market premium.

“I agree with the CBN Governor that people should go to the bank but when you use administrative controls people get to suffer a little.

“You and I know that it is easier to put 50 flies in a matchbox than walking into the bank and coming out in the next five minutes. So people will take the pain,” Rewane stated.

Recommending what the CBN should do, he said the ultimate solution is that CBN should sell to the BDCs at parallel market rates, less five per per cent. If parallel market exchange rate is N500 to a dollar, the CBN should sell to BDCs at N490 to a dollar.

He believes that the N10 margin is lower than the N100 margin.

According to Rewane, the CBN is spending $100 million a week, $440 million a month and $5 billion a year for travelers.

He also recommended that the best thing to do is to have a market solution and administrative solution working together because administrative solutions are always prone to abuses. People should go to the bank and get their dollars but those who are in a hurry like smugglers, to get foreign exchange should go and pay the parallel market rate.

Before the cessation of supply, about $110 million was sold to BDC operators every week, but this amount would now be re-channeled to commercial banks to meet legitimate FX needs highlighted in the CBN’s FX manual.

Will it be a repeat of 2016 episode?

This would not be the first time the CBN would take the hammer to BDCs. In January 2016, it stopped the sale of FX to BDC operators and revised their operational guidelines for similar reasons stated in the last MPC meeting. At the end of the year 2016, the Naira depreciated by -54.94 per cent at the Investors and Exporters (I & E) FX window while at the BDC window it depreciated by -76.25 per cent.

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Another factor that drove down the value of the Naira in 2016 was the fall in external oil revenue which was underlaid by a dip in oil prices.

The country’s foreign reserves also came under pressure in 2016, indeed by the end of that year, the average annual foreign reserves had nosedived year-on-year (Y-o-Y) by -14.39 per cent to an average annual figure of $26.28 billion.

According to analysts, recent events look like a throwback to 2016. However, 2021 realities have had some peculiarities. In 2021 inflation has stayed at double digits of above 17per cent per annum, adoption of the NAFEX rate by the CBN, adjusting the Naira from N379/ $ to N410/ $, however, the average year-to-date (YTD) price of crude is $64/b as of 1 July 2021, with production volume at 1.45 million bpd. The YTD movement in the foreign reserve has also declined by -5.71 per cent.

To avoid a repeat of what happened in 2016  when the Central Bank of Nigeria (CBN) suspended dollar sales to  Bureau De Change (BDC) operators, finance and economic experts from Lagos-based investment banking and research firm Afrinvest (West) Africa Limited has recommended five strategic steps that must be taken.

The experts said: “first, we posit that the CBN provides better clarity on its exchange rate policy to gain the confidence of foreign portfolio investors.

“We recommend an increase of the FX allocation to banks to enable them to cater to all genuine demands. Thirdly, we advise that the CBN should scale back banks’ FX processing requirements, to attract Nigerians into the official FX loop.

“We suggest that the CBN intensify public awareness on the need to embrace the latest development, to prevent unfavourable reactions that could further promote speculative trading.

“Lastly, we recommend that the CBN provide more funding to local producers of the now 44 items restricted from accessing FX at the official rate, to mitigate the likely pass-through effect of higher costs to consumers.”

According to the analysts from Afrinvest, the 2016 decision failed as insufficient FX supply to banks (from CBN) and customers’ apathy to banks’ cumbersome procedures kept demand at the parallel market elevated.

Despite the pressure being put on the Naira, “we expect the Naira to rebound, if the CBN stays true to its statement of continuous supply of FX to the commercial banks and the commercial staying true to the execution and implementation of the policy,” the Proshare analysts stated.

The analysts further pose some rhetorical questions: “Does the vendor of FX matter in the case of falling FX earnings or should attention be pivoted towards shoring up supply?

“How efficient will the commercial banks be in implementing the new policy?

“Will the FX buyers be faced with the issue of bureaucracy and delay in accessing FX from the commercial banks? “

The jury is still out on how far the Naira to Dollar exchange rate would fall, but no matter how far it tumbles, importers and domestic consumers will feel the brunt as import costs and domestic prices rise steadily.

The CBN’s decision has thrown the cats amongst the pigeons and unlike 2016 when a quick policy reversal resuscitated the BDC business, this time around, with the economy fragile and the government hemorrhaging cash, not too many pigeons will remain in the FX courtyard for too long, the analysts said.

What the banks are saying

The Body of Bank Chief Executive Officers (CEOs) says the banking industry is ready to sell foreign exchange to all legitimate customers as directed by the Central Bank of Nigeria (CBN).

Speaking last Thursday at a virtual media briefing, Herbert Wigwe, chairman of the Body of Bank CEOs and Access Bank MD, said banks have broader sources than BDCs to meet customers’ forex needs.

“The move by the CBN is commendable as it would give customers different channels to collect their Personal Travel Allowances (PTAs), Business Travel Allowances (BTAs) and school fees requirements for their children,” he said.

“This is just to get you up-to-date on the readiness of the banking industry so that you will be able to help us communicate to the market that we are ready to carry on with this responsibility.”

Wigwe explained that the CBN had sent a circular to all banks to create a designated point to meet customers’ need for forex, adding that the service would come at no additional cost.

“They might have not reached 100 per cent across the country, but it is happening as we speak and there is more than enough forex to meet their demands. There is not one additional charge for all of these things,” Wigwe said.

Also at the event, Segun Agbaje, Group Managing Director of GT Holding Company Plc, said customers could start walking into banks to get served.

He assured the public of the banks’ capacity to meet customers’ expectations.

“The rates we saw yesterday and today are a complete aberration and if I recall correctly, BDC money comes at N412 and the banks would sell it at N412,” he added.

“With this development, customers have a wider network to buy from and I can bet the rates are going to come down and it would be very easy to buy at N423 or N425 if you are travelling today.”

BDC operators’ position

It is said that “if you did not blow your trumpet, no one will do that for you.” So, in a quick step to rise to the occasion, the Association of Bureaux De Change Operators of Nigeria (ABCON) came up with a strong statement.

They assured members of the public that BDCs are still providing foreign exchange services.

Signed by the ABCON President, Aminu Gwadabe, the association gave this assurance  stressing that the recent pronouncement of the CBN does not stop BDCs from providing foreign exchange services as allowed by their operating licenses and also in their operating guidelines.

He added that while the dollar sale from CBN had helped in enhancing supply, the fact remains that BDCs are empowered to source forex from other sources and also to provide various services to members of the public.

“While the CBN has stopped dollar sale to BDCs, it has not canceled their operating licenses, or banned them from providing forex services to members of the public”, he added.

“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, it promised that it 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.

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