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CBN-BDC debacle: Why CBN should resume funding BDCs

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The divorce between the Central Bank of Nigeria and the Bureau De Change has created a vacuum in the heart of the foreign exchange market. To fix their broken home, the BDCs will need to adhere to rules in areas such as transparency, liquidity, and accountability.

It’s been over two weeks since the Central Bank of Nigeria decided to discontinue the supply of FX to Bureau De Change operators (BDCs) in its attempt to fix the controversial foreign exchange market. The intent of the measure was to clamp-down on illegal activities being perpetrated by the BDCs.

In the aftermath of the CBN’s directive, Nigerian banks have barraged their customers with emails offering dedicated teller points for FX transactions at all their branches nationwide.

On the other side of the divide, the BDCs have been hung out to dry as the CBN sealed inflows to their pipes. And quite rightly so as the BDCs enabled a market that created artificial FX scarcity, dollarization of the Nigerian economy, subversion of the cashless policy, common ownership of several BDCs by the same owners to obtain multiple FX to name a few monsters their system made.

So in the context of these woes, the sole arbiter of the Nigerian Financial System made the right decision – however, the paradox of the Nigerian economy would highlight that the CBN has created gaps in supply and demand.

Let’s recall the border closure policy. The main reason for the closure was to curtail the smuggling of goods such as rice and textiles to boost domestic production. Unarguably, the right decision for a country that sought to prioritize export-substitution but we know how the policy backfired.

Now the foreign exchange market generally is influenced by demand and supply, although not entirely laissez-faire as the Central Bank regulates it. So, the idea of subjecting the demand of FX to “PTA, BTA, school, medical fees, and SME transactions” is fundamentally un-economic. In the Central Bank Governor’s address, he said banks should fund only “legitimate” needs.

The overriding issue with this particular directive resides in its semantics. The litmus test for ‘legitimacy’ in the CBN’s context leaves more questions than answers. Does a student’s need for monthly ‘pocket money’ or emergency funds from his parents in the United Kingdom not count as legitimate? If yes, is this “legitimate” need provided for by the banks? No. This common transaction is easily done with the BDCs and herein lies the gaps. It is easy to pick holes but that is not the crux of the matter. Utopia does not exist anywhere. There are legitimate concerns that making the banks the ‘be all and end all’ would create another monster as they have also conducted illicit malpractices in the past.

The importance of BDCs in the Nigerian forex market cannot be overemphasized. Globally, the ideal practice for Bureau De Change (BDCs) is that there are formal institutions licensed by the Central Bank with guidelines defining their mandate. Yet in Nigeria, a few BDC operators have flagrantly abused this mandate. Nonetheless, let’s not throw the baby out with the bathwater. An association of over 5,000 operators would likely contain bad eggs, it is no ‘Sanctuary’ – even that had a Judas with just 12 people.

The ABC of BDCs is to cater for the pocket FX needs of individuals and SMEs. Its reach and accessibility provide a comparative advantage the banks do not have. Their services play an important part in currency flow between nations and people. The Bureau De Change provides critical roles in the economy and contributes to the economic development of the country like ensuring accessibility in the forex market, providing data for monetary policy, channels for CBN Intervention in the retail forex market, and creation of over 15,000 jobs among others.

Despite these positives, there is a need to stamp out the negatives. The leadership at No. 4, Oluwaleyimu Street, Ikeja, Lagos has to enforce stringent rules that border on transparency, liquidity, and accountability.

According to private sources, the association is attempting to overhaul its operations and are consulting with experienced audit and technical partners that would add to their existing measures to eliminate all issues addressed by the Central Bank. The new initiative would leverage advanced technologies such as:

  • SaaS Masters for an online real-time rendition of returns.
  • Integration of BDCs on the BVN validation portal.
  • goAML/NIL returns to the NFIU platform.
  • Sanctions list and PEP validation platform.
  • High-level foreign technology that would onboard all Bureau De Change operators and track their inflow and outflow.
  • Merge all the existing BDC operators for effective monitoring and management as the current number of operators provides a channel for malpractice.

These moves are in addition to complying with the existing CBN Act, BOFIA, Anti-money Laundering, and Counter Financing Terrorism guidelines, Know Your Customer (KYC) requirements. The BDCs are statutorily compelled to adhere to the CBN Guidelines on their scope and operations. To ensure compliance, the CBN requires that each licensed BDC renders returns periodically (Daily, Weekly, Monthly, and Annually).

To put it directly, the Central Bank should embrace these possible changes ABCON would make in their operations similar to how they did a 180 and opened up to the idea of a digital currency (E-naira) despite its earlier reservations on cryptocurrency.

Technology solves everything as our financial systems are becoming increasingly digital. Conclusively, if the Head of the Financial house looks at the pots in the sink rather than the kettles on the counter, we would understand why the FX market ends up dirty. Liquidity is an especially important issue and is the reason most of these problems occur.

The BDCs are always the scapegoat, just like in 2016, whenever there is a dollar shortage in the economy because of low inflow, FDI, or oil proceeds. A classic example of the baby dying when the witch cries.

Nigeria’s Foreign Reserves has declined by $1.97 billion compared to $35.37 billion at the start of the year despite oil prices ranging in the $60-$70 region. FDI slumped to the lowest level in 11 years as Q2 2021 data recorded just $77.97 million coming in. As inconvenient as this truth may be, limiting forex accessibility during these times would inevitably create arbitrage opportunities. The CBN can engage in strategies that stimulate forex inflow and embrace the initiatives ABCON has proposed with stricter financial monitoring tools.

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