The Central Bank of Nigeria (CBN) recently announced a 250 percentage raise in the minimum capital requirement for Bureaux De Change (BDC) business in the country from N10 million to N35 million.
The Central Bank said it took the tough decision of raising the capital requirement from N10 million to N35 million and some other stringent measures to correct observed deficiencies in the BDC segment which have led to gross inefficiencies and sharp practices in the Foreign Exchange (FOREX) market.
The apex bank said the steps were particularly to check growing incidence of rent-seeking, depletion of external reserves, financing of unauthorized transactions with foreign exchange procured from its window, gradual dollarization of the Nigerian economy with attendant adverse consequences on the conduct of monetary policy and subtle subversion of cashless policy initiative.
But on announcement, the policy was immediately shouted down, first, by the House of representatives who ordered the CBN to immediately revise those rules and then more recently by the Senate members, who however said they would look into the policy and substantiate its worthiness or otherwise.
Recall that apart from jerking up the minimum requirement, the CBN also reviewed the mandatory cautionary deposit from N500,000 to N3.5 million which is expected to be deposited in a non-interest yielding account in the CBN, upon the grant of an Approval-In-Principle.
The CBN said it expects all existing BDCs and those currently operating with a final approval letter to comply with the new requirement on mandatory cautionary deposit by July 15, 2014, while urging all current applications to comply with these new requirements.
In a statement announcing the new guidelines, the CBN said the new set of rules were therefore to ensure that only genuine and more serious companies are allowed to operate in the sector, going forward. Henceforth, application for a BDC licence would attract an application fee of N100,000, licensing fee of N1 million and an annual renewal fee of N250,000. Meanwhile, owning multiple BDCs was no longer permissible in the new era and would attract sanctions if detected.
Since the announcement of the new requirements, so much discuss has gone on as to whether or not the CBN went overboard in taking steps to sanitize the parallel aspect of the FOREX market. Observers, however, think that the level of push back that has greeted this policy since its announcement barely two weeks ago was not unexpected, bearing in mind that the FOREX market, especially the BDC end directly involves elitist patronage. Critics argue that the new policy would worsen unemployment, lead to an embarrassing devaluation of the nation’s currency because many operators would close down, a situation they think would lead to the emergence of various black markets across the country.
There are however, other contrary views to this. But as expected, the operators themselves who are directly affected are already fighting back, lobbying politicians, law makers and all concerned to help shut down the policy so that they remain in business without considering the huge damage that the sector’s inefficiency has done so far to the economy and/or could do in future if not sanitized now.
The Association of Bureau De Change of Nigeria, led by their Acting President, Aminu Gwadabe has already met with the CBN authorities and politicians, seeking a redress on the policy they consider unfair. Gwadabe’s argument has been that the imposition of the policy on the operators would lead to circulation of foreign currencies, adding that the active involvement of the organised BDC operators in forex trading over the years had greatly improved the image of the country abroad as Nigerian travelers were no longer harassed for being in possession of fake currencies.
But apart from the BDC operators, there is also another critical stakeholder in the “dollar market” (going by history and reports), who were of course, expected to quickly revolt against the new FOREX requirements- they are the politicians and they have not disappointed so far. But more disappointing is the fact that most of their fight may not necessarily be for economic gains for the entire country but for personal aggrandizement.
Nigeria is entering an election year when politicians buy up and stock enough foreign currencies, particularly dollars to influence supporters and votes, thereby dollarising the economy, creating scarcity and ultimately putting the local currency- the naira under intense pressure. This has been a regular practice.
The politicians do not need to source the dollars from the official market where their illegal acts and business will be exposed. The parallel market- the BDCs then become their best source to launder and access as much foreign currency as they want and then they create scarcity.
This is also no news. And what this does to the economy is that the market comes under pressure, the BDCs are no longer able to meet genuine demands and then exchange rates go up and naira depreciates.
The naira has constantly come under pressure, mostly due to speculations and artificial scarcity created by excessive dollar demand. The CBN continues to intervene in the market by increasing dollar supply to meet demand, and in the process the nation’s Foreign Reserves continues to deplete.
The Central Bank had severally raised the concern that it had traced where and how the FOREX it supplies to operators for onward sales to genuine end users go. The monies, regrettably were ending up in wrong hands- not for imports, not for Basic Transport Allowances (BTAs) for genuine travelers abroad – but the dollars are often mopped up by the politicians.
While still in the office, former CBN governor, Sanusi Lamido Sanusi had cried out severally that the apex bank had noted the existence of strong foreign exchange demand pressures coming domestically and which were not necessarily linked to an increase in the import of goods.
“The non- import related demand was due to the buildup in political activities in the country and increasing resort to dollarization of the economy by the political class,” he had cried out at some point. He signaled then that the apex bank would fast-track strategies to adopt new regulations aimed at combating money laundering in the BDC segment. Meanwhile, Gross official reserves which stood at US$42.85 billion at end-December 2013 had dropped to just about $37.6 billion, by July 2, 2014.
The CBN largely attributes the decrease in the reserves level to “the increased funding of the foreign exchange market in the face of intense pressure on the Naira and the need to maintain stability.” By the way, the BDC is a parallel market duly recognized by law to complement the official FOREX market.
The Foreign Exchange (Monitoring and Miscellaneous Provisions) Act 17 of 1995 and the BOFI Act of 1991 empowers the CBN to license and regulate Bureaux de Change (BDC) operations in Nigeria. The major objectives include to provide access to foreign exchange to small-scale end-users – for instance those requiring below $5,000 for Basic Transport Allowance (BTA) for short trips abroad like holidays, official purposes etc. It would also serve as tools for the management of exchange rate while assisting in the fight against illegal financial activities; facilitate economic activities; and Provide economic data for policy decisions. But rather than achieve these goals, the BDCs have turned to money milling machines of some sort to the operators and beneficiaries of their often illicit acts.
The CBN is worried that there has been an avalanche of rent-seeking operators only interested in widening margins and profits from the foreign exchange market, regardless of prevailing official and interbank rates. Again, the BDCs’ steady creation of artificial scarcity in the market has led to the continuous depletion of the country’s foreign reserves, in view of the unusually large number of BDCs. There were about 3,208 BDCs in operation as at May 2014.
There is another set of 1,417 currently awaiting approvals while 252 additional applications were received between May 30-June 22, 2014. Meanwhile, out of 120 BDCs that the CBN sampled based on volume of purchase from banks, about 101, representing 84 per cent were in breach of the objectives and provisions of the Guidelines.
There was equally weak and ineffective operational structure, resulting in the sub-sector completely abandoning the objectives for its establishment in line with the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act 17 of 1995 and the BOFI Act of 1991. CBN notes that while several BDCS use the same addresses, majority of them could not be located and had no accounting records. Majority of them also relocated without approval; while most of them do not have sales documents, contrary to regulatory rules.
It was also gathered that a high percentage of the BDCs sell well over the approved maximum 2 percent margin allowed by the guidelines as some of the operators were caught in clear cases of sharp practices. Besides, the Nigeria Customs Service (NCS) has severally reported cases of direct export of foreign exchange, particularly dollars, through the airports. Most of these cases have been linked to parallel market operators.
The required minimum paid-up capital of BDCs had remained inadequate at N10 million even when the capital requirements of all other CBN-regulated entities have been reviewed upwards over the years. CBN said there were equally cases of prevailing ownership of several BDCs by the same promoters in order to buy foreign exchange multiple times from the its Window, which is clearly related to the low level of capital requirements for licensing BDCs.
These are why the CBN rolled out the new guidelines to correct the anomalies. In the new era, the CBN said its expectation is to have BDCs that are properly structured, effectively regulated, and well-capitalised to meet the objectives for which operators are licensed. The apex banking regulatory authority said it particularly envisages to see an emergence of well-capitalised and structured entities that can effectively perform the roles of Bureau De Change in the economy.
It also anticipates some sort of partnership between BDCs and renowned companies engaged in inward and outward money transfers in Nigeria as well as Creation of robust and sustainable business franchises that are not dependent on rent-seeking activities but are properly situated to compete in the foreign exchange market, and deliver superior values and returns. Experts believe that the benefits to be derived from the new guidelines are enormous. First of all, it is expected that more jobs will be created when the BDCs are well-structured in line with the new guidelines.
“This will be a great departure from the current practice where only few, in most cases not more than two persons, are employed by the 3,208 BDCs,” said Ayo Onabanjo, an Abuja based financial analyst. But more importantly will be an accretion in the country’s foreign reserves and the preservation of the Naira value. The CBN says its “intention is not to distort the operations of the FOREX market if there are no observed sharp practices that pose threats to the nation’s financial and economic stability.”
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