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More endorsements for CBN’s clampdown on BDCs

By on July 7, 2014

Amidst the report that certain bureau de change operators may have been wiring funds to the various terrorist cells in the country, in addition to the depletion which their insatiable demand for forex is causing the nation’s foreign exchange account, a wide spectrum of financial analysts said the Central Bank of Nigeria should be allowed to carry the reform to a logical conclusion in the nation’s interest, reports Festus Akanbi
For the second week in a row, reactions to the recent review of operational guidelines for bureau de change operators by the Central Bank of Nigeria (CBN) occupied prominent positions in major national dailies.
However, unlike the previous week when industry watchers appeared to be aloof because they were busy studying the new guidelines, last week was different as a number of financial experts not only backed the leadership of the apex bank on its latest intervention, they also found it necessary to stress the implication of the on-going meddlesomeness of the National Assembly in the matter.
The House of Representatives which first opposed the policy said the increase will lead to massive unemployment and increase in the price of dollar, and this would extensively affect the prices of imported goods. In the same vein, the Chairman, Senate Committee on Finance, Senator Ahmed Makarfi, who also criticised the new plan by the CBN to bench the capital base for bureau de change operations at N35 million, said it was unjust, unfair and inequitable.
Makarfi said the policy should be optional, noting that operators of BDC would be running at a loss if such a high capital base is set for them.
The CBN had observed with grave concern the deficiencies in the operational effectiveness of BDCs, which showed gross violation of some of its objectives, particularly the activities of operators only interested in profiteering from the foreign exchange market, regardless of prevailing official and interbank rates.
The abuses, the banking industry regulator said, have also resulted in weak and ineffective operational structures in defiance of established objectives, reckless depletion of the country’s foreign reserves, and large-scale financing of unauthorised transactions, including the financing of terrorism with foreign exchange procured from the Central Bank.
Links with Terrorists
As the apex bank continues to establish links between some of the bureau de change operators and terrorist activities, informed financial and security analysts said the current efforts to contain the activities of the Boko Haram insurgents in some parts of the country will be a futile effort if the clampdown on BDCs operators is politicised.
It was gathered that the central bank had undertaken an audit of BDC operations and discovered that several BDCs used multiple addresses and some of their owners owned multiple BDCs, which are all licensed with the CBN.
It was also learnt that some of the BDCs are used to procure foreign exchange from the central bank everyday that is in turn used to buy arms and ammunition as well as for the funding of other terror related activities by Boko Haram.
The sources said the Joint Intelligence Board (JIB), comprising the CBN, Economic and Financial Crimes Commission (EFCC), Office of the National Security Adviser (ONSA), Independent Corrupt Practices and Other Related Offences Commission (ICPC), the police and Department of State Security had established that some BDCs in Maiduguri, the Borno State capital, have been involved in laundering funds for terrorists.
The JIB was set up to monitor and clampdown on the illicit flow of funds into and out of the country through the financial system, requiring banks to report deposits in excess of $10,000 to the CBN and EFCC.

Dollarisation of the Economy
The CBN also frowned at the practice where dollar was being used in local transactions in the country, a development that has negatively impacted the conduct of monetary policy and undermined the cashless policy initiative.
It condemned the practice where some operators owned several BDCs with the sole aim of buying foreign exchange multiple times from the CBN window for profiteering purposes.
Consequently, the apex bank reviewed the minimum capital requirement for the operation of BDCs in Nigeria to N35 million; the mandatory cautionary deposit is reviewed to N35 million and shall be deposited in a non-interest yielding account in the CBN, upon the grant of Approval-in-Principle; the following fees shall apply to the licensing of BDCs: Application Fee – N100, 000.00; Licensing Fee – N1 million; and Annual Renewal Fee – N250, 000.00.
Interestingly, as some members of the National Assembly appear to be politicising a purely economic issue, cautions were coming in torrents in form of discussions in the broadcast media, opinion articles and newspaper editorials on the need to rally round the CBN in its bid to rid the nation’s foreign exchange market of the twin problem of arbitrage and rising dollarisation of the Nigerian economy.
Wrong Signals
Analysts said the National Assembly would be sending a dangerous signal to Nigerians if it continues to block the on-going review of operations of BDCs in the light of the speculation that the apex bank might be targeting sponsors of terrorism in the country.
According to the Executive Secretary, Financial Markets Dealers Association, Mr. Wale Abe, who was a guest on Channels Television’s Business Programme, Business Morning, last week, a situation where the National Assembly keeps questioning a decision taken by a regulator in the country was not in the interest of the economy as this would send wrong signals to the international investors.
Abe said that the CBN should be allowed to exercise its rights and its part of the CBN’s right to regulate the foreign exchange market.
He noted that since the announcement of the new guideline, the pressure which has been on the naira for some time has reduced.
Abe is of the opinion that ultimately, if the new policy is allowed to stand, it will have a lot of positive impact on the forex market, including bridging the gap in the exchange rate in the official market and the parallel market.
Reacting to the antagonism of the National Assembly to the new guidelines on BDCs operation, Managing Director, Financial Derivatives Company Limited, Mr. Bismarck Rewane, said politicians have no authority to dabble into the regulation of bureau de change operation.
The responsibility of managing the currency, according to him, is that of the central bank, saying while the assembly can talk on broad economic policy, that of management of the currency is that of the CBN.
He maintained: “The moment the assembly starts to influence what the capital base of bureaux de change is, then they will be over-reaching themselves. It is a clear case of trying to meddle. In any case, the instrument being used to tackle the currency issue does not address the fundamental issue of the value of the currency. The determination of the value of the currency is an issue that the CBN is trying to decide but that is not a justification for politicians to dabble into it. The central bank could have short-term measures to avoid making an adjustment close to an election, but sooner or later the question on the true value of the currency will come up. Sooner or later we will have to address that,” he said.
Managing Director, Proshare Nigeria, Mr. Femi Awoyemi, described the latest efforts of the CBN as a bid to address the current state where it has inadvertently created a huge arbitrage in the forex market and consequentially, aided the dollarisation of the economy.

Litmus Test for CBN
Given the ownership structure of some of the bureau de change in Nigeria, Awoyemi believed the apex bank’s action would not be an easy task, but remains one that must be done. We dare say, it is the first litmus test of the current CBN Governor.
Also in an editorial titled, Time for the CBN to Stop the Excess it Created through BDCs, Proshare, a Lagos-based financial and investment firm said the CBN will however have to deal with a well organised intent/effort at scuttling the new requirements for BDC operations in Nigeria, as proposed but it must hold firm on the premise that delivered the change proposed.
The argument is that the new licensing guidelines of BDCs is premised on the need to basically ensure that the ‘eventually approved BDCs are well structured to eliminate inefficiencies in practice, improve processes and ensure that we comply with global best practice. If this means little to Nigerians, it helps to know that the CBN is equally clear that going forward, new BDC’s will have to partner with globally recognised money transfer institutions that subscribe to best practices – leaving them to earn commissions as done the world over.
“It should interest Nigerians who wonder why all the attention on BDC’s to know that the CBN remains the only country still selling Dollars to BDCs in the world. Kenya, the last before Nigeria stopped this practice a while ago,” the company stated.
The Drain
Other analysts’ who identified with the CBN on the review of guidelines for BDCs operations said the drain which the proliferation of bureau de change operation cause to the foreign exchange account poses danger to the economy, hence the need for the apex bank’s intervention.
The fury of the affected bureau de change operators over the new regime of operation guidelines did not come as a surprise. Given the low capital base in the old regime (N10m) and the daily access to the dollars, it was easy for smart operators to take advantage of the situation at the detriment of the economy.
A source told THISDAY that because of the low capital needed for their operations, some bureau de change operators could easily operate even without much capital.
He said the situation was so bad that some operators even found it difficult to raise the naira equivalent of the $50,000 weekly sale from the CBN, saying what they did was to look for anybody who is ready to trade with his money while the BDC operators settle for a percentage of the dollar sale.
According to the explanations, there are 3,208 bureaux de change (BDCs) officially registered with the CBN. In addition to those already registered, the central bank has applications from 1,417 prospective bureau de change awaiting its approval. Analysts said should the CBN grant them the licences, the country would have 4,625 licensed BDCs operating in the country to which the central bank must sell $50,000 on a weekly basis. What this means is that should the CBN go ahead to license the 1,417 prospective BDCs, funding almost 5,000 BDCs would exceed $12 billion per annum, thus providing a veritable avenue for the depletion of our foreign reserves.
Reports have it that between 1989 and 2004, the Ministry of Finance, which at the time was responsible for licensing BDCs, licensed 74 of them. In the 15-year period, the 74 BDCs were self-funded and sourced their foreign exchange from autonomous sources, not the CBN. By 2005, the central banks stepped forward by taking over the licensing regime and increasing the number of BDCs from 74 to 938 over a four-year period. It also started to sell $200,000 twice a week to the BDCs in April 2006 and increased the volume to $300,000 twice a week on September 1, 2008.
In 2009, former CBN Governor, Professor Chukwuma Soludo, decided to stratify the BDCs, classifying them into Class A BDCs, which was sold $1 million per week by the CBN and Class B BDCs that were entitled to $100,000 weekly. His successor, Sanusi, dropped the classification system in 2010 but continued with forex sales of $1 million per week to all the BDCs. Later, he slashed the amount of forex sold to BDCs to $50,000 weekly, translating to $7.7 billion per annum that was sold by the central banks from 2012 to date.
There is no doubt that this practice cannot be sustained forever and analysts believe the time has come for the apex bank to step in before further danger is done to the foreign exchange account.
The sheer number of the licensed BDCs is also said to be encouraging the dollarisation of the economy and money laundering activities. Today, some schools collect fees in dollars, hotels are not left out as they price their rooms in dollars while some landlords in some parts of the country collect rents in dollars.
The danger is that the rising appetite for dollars will erode the foreign exchange account with the corresponding pressure on naira.
Besides, analysts observed that Nigeria appears to be the only country where the central bank is still funding BDCs and this is the reason being adduced for multiple exchange rates in the country.

 

 

[This Day]

2 Comments

  1. Ugwu Uche

    July 7, 2014 at 6:04 pm

    A more gradual approach to this bdc problem could be adopted.
    For instance giving a dateline of July 15, 2014 is not enough time for implementation. He could have given them say 3months from the date of the pronouncement.

  2. Absadiqmi

    July 8, 2014 at 11:18 am

    He should atleast give them the deadline of one month not just some few days. we are talking about 35m naira here.