The recent hike in the capital base for the operation of the Bureau De Change (BDC) in the country by the Central Bank of Nigeria (CBN) is generating controversy. In this interview with Dike Onwuamaeze, Associate Editor, Wilfred Iyiegbuniwe, professor of Finance, Faculty of Business Administration, University of Lagos, bares his mind on the new policy and suggests that the CBN should stop the practice of selling foreign exchange to the BDCs. Excerpts:
What is your view on the recent CBN’s policy which increased the capital base for operating a BDC from N10 million to N35 million?
The increase from N10 million to N35 million has good intentions. Looking at the background of the Bureau De Change (BDC) business, there is what I call indicators of abuse. We have too many of them such that just around the street corner you can buy foreign currencies. The CBN observed that some promoters appear to have multiple BDCs, which shouldn’t have been a problem but for the fact that the allocation of foreign currencies to the BDCs is more of a preferred basis, in the sense that it is not in the open market competition. If it is in an open market, and without an implicit subsidy, it wouldn’t matter how many BDCs a person wants to set up. The abuses are obvious, although the CBN has not come out to say that a particular operator has been found wanting. Low capitalisation makes it easy to have multiple BDCs by the same promoters for the obvious reason that each of them gets cheap foreign currencies allocations from the CBN. The intention is this: the more BDCs you have the more forex allocations you receive. Of course, you can argue that capital requirements from a technical point of view by asking: “how much capital does a BDC promoter need to carry on with his operations? How much risk do they bear that they need to be capitalised to that tune?.” I think that should be the argument. It looks too ordinary, or too mundane, to say that you want to discourage ownership of multiple BDCs by increasing the capital requirements. I think the issue of capital requirement should be separated from the abuse of the system. Capital requirement should be based on a computation of how much money that is needed to run a BDC effectively.
Some people have argued that we do not have the ideal BDC market in Nigeria. That it is only in Nigeria that the central bank sells foreign exchange directly to BDCs?
Exactly. That is the point. There is a free lunch by the fact that they are getting preferred allocations. If that is not the case, and that was what I meant by saying that if it is an open market operation where they can source their foreign exchange on their own competitively, then it wouldn’t have been an issue to say you have one or more BDCs. The government should stop funding them. The CBN should stop giving them preferred allocations. They are getting a free lunch and that is why I am not surprised that the National Assembly has joined the bandwagon to protest the new BDC policy. Well, who are the promoters? Some of them are either in the National Assembly or the promoters have their boys in the National Assembly. So, it is a question of people protecting their vested interest. I think the CBN should be more articulate and change the way the BDCs source foreign exchange. Let them bid competitively. It shouldn’t be given to them on preferred allocation so that it would no longer matter who wants to own more than one BDC as they should know that they are taking a risk. I subscribe to the argument that BDCs should source for foreign currencies independent of the CBN so that the free lunch that breeds the abuses the Central Bank complains about would cease.
How do you see the trend of rushing to the National Assembly to stop a financial regulator from doing its legitimate duties?
I think it is absurd. I think that the National Assembly is over-reaching its powers in the sense that there is an enabling law that established the CBN and as long as it’s operating within that law, the National Assembly cannot query it. And I think the National Assembly must understand that for its opinion to be respected, it must ensure that it acts within the law. He who comes to equity must come with clean hands. You cannot say that because you make the law, you can interfere with its implementation anyhow. No! What is needed is for the aggrieved BDC operators to go to court if they strongly feel that CBN has acted beyond its powers.
Some people are claiming that if the CBN is allowed to have its way, the new policy would take the country back to the era of round-tripping by the commercial bankers?
If a may ask; has round-tripping been totally absent? How do BDCs get more foreign exchange apart from the preferred bidding they receive from the CBN? What the CBN should do is to catalogue the abuses, punish the abusers and withdraw some licences. But as I said earlier, this should be kept separate from the issue of capitalisation. The circular CBN sent out on this matter mentioned rent-seeking behaviours among the BDCs. But this happens because you created the opportunity for rent-seeking by not allowing BDCs to source for foreign exchange competitively in the market.
Don’t you think that this policy could create a wide gap between the official and the parallel market and further devalue the Naira?
I do not agree with you because the BDCs are not being proscribed. How much is N35 million? There will still be many promoters that will be in the business. The new capitalisation will only remove fringe operators. To run an appropriate BDC’s office with good staffing will gulp half of that capital in a year. We are talking about N35 million and not N35 billion. Some people just want to play politics out of this. The people that will be removed definitely will be the fringe players who sell foreign exchange by the road side. And it is very absurd that we sell and buy foreign exchange by the road side. The CBN should come out with a clear specification on the office structure and staffing of a BDC and raise the standard. Of course, working capital is part of this N35 million. I do not see the hue and cry except that because people have gotten used to road side operators they want them to be allowed to continue to exist. The CBN should take bold steps and insist that foreign exchange transactions by the BDCs must only be conducted in stipulated office, not on the road side and market squares.