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Emefiele-new cover

Mr. Godwin Emefiele, new Governor of the  Central Bank of Nigeria, increases the capital base of Bureaux De Change operators in Nigeria from N10 million to N35million in a bid to  clean up the sub-sector,  maintain exchange rate stability and preserve the value of the domestic currency.

By Dike Onwuamaeze

 When Mr. Godwin Emefiele, new Governor of Central of Bank of Nigeria (CBN) held his maiden press conference on June 7, 2014, and later presided over the Bankers’ Committee meeting without any earth-shaking policy pronouncement, many stakeholders in the Nigerian financial sector heaved sighs of relief. They felt relieved that the new governor departed from the precedents set by his immediate predecessors who greeted them with policies that saw many chief executives in the sector losing their jobs. In 2004, Chukwuma Charles Soludo, a professor of Economics, used his first outing as the governor of the Central Bank to launch a recapitalisation exercise that saw 64 bank CEOs out of office by the time it was concluded. Again, in 2009,   Alhaji Sanusi Lamido Sanusi, who took over from Soludo, on assumption of office as CBN governor used his first public engagement to boot out five bank chief executives in his bid to cleanse the banking industry.

Even when Emefiele mentioned the management of the foreign exchange while unveiling his vision for the CBN on June 7, he did not give any hint that a storm was on the way. “Under my leadership, the Bank will continue to focus on maintaining exchange rate stability and preserve the value of the domestic currency. We will strive to build-up and maintain a healthy external reserves position and ensure external balance,” the new CBN governor said, without betraying any follow-ups.

Thrust of the modified guidelines

If the operators in the Bureaux De Change (BDC), who were spared the trauma of the wave of recapitalisation exercises that blew across the financial sector in the past 10 years, thought that it is going to be business as usual, they were wrong. Like a bolt from the blue, the CBN slammed a new capital base on the sub-sector when it announced modified Bureau De Change Guidelines on June 23. The modification reviewed the minimum capital requirement from N10 million to N35million. In the same manner, the mandatory cautionary deposit was reviewed to N35 million and must be deposited in a non-interest yielding account in the CBN upon the grant of Approval-in-Principle.

The modification also outlawed multiple ownership of BDCs. Application fees is now N100,000. The licensing fee is now N1 million while the annual renewal fees is N250, 000. The CBN said that “all existing BDCs and those currently operating with a final approval letter are required to comply with the requirement on mandatory cautionary deposit by July 15, 2014, while current applications are expected to comply with these new requirements.” The Central Bank also instructed that “furthermore, the compulsory membership of the Association of Bureau De Change Operators of Nigeria (ABCON) is no longer a requirement for the licensing of BDCs.” The apex bank also reduced the weekly allocation of foreign exchange to BDCs from $50,000 to $15,000.

Following appeals by the BDCs, the CBN on July 7 extended the deadline for compliance with the new requirements from July 15 to July 31. It’s circular said the guidelines issued on June 23 had been modified. For instance, the mandatory cautionary deposit of N35million would now attract interest payments based on banking industry savings account rate.

The new decision was reached following representations made by all stakeholders to the apex bank. It  reads: “Further to our Circular ref: FPRD/DIR/GEN/CIR/01/009 of June 23, 2014 on ‘New Requirements for the Operation of Bureau De Change in Nigeria’, the Central Bank of Nigeria, based on representations from stakeholders, clarifies as follows: “Deadline for compliance with the New Licensing Requirements has been extended to July 31, 2014. “The CBN, on the expiration of the deadline of July 31, 2014, will cease to fund any Bureau De Change that fails to comply with the new requirements. “Only Bureaux De Change that meet the new requirements will qualify to be engaged as Agent by the licensed International Money Transfer Operators for inward and outward money transfer business in Nigeria.”

Emefiele later clarified that the nation’s apex monetary authority had to take these measures because it observed gross inefficiencies and sharp practices including rent-seeking, depletion of external reserves, financing of unauthorized transactions and dollarization of the economy.

The apex bank governor envisages the “emergence of well capitalized and structured entities that can effectively perform the roles of BDC in the economy.” He also hopes to see the beginning of partnerships between the BDCs and renowned companies engaged in inward and outward money transfers in Nigeria, creating, in the process, robust and sustainable business franchises that would shun rent-seeking and are properly placed to compete in the foreign exchange market and deliver superior value.

Operators react

Unsurprisingly, BDCs were not impressed by the good intentions of the CBN. The initial reaction of Aminu Gwadabe, acting president of ABCON, was to call for a complete reversal of the policy. According to him, the new guidelines would force many of their members out of the market, put the job of 31,500 Nigerians in jeopardy, boost the return of black market activities and enthrone the exclusive group “A” bureau de change. He later demanded that the capital requirement be reduced to N15 million.

Gwadabe also pooh-poohed the imposition of N35 million cautionary fees. His objection sounds compelling, if self-serving: “BDCs are not deposit collecting organisations. They operate on cash and carry basis. Even the dollar sales by the CBN to BDCs are on cash and carry basis. We pay two days in advance, before the dollar is sold to us. So why should BDCs have to deposit N35 million as mandatory caution deposit? While there are inherent risks in the business of BDCs like every other business, mitigating these risks, especially in view of the fact that the business is retail in nature, and volume of sales on a small scale, do not warrant such huge mandatory deposit, nor the astronomical increase. Hence, in the spirit of fairness, we appeal that this requirement be reversed.” He called for a meeting of the CBN with all stakeholders before the apex bank would make further moves to implement the policy.

National Assembly’s intervention

ABCON is already lobbying the National Assembly. On June 27, the House of Representatives called on the CBN to suspend the policy and invited Emefiele on the contentious policy. Ahmed Markafi, head, Senate committee on finance, described the new guidelines as unjust, unfair and inequitable.  He argued that BDCs would be running at a loss if such a high capital base is set for them and promised ABCON that the Senate would ensure that common sense prevailed on the matter.

Josephat Madueke, managing director, Cash Express Bureau De Change Limited, told The Economy that the guidelines were not well thought-out because of the haste with which it was rushed through and the short period given for compliance. “I do not understand why the CBN would make membership of ABCON optional for licensed BDCs. I felt that it would be easier for the Central Bank to control BDCs operators through ABCON, which will be self regulating,” Madueke said.

TheEconomy was reliably informed that the reduction of the weekly allocation from $50,000 to $15,000 would make the foreign exchange business unprofitable. According to a source that spoke under anonymity, his firm makes a guaranteed profit of N400, 000 with an allocation of $50,000. Now, this would be reduced to N120, 000 or less, which would not be sufficient to pay staff salaries and the office rent.

Endorsements for CBN’s action

Some of the financial experts who spoke to TheEconomy gave the apex bank a benefit of doubt that it acted with good intentions. Reacting to the antagonism of the National Assembly to the new BDS guidelines, Mr. Bismarck Rewane, Managing Director, Financial Derivatives Company Limited, 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, even though Assembly can talk on broad economic policy. “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.

Pat Utomi, professor of Political Economy and director, Lagos Business School, agreed that the CBN has more information than anyone else to make intelligent decisions on the subject.

For Winifred Iyiegbuniwe, professor of Finance, University of Lagos, the increase in the operational capital from N10 million to N35 million was well intentioned because of the indicators of abuse in the activities of the BDCs. Moreover, he said Nigeria has too many BDCs because the Central Bank was literarily feeding them with free lunch. “Low capitalisation makes it easy for them to have multiple BDCs by the same promoters for the obvious reason that each of them gets cheap allocation of foreign currencies on preferred basis from the CBN. The intention is this: the more BDCs you have, the more foreign currency allocations you receive.” Notwithstanding, he pointed out that “capital requirement should be based on a computation of how much money that is needed to run a BDC effectively.”

Emeka Ezike, associate professor of Finance, University of Lagos, viewed it all as a purely resource allocation decision, which was based on best practice principles. According to him, foreign currency allocation to the BDCs had to be reduced in view of the country’s dwindling foreign reserve. It would also make them more accountable on how they utilize the allocations. “Nigeria cannot continue to keep on dolling out money to them. Our present circumstances do not warrant it. We are in an abnormal situation that warrants abnormal decisions. So, there is nothing wrong in asking them to increase their capital base. It does not mean that they will be put out of business. After all, banks and insurance firms that recapitalized are still in business,” Ezike said.

BDCs background

Bureau de change started operations in 1989 to deal in privately sourced foreign exchange. Later, they were accorded the status of authorized buyers and sellers of foreign exchange. The idea of selling foreign exchange was introduced by Late General Sani Abacha’s administration when foreigners were looking for ways to repatriate their funds from Nigeria fearing that a civil strife would engulf the country at the height of the struggle to validate the annulled June 12, 1993 presidential election result. In order to bring the parallel rates down, Abacha decided to sell currencies to selected BDCs who were well known and trusted by him. This move served its purpose albeit on a temporary basis.

The CBN decided in 2006 to start selling foreign exchange directly to the BDCs to ensure adequate supply to the productive sector as part of its liberalization programme to cater for the demand of small foreign exchange users. Initially this had a positive impact on the efficiency of the foreign exchange market and enabled the CBN to achieve a convergence of the BDCs and inter-bank rates for the first time in 20 years in July 2006.

Farouk Suleiman, former president of ABCON, said that the admission of BDCs into the official foreign exchange market through the cash sale of dollar scheme as well as the expansion of the scope of operations of BDCs as announced in the liberalisation policy of the CBN in March 2006, was effective in eliminating the dominion of parallel market premium within six months of its implementation. “These were, however, products of dialogue and consultation between the association and the regulatory authorities occasioned by our commitment to a harmonious working relationship with them,” he said.

Mike I. Obadan, professor of Economics, University of Benin, in his recent book entitled Foreign Exchange Market & The Balance of Payments: Elements, Policies and Nigerian Experience, stated that the specific objectives for introducing the BDC were to accord legal recognition to small dealers in foreign exchange and thereby enlarge the size of officially recognized foreign exchange market to “provide free access to foreign exchange by small buyers in a convenient and informal manner.” In addition, BDC was also intended to enhance efficiency in macro economic management through more adequate statistical coverage of foreign flows and to improve fiscal efficiency.

Dollarization of the economy

In order to realize the above objectives, according to Obadan, BDCs were registered as private entrepreneurs and granted legal recognition by government to deal in foreign exchange. They are not subject to extensive rules and regulations. Their documentation requirements were few and there was no control on who buys foreign exchange from them.

The question now is whether the country has achieved the objectives for establishing the BDC foreign exchange market? The answer, according to the CBN, is no. The apex bank observed with grave concern the deficiencies in the operational effectiveness of the BDCs. These deficiencies include avalanche of rent-seeking operators that are only interested in widening margins and profits from the foreign exchange market regardless of the prevailing official and interbank rates. The BDCs are also bedeviled with weak and ineffective operational structure, resulting in the sub-sector completely abandoning the objectives for its establishment. The BDCs have also become a source for the depletion of the country’s foreign reserves in view of their unusually large number. Furthermore, the apex bank accused the BDCs of engaging in unauthorized transactions, gradual dollarization of The Nigerian economy and registering of multiple BDCs by operators.

Soludo, who authorized the sale of cash to the BDCs in 2006, was unequivocal in his condemnation of the unwholesome activities of the BDCs. On February 25, 2009, Soludu said that “it has become obvious that the majority of the operators sought and obtained BDC license exclusively to trade in foreign exchange obtained from the CBN instead of being a source of autonomous inflow into the economy. It has also become obvious that that the operations of a majority of the BDCs are inconsistent with foreign exchange management regime, which requires forex to be used exclusively for eligible transactions and for timely returns to be made to the CBN. The BDCs have become a major source of leakage in the system and may not be in full compliance with the anti-money laundering law.”

 

Free-for-all for rent-seekers

The rate of the multiplication of the numbers of the BDCs in the country is alarming and unsustainable. It was gathered from the Foreign Exchange Department of the CBN 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 2006 when the CBN took over the licensing regime, the number of BDCs increased from 74 to 1,147 in three years.

Today, there are 3,208 bureaus de change (BDCs) officially registered with the CBN. In addition to those already registered, the CBN has applications from 1,417 prospective bureaus de changes awaiting its approval. Should the CBN grant them the licences, there would be 4,625 licensed BDCs operating in the country to which the CBN must sell $50,000 on a weekly basis. The implication is that, funding almost 5,000 BDCs would exceed $13 billion per annum, thus providing a veritable avenue for the depletion of the country’s foreign reserves.

The surge in the number of entrants into the BDC business has raised critical questions of their motives. An operator who spoke to TheEconomy on condition of anonymity said that owning a BDC guaranteed weekly revenue of N4 million in 2006 when CBN started selling $200,000 to the sector. The weekly sale was later increased to $300,000, only to jump to as much as $600,000 per week during the tenure of Sanusi. This spurred many to enter the BDC business.

TheEconomy reliably gathered that many retirees from the CBN, civil service and commercial banks have made the BDC their destination. Commercial banks also joined the bandwagon. Not left out are traditional rulers such as Emirs, Obis and Obas who take advantage of that exalted positions. Some importers also own BDCs to guarantee the supply of cheap foreign exchange for their businesses. This magazine was informed that one of the more popular dealers owns 50 BDC licences and operates from an office in Lagos Island.

Worse, some speculators obtained BDC licenses from the Central Bank and solicit for sponsors to bid in the weekly sale. A good number of them find willing sponsors from commercial banks, as well as connected Indians and Chinese businessmen. These Asians would hang around the CBN office each bidding day to pick up bundles of foreign exchange from their agents.

 

The terrorist-financing angle

Unofficial reports claimed that the CBN’s move was taken to check the abuse of the system by terror-financier. Some of the BDCs allegedly procure foreign exchange from the Central Bank only to turn around and fund the activities of terrorists. Sources said that the Joint Intelligence Board (JIB), comprising the CBN, the 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, established that some BDCs in Maiduguri, the Borno State capital, have been involved in laundering funds for terrorists.

Nigeria has indeed squandered enormous fortune financing the BDCs. The CBN spent $30 million a week in 2006 to fund the BDCs when they were less than 100. By February 25, 2009, the amount required to support about 1,147 BDCs per week rose to $200 million. Yet, as Soludo remarked during the twilight of his tenure, “the BDC rates continue to diverge away from the official rate.”  At a point after Central Bank was selling $800 million per week to about 1,400 BDCs. This is about $208 billion gone from the foreign reserves in five years.  The commutative effect of the activities of the BDCs is the depletion of the nation’s foreign reserves that stood at $40 billion at the beginning of the year. It later fell to between $35 and $37 billion, putting undue pressure on the exchange rate of the naira.

The pertinent question is whether Nigerians spend this amount of money to travel overseas for the approved purposes. The answer is No! The fact is that Nigeria has become the foreign exchange mall for West African countries through the activities of the BDCs due to the liberalization of the foreign exchange market. Other unintended beneficiaries of the weekly sale of foreign exchange are importers of prohibited goods drug dealers and importers of used cars into the country. Financial analysts believe the Central Bank through the liberalization of the foreign exchange market unwittingly reinforced the illegality to the detriment of the economy, making currency management and monetary policy formulation and implementation an uphill task.

Would the CBN have the courage to go the whole hog and stop selling cash to the BDCs? Iyiegbuniwe was emphatic that “the government should stop funding them. CBN should stop giving them preferred allocations. They are getting a free lunch.”  He suggested that the CBN should return the BDC to its pre-March 2006 status and allow them to fend for themselves and at the same time have the ingenuity to fund the official foreign exchange market sufficiently to avoid a disproportionate gap between the official and unofficial exchange rates.

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