When a regulator kicks: The case of CBN and BDCs (1)

By Adolphus Aletor

As an analyst on The Finance Nigeria Show, a radio programme anchored by Uche Ikebudu, I had been contacted to speak on the expectations of the forthcoming Monetary Policy Committee (MPC) meeting held on Tuesday July 27, 2021. Considering that there has been no ‘Breaking News’ in recent times, I was able to convince my host that I would rather analyse the outcome of the meeting.

So it was with a strong sense of responsibility that I sat down after a long while to listen to the CBN governor, Mr Godwin Emefiele read his communique.

Though the matter was rife, no one saw it coming. When he mentioned that there would be ‘Breaking News’, I stood up from my seat and shut the door of my office signalling, not to be disturbed.

The governor mentioned the initial objectives of setting up Bureau De Change (BDCs) and how they have failed in this regard. “They have turned themselves away from their objectives. They are now agents that facilitate graft and corruption in the country. We cannot continue with the bad practices that are happening at the BDC market,” He added that there was nowhere in the world where BDCs were fed from the country’s foreign exchange reserve. He accused BDC operators of rent-seeking behaviour, exhibiting greed and involvement in money laundering activities, adding that the authority receives about 5,000 fresh applications monthly. Then he dropped the bomb! “The Central Bank will henceforth discontinue the sale of forex to Bureau de Change operators,” This role will now be played by the commercial banks.

This courageous and major policy shift has since dominated the media in the country with everyone expressing their concern. Researchers have predicted 1). A sharp devaluation of the naira, 2). Loss of job leading to deepening unemployment rate, 3). Heightened crime and insecurity, which is already stretching the government thin, 4). Increased inflation rate as a result of our dependence on imported goods, 5). Capital flight and many more.

Active and retired economists have complained that the CBN should have timed the policy appropriately and that the current situation in the economy does not favour the implementation and have gone ahead to recommend that the CBN should adopt a more strategic and innovative approach to the issue of using BDCs to regulate FX rate in Nigeria.

I must confess that there is substance in the many voices going by the history of similar policy shifts. For instance, according to Nairametrics, in 2016 when CBN banned BDCs, the exchange rate was N268/$1. When the ban was lifted in December, the dollar had gained 85% while the Naira suffered about 46% devaluation. If this same scenario was to be sensitized, many fear that the dollar would hover around N925 to N1000/$ by December 2021. In another vein President Mohammadu Buhari, during a media briefing recently, announced that over 10 million people have been elevated from poverty even though current independent reports state that about five million people dropped to poverty level in the year 2020. Records also show that unemployment rate (including youth unemployment) ranges between 30% and 45%. So it is safe to say that the current policy could worsen the current unemployment situation as the over 5689 licensed BDCs are rendered inactive by virtue of their current business. The easiest and most certain prediction, which has made everyone a prophet, is the issue of devaluation. Many predicted rightly about the sharp devaluation of the Naira as this saw the Naira drop to N522/$1 from N506 twenty-four hours after the announcement.

The CBN has maintained its position stating that the discontinuation of the sales of fx to BDCs is sacrosanct, directing commercial banks to open dedicated desks for fx sales in their chosen outlets. They have also advised commercial banks to develop Applications to make fx easy to dispense at the retail level and have, through the Bankers Committee, assured that the sharp drop was anticipated and would be stabilised.

I share in the sentiment and doggedness of the regulator. While this position may be unpopular, suffice to say that the CBN has taken a bold and courageous step that have addressed what many see as an anomaly and yet were unable to voice out. It is usually said that it amounts to insanity when you continue to do a particular thing over and over and expect a different result. So, I solicit for commendation, for the step that the CBN has taken. BDCs in other climes are normal businesses that should develop a model that suits their objectives. In Nigeria, I expect BDcs to develop their business model outside dependence on their regulator for their revenue. They should be able to source and mop up fx and sell at a premium. Many have argued that the regulators are responsible for the current model and in the midst of the chaos, have continued to issue new licenses. Well, to show that there is a new Sheriff with a new thinking, the CBN through a recent circular have cancelled the issuance of new licenses and requested promoters with pending applications to provide their bank details for the refund of their capital deposit and licensing fees. This clearly shows the commitment of the regulator to this new policy. Many have also argued that the regulator will soon bow to the pressures of the oligarchs and bourgeoisie. While many may be comfortable with this assumption, it would be nice to recall the outcry surrounding commercial bank recapitalisation in 2005 when over 80 commercial banks were reduced to 23 banks. There are certain steps that must be taken to guarantee the collective survival of all. In 2016, when the BDCs were first banned, the current direction and parameters created a different scenario. To highlight what is being done differently, I would like to link the ban with the launch of e-naira (CBN’s proposed crypto currency).  With the introduction of e-naira and creation of e-wallet, everyone enjoys direct access to the CBN. There is therefore a global platform of monetary exchange that will facilitate payments. The issue of a domestic crypto currency is a discussion for another day but I can see a link between both policies as the CBN has proposed a date before the end of 2021 for its launch. You may argue that this is a mere psychological comfort, but I strongly share this as a personal view.

My Conclusion

The BDC operators enjoyed the party while it lasted and should put the larger interest of Nigeria into cognizance in their reaction to the new policy. They should go back to the drawing board to innovatively design a new workable and applicable fx business model that is sustainable and worthy of a new Nigeria.  Mr Godwin Emefiele will go into the records as the change agent that has broken this ancient jinx. My assumption is that subsequent governments would build upon this policy and not create a vicious cycle as predicted by many.

As for the CBN, this is a step in the right direction and worth experimenting. Never before have we had the opportunity that now faces us to use mobile Applications combined with proposed digital currency to address the issue of BDC activities. The wise men in CBN have taken a position and if we have entrusted them with the economy of this great country, we should accept their recommendations. We cannot afford to continue in cycles. Contributions from aggrieved voices seemed not to differ from previous ones. So for a change, let’s try something different!

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Adolphus Aletor, FCA, MCIB, a banker and finance analyst, is the managing director/CEO, Rigo Microfinance Bank; he can be reached on +2348033410380 (WhatsApp only) or jiyere@yahoo.com