Controversy forces CBN to amend new forex policy

June 20, 2016

By Emeka Anaeto, Economy Editor
agos — A major  controversy has hit the new foreign exchange policy announced by the Central Bank of Nigeria, CBN, last week, a development which may have forced the apex bank to amend the policy, even before take-off.

The flexible exchange policy is taking off today.

Emefiele CBN Governor

The controversial aspect was the Foreign Exchange Principal Dealers, FXPD, arrangement under which the apex bank said it would trade forex principally with about eight to 10 banks which it would register as principal dealers or FXPDs, who in turn would deal with other banks and traders.

Vanguard learned that about 13 banks shut out of the initial FXPD class have pressured the apex bank to either jettison the FXPD arrangement or accommodate more or all banks, a request the apex bank was said to have accepted as a compromise, thereby, jettisoning its initial criteria for admitting banks into the FXPD class.

Consequently, the apex bank, Vanguard learned, had reversed itself by weekend, issuing FXPD license to 15 banks instead of maximum 10.

According to the CBN’s initial stipulations the FXPDs must meet two or three of the following criteria: Liquidity ratio of 40 per cent or more;   shareholders’ funds (unimpaired by losses) of at least N200 billion; and foreign currency assets of N400 billion or more.

A source in the apex bank told Vanguard that following protests by some non-FXPD banks, the apex bank had to open the class to all banks, asking them to apply.

Moreover, the CBN had to soften the considerations in what it called “internal criteria” so as to enable more banks qualify and be admitted into the FXPD class.

There were also indications that more banks would come into the class as they qualify though CBN did not make the new criteria public. About eight banks are currently outside the FXPD class.

According to banks’ reports filed with the CBN for full year 2015 and first quarter 2016 as well as other banking industry analysts’ reports, only about seven or less banks qualified under the criteria earlier given by the apex bank.

One of the banks that couldn’t meet the previous criteria told Vanguard that though there was wisdom in the CBN’s FXPD initiative, it was coming with unintended consequencies regardingtheir competitiveness.

According to them the business analysis of the FXPD arrangement indicated that it would go beyond foreign exchange businesses to impact other business segments where the FXPD banks would dominate the market, thereby creating an uneven playing field.

Another official of a non-FXPD bank told Vanguard  that “the FXPD arrangement has reduced the rest of us to a glorified bureau de change.”

Given the industry view of the initial FXPD arrangement, analysts at Afrinvest West Africa, a Lagos based financial institution, said:   “We believe CBN’s decision to introduce FXPD will have further impact on the competition dynamics of the banking industry with Tier1 banks, which overwhelmingly dominate the list of banks qualified for FXPD gaining more competitive advantage.

“The CBN is the single largest supplier of forex in Nigeria. By providing FXPDs exclusive access to deal with the CBN for large volume transactions (with no capped spread on resale on FX sold to other authorized dealers and other retail clients), corporate clients with huge demand for forex could shift deposits to designated FXPDs, further widening the cost of funding gap between Tier1 and Tier2 banks.

“This will inevitably filter into bottomline performance which will further segregate the profitability of FXPDs and other banks.

“Yet, we believe the decision of the CBN is justified, given the need for FXPDs to have sufficient liquidity, capital base and assets to independently source for FX.”

When contacted, spokesman for CBN, Mr. Isaac Okoroafor, declined comments.

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