FX volatility: BDCs’ reintroduction triggers divergent expectations


Barely one month after the Central Bank of Nigeria (CBN), reintroduced Bureau De Change (BDC) in its foreign exchange framework, the parallel market operators are seeking merger and consolidation rather than recapitalization of the industry as a way of enhancing their efficiency.

The policy advisory council of President Bola Tinubu had asked the Federal Government to increase the capital requirements of BDCs operators, saying only BDCs with a strong capitalisation should be allowed to participate in the country’s FX market.

The CBN in July 2023 updated the number of BDCs operating in the country, confirming 5,687 operating licenses. This was disclosed in a publication titled, ‘Approved BDCs’ on the CBN website. The number of BDC operators in Nigeria has risen by more than 75-fold in 18 years, from 74 in 2005 to 5,687 in 2023, data from the CBN revealed.

The new operational mechanism, contained in a circular dated 17 August, stated that the spread on buying and selling by BDC operators will be within an allowable limit of -2.5 percent to +2.5 per cent of the Nigerian Foreign Exchange market window weighted average rate of the previous days.

In the circular, signed by O.S Nnaji, the Director of Exchange Department, the bank ordered a mandatory rendition by BDC operators of the statutory periodic reports (daily, weekly, monthly, quarterly and yearly) on the Financial Institution Form Rendition System (FIFX), which it said has been upgraded to meet individual operators requirements.

The apex bank warned that non-rendition of returns would attract sanctions, which may include withdrawal of operating license with effect from the date of the circular.

“Where operators do not have any transaction within the period, they are expected to render nil returns. Please be guided accordingly and ensure compliance,” the circular said.

The CBN had in August 2021 ended the sale of forex to BDC operators, saying the parallel market had become a conduit for illicit forex flows and graft. The bank said it would no longer process applications for BDC licences in the country.

Weekly sales of foreign exchange by the CBN was thereafter designed to go through commercial banks, the ousted governor of CBN, Godwin Emefiele, said at the time. “We are concerned that BDCs have allowed themselves to be used for graft,” Emefiele said.

He argued that international bodies, including some embassies and donor agencies, had been complicit in illegal forex transactions that hindered the flow of foreign exchange into the country.

But the recent moves suggest that the CBN now feels that BDCs can help increase the supply of FX in the market and ease pressure on the rates. BDCs have traditionally benefited from arbitrage and Nigeria’s multiple exchange windows.

The CBN’s attempt to unify the FX rates has failed to hit home due to the bank’s inability to meet demand backlog. As a result, the parallel market continued to be the viable source of supply, opening up a significant arbitrage opportunity.

Merger and consolidation

The Association of Bureaux De Change Operators of Nigeria (ABCON) is seeking the merger and consolidation of bureau de change (BDC) operators while kicking against recapitalisation of the industry.

It said consolidation would improve corporate governance and rules of engagement with the apex bank.The merger option was adopted for class ‘A’ BDCs in 2007/2008, which entitled them to $1 million weekly allocation with a N500 million capital base, the association said.

The group, in a statement, called for a similar business model through mergers and consolidation rather than an outright review of the capital base of each operator.

It said the CBN would be in a better position to regulate the BDCs from the consolidation exercise. Each of the CBN-licensed BDCs is capitalised to the tune of N35 million and should be allowed to willingly consolidate among themselves, ABCON President, Dr. Aminu Gwadabe, said in a statement.

Gwadabe said the group never asked for an upward review of N35 million approved capital base for each BDC, but for a merger of, at least, 10 BDCs to form new capital of N350 million.

The move, he said, would enhance the scope of operation and diversification through various windows. He said a merger of multiple BDCs into a stronger entity would prepare them for a higher role in the financial system, including handling diaspora remittances or other offshore funds to deepen forex access.

Gwadabe said a merger of multiple commercial banks in 2004 consolidation exercise by the apex bank is an example the apex bank could adopt for the BDCs to streamline their numbers and present manageable operators for maximum impact.

Naira in all-time low

The Naira lost 0.53 percent of its value in less than one day, falling to an all-time low of N955 per dollar on Friday as demand for the greenback intensified at the parallel market, popularly called the black market.

The local currency had on Thursday exchanged with the dollar at N945, which was stronger than the closing rate of N950/$1 and weaker than N940 traded on Wednesday at the black market.

At the Investors’ and Exporters’ (I&E) forex window, Nigeria’s official FX market, the naira fell by 2.88 per cent as the dollar was quoted at N780.00 on Thursday compared to N758.12 on Wednesday and weaker than N742.10/$1 quoted on Tuesday, data from the FMDQ indicated.

“Individuals and importers are buying up dollars for business travel, school fees, medical and tourism”, a trader at Lagos International Airport said.

According to a report by Vetiva Research, the naira took a nosedive following the monetary authority’s bold step to unify the foreign exchange rates.

“Over the short term, the Nigerian authorities are working on a medium-term multilateral loan and the reintroduction of Bureau de Change operators in its FX framework. We believe these measures are inadequate without organic FX supply and sterilization,” analysts at Vetiva said in a new report.

“Going into the ember months, we retain our bearish outlook on the naira till oil production recovers significantly. However, increased interventions (though unsustainable) could reduce the pace of depreciation at the parallel market,” the analysts said.

Vetiva predicted that BDC operators could be brought into the official foreign exchange framework. According to the bank, BDCs were required to make a 2.5 per cent margin on the average rate sold at the foreign exchange market the previous day. This reintroduction also comes with a mandatory rendition of returns.

“While acknowledging these measures, we believe the underlying low FX supply could elevate the FX gap. Thus, measures to boost crude supplies and organically grow the external reserve stock are required,” the analysts said.

News continues after this Advertisement


Please enter your comment!
Please enter your name here