Banks Under Pressure From Industry Groups To Deepen FX Market - Business

Nigerian banks are under pressure to revive two-way trading in the country’s foreign exchange (FX) market after it became clear that there were no legal impediments to them doing so, sources familiar with the matter tell BusinessDay.


This comes after the Nigerian Economic Summit Group (NESG), a private sector think-tank, wrote to the 22 commercial banks requesting clarification on their apparent violation of the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act 2004 or FEA Act, by refusing to quote rates that are based on bilateral agreements between buyers and sellers of FX as enshrined in the law of 2004.

“We are informed that over the last year (February 13, 2015 to date) the foreign exchange rate quoted by banks to Authorised Sellers (such as, International Oil Companies, Importers, etc) has remained consistent at $/N199 regardless of the transaction amount or timing of the transaction,” the NESG said in the letter which was also copied to the CBN, the Chartered Institute of Bankers, the FMDQ OTC Securities Exchange and the Nigerian Bar Association (NBA).

According to the letter “despite recent events in the FX market which have led to exchange rate volatilities, the purchase price quoted to Authorised Sellers has remained stagnant – thus not providing a true reflection of the current state of the FX market.”
Nigeria has pegged the naira at N197- N199 per dollar since March 2015 and virtually frozen the market in an apparent bid to stem the currency’s slide amid a rout in oil prices.

The policy, seen to have worsened the foreign-exchange shortage and lack of dollar inflows, has been widely criticised by investors and businesses.

The FEA 2004 Act by virtue of the provision of its section 9 specifically states that: “the rate at which each transaction in the market is to be executed shall be at the rate mutually agreed between the applicant purchaser and the authorised dealer or authorised buyer concerned.”
Sources however say that by virtue of the FEA 2004 law, the purchase price ought to be based on bilateral agreements, and as such, is inconsistent with the current practice of quoting a fixed FX rate.

“The FEA 2004 Act was envisaged to create a free FX market, however, there is none today,” Oluwakonyinsola Ajayi, a professor of law and Senior Advocate of Nigeria (SAN), said in response to BusinessDay questions.
“The banks are currently lacking courage to stand up for their rights. They should simply trade FX as the law provides,” Ajayi said.
The shutting down of the autonomous market has led to a slide in FX trading volumes, with attendant negative impact on the market’s ability to fund real sector activities of companies that need dollars.

Nigerian FX turnover was around $500mn a day, when the foreign exchange trading position for banks was 1 percent of shareholders’ funds, and as high as $1 billion a day when the FX net open position was at 20 percent of shareholders’ funds in 2008.

Today, daily trading volumes have collapse to only about $10 million, according to data from Standard Chartered Bank.
“The market should be liberalised and CBN should allow anybody that has forex outside the country to bring it in. Diaspora remittances, donor funds and foreign investment capital, should be exchanged at the prevailing market rate and not the CBN rate,” Muda Yusuf, director-general of the Lagos Chamber of Commerce and Industry (LCCI), said in response to BusinessDay’s questions on how to return liquidity to the FX market.
“The CBN should desist from fixing the exchange rate at a level the reserves cannot support. They should adopt a more flexible exchange rate regime. What this means is that they should allow the market fundamentals (the forces of demand and supply) determine the exchange rate.”
Yusuf added that the CBN should watch the growth of money supply, as excessive growth in money supply will weaken the naira currency.

The CBN’s FX reserves dropped 33 percent to $27.6 billion, between January 2014 and April 2016.
The naira has hit a record low of N320 to the dollar on the parallel market, as importers desperate to meet their obligations scramble for dollars.

Foreign investors have mostly shunned Nigeria’s bond and stock markets, as they await clarity from the CBN, regarding any update on proposed new FX trading rules.
Section 7 of exchange act, provides that transactions in the Autonomous Foreign Exchange Market (“the Foreign Exchange Market”) shall be as in the inter-bank system, that is between (i) the public and Authorised Dealers appointed under this Act; (ii) the Authorised Dealers appointed under this Act; (iii) the Authorised Dealers and Authorised Buyers appointed under this Act, said Asue Ighodalo, Founding Partner of Law firm Banwo & Ighodalo.

According to him, “a recurring theme in section 7 of FEMMA is the presence of ‘Authorised Dealers’ for dealings in the Foreign Exchange Market.
“Thus, transactions in the Foreign Exchange Market cannot occur without the presence of Authorised Dealers and the rate at which each transaction in the Foreign Exchange Market shall be executed shall be the rate mutually agreed between the applicant purchaser and the Authorised Dealer or Authorised Buyer concerned. Furthermore, section 37(2) of FEMMA, provides that where the provisions of any other law (including the CBN Act) are inconsistent with the provisions of FEMMA, the provisions of FEMMA shall prevail.

“Based on the foregoing, my understanding of section 16 of the CBN Act is that although the CBN can determine the exchange rate of the Naira by a suitable mechanism devised by the CBN; it cannot determine the actual exchange rate in the Foreign Exchange Market and accordingly, transactions involving Authorised Dealers,” Ighodalo said in response to questions.
“It is not the traditional role of the CBN to determine exchange rates in the market. Its role is simply to guide and control monetary policies. This is the traditional role of the CBN anywhere in the world,” Olisa Agbakoba, a Senior Advocate of Nigeria (SAN) said in response to BusinessDay questions.

“It is not its place to interfere with the market. But let us even assume that it is (as we are not known as a country that thrives on the Rule of law), and the CBN is aware that it has no legal powers to do what it is doing. Commercially, should it even be doing this? No, because it makes no sense! The foreign exchange market is now determined narrowly by the CBN to mean the Foreign exchange reserves that Nigeria has.
This is totally wrong. The foreign exchange market includes everybody: you, me and everyone else.”

The CBN’s FX reserves dropped 33 percent to $27.6 billion between January 2014 and April 2016
The apex regulator’s monthly dollar inflows from oil taxes and royalties fell to less than $1 billion dollars in January, falling from a peak of about $3.2 billion in data from the CBN show.

The naira has hit a record low of N320 to the dollar on the parallel market as importers desperate to meet their obligations scramble for dollars.
“Exporters and investors are holding on to foreign currency, as no one would sell at the rate the government is setting, while the government does not have the reserves to keep the exchange rate at its official level in the market”, Lamido Sanusi CBN governor from 2009 to 2014, said in a recent interview.

Sources say one direction the CBN could take to return liquidity and improve the functioning of the FX market would be to authorise a second-tier FX market to ease the current dollar crunch.
A second-tier FX market has been tried in Nigeria in the past in the 1980’s
The second-tier foreign exchange market (SFEM) had three key components: CBN organised tender sessions, interbank dealings and OTC dealings between banks and their customers.

The SFEM system was relatively managed and required import documentation, but it ensured more market-determined exchange rate adjustment and a USD-NGN divergence from the Tier I exchange rate.

“A second-tier FX market may smooth the depletion of FX reserves, but it will most likely not prevent NGN depreciation if oil prices remain so low,” Samir Gadio Head of Africa Strategy and FICC Research at Standard Chartered Bank, said in response to BusinessDay questions.
“From an offshore investor standpoint, the key question is whether the non deliverable forwards (NDF) fixing will change.”

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