Top 5 effects the CBN ban on BDC dollar supply may have on the economy

CBN Governor Godwin Emefiele

What is Bureau de Change (BDC) business?

This is a business that provides services to the general public involving buying or selling of foreign currencies. BDCs make money in any of the following ways:

1. Buy foreign currencies at lower rates from the central bank, and sell to their customers at higher rates. According to CBN governor, Mr Godwin Emefiele, "Nigeria is the only country in the world today, where a central bank sells dollar directly to Bureau de Change operators". 

2. Buy foreign currencies from customers who want to sell at lower rates, and resell to other customers at higher rates.

3. Buy foreign currencies from other sources (individuals, friends, family members, merchants, organizations, anyone that can provide it) at lower rates, and resell to their customers at higher rates. Because of this, BDCs can be used to launder money across borders, or even fund terrorism. So, the CBN and financial crime police make it a duty to monitor their activities strictly and closely.

BDCs haven't always gotten FX from the CBN like this. The practice started when the CBN banned banks from changing FX across the counter, and made that exclusive to the BDCs. The CBN asked BDCs to sell dollar to retail customers who needed $5,000 and less for small-scale trading activity. 

But, during a press conference last Wednesday, Emefiele announced a halt to the sale of US dollar to BDCs directly by the CBN. Instead, the CBN will now sell the dollar directly to banks, to resell to the public in a controlled manner regulated by CBN's foreign exchange manual. 

Also, he announced an immediate stoppage to the registration and issuance of new operating licenses to new BDC operators as well. Those currently going through the application process for a new license and who have paid have been instructed to request for a refund via a circular issued by the CBN after the press conference. 

Here are some insights into why the CBN made these decisions:

1. Licensed BDCs were receiving $20,000 weekly from the CBN (in 2 tranches of $10,000) at the rate of N393 per dollar. And they hand what Emefiele infers was a 'gentleman's understanding' to sell to the public with a small mark up. Meaning that BDC rate should have be around N396 or a little bit more. 

2. But, before the new CBN policy, some BDCs were selling this US dollar at the rate of N520 or more, an almost 25% mark up—something Emefiele describes as "greedy and abnormal profit margin". This has been pushing the black market rate of US dollar higher and higher over the years, to the detriment of common Nigerians and small business men and women, who mostly source USD from BDCs, and are forced to buy at these higher rates. This ultimately results in an increase in the prices of goods in the market, as Nigeria is heavily dependent on imports. 

3. However, although BDCs get $20,000 from the CBN, they actually source for more of their FX from multiple sources. Some allegedly create multiple BDC operator licenses so as to get more FX from the CBN. And almost all BDCs source for more FX from alternative sources including friends, family members, organizations, travelers, etc. Hence, BDCs are now often able to carryout transactions that are worth millions of dollars, more than the original intention for which the CBN created them.

4. Because BDCs have so much FX in their custody, they are now able to hoard it, cause scarcity, and dictate the exchange rate per time—and inflation too.

FORM Qs

Form Qs are secondary import instruments of the CBN, to enable SMEs gain access to USD at CBN rate, for the purpose of small-scale importation of goods. The CBN issues Form Qs through banks, to eligible SMEs importing specific items needed to boost the economy.

Eligible SMEs are entitled to getting upto $20,000 every quarter in Form Qs. However, according to a banker who spoke to The Paul Anunaso Blog on conditioning anonymity, some BDCs are known to also obtain FX through Form Qs, by registering and posing as SMEs that are into importation.

Are BDCs really greedy, or is it just business for them? 

For most BDCs who carry out transactions to the tune of millions of dollars, it is clear that the CBN is not their primary source of FX. 

Here why: Even if such a BDC has upto 10 licenses, that only guarantees them about $200,000 every week. That's still $800,000 shy of a million dollars. So, clearly, for most of such BDCs, they source upto 80% of their FX from external sources at rates that are comparable to black market rates, and still have to sell at higher rates than they bought. 

Now, the question that needs to be asked is at how much (on the average) do they get most of their FX? Because I believe that, that becomes the rate they use to sell all their other FX, including the ones they sourced from the CBN. This should explain why BDC FX rates are often as high as they are. 

So, should the CBN actually be identifying the other sources from where BDCs get FX, and taking some control measures? 

How the BDC Industry Food Chain fixes FX Rates in Nigeria 

CBN-licensed BDC operators are not the only operators or players in Nigeria's BDC industry. But they are at the top of the food chain there. 

Remember that the BDC business is a sales business, and the product is foreign currencies. As such, there are BDCs that are distributors, wholesalers and retailers. And at each of these levels, price will go up so that the respective seller can make profit. 

Licensed BDC operators are like distributors. They are the ones who were able to get dollar from the CBN directly, and they make the most profit. And it is to them that the new ban applies. 

However, there are also unlicensed BDC operators. Some of them are wholesalers, while others are retailers. The price at which wholesalers buy and sell are different (and lower) than those of the retailers. 

Hence, before FX that was sourced from the CBN at N393 will get to end users through the BDC retailers, the market rate may be over N500—as sellers at each level of the food chain will have added their mark ups for profit. This is how the BDC's food chain controls FX rates in Nigeria. 

How dumb was the CBN policy to sell dollar to BDCs?

It was quite dumb! 

BDC operators could already source dollar through alternative sources to the tune of hundreds of thousands and millions of dollars. But they did so at rates comparable to black market rate. 

So, by giving BDCs $20,000 weekly through that policy, they essentially gave them free cash. Because there was nothing to stop a BDC operator from collecting CBN dollar at the rate of N393, then simply selling it at black market rate (upto N500 or more), and still continuing their normal business with their main dollar stash. 

So, the now defunct policy of issuing dollar to BDCs weekly was quite a dumb one on the part of the CBN, and profited the licensed operators more. No wonder why the number of licensed BDC operators in Nigeria grew from about a mere 74 in 2006, to over 5,500 as at July 2021, according to CBN Governor Emefiele. 

Will the new CBN policy have any effect?

The likely effect(s) of this new policy against issuing USD to the BDCs directly, and instead to the banks, for retail sale, are still unclear. This is because there is as of now no official circular from the CBN prescribing how the policy should be implemented by the banks.

However, since the announcement of the ban by Emefiele, the price of dollar has actually risen further in the black market to as much as N525 (up from about N504 before that). This reflects the overwhelming dominance that BDCs weild over the nation's FOREX market. They can create scarcity by hoarding the dollar, forcing price up as a result. 

But, when implemented, the policy is expected to have some or all of the following effects:

1. The CBN has already issued a circular directing banks to create special teller points for the sale of FX to retail customers.  This signals seriousness on the part of the CBN to implement this new policy. But could also be a bargaining chip useful to the apex bank in possible behind-the-scenes negotiations with BDC operators regarding the new policy.

2. Banks may likely resume changing FX across the counter. If banks will now start issuing FX at the new teller points as directed by the CBN, this will likely mean that they will be able to start changing FX across the counter again, as they used to do before. However, banks are still waiting for a circular from the CBN, providing clear directives on the new policy framework regarding this, so it's still too early to tell.

3. Likely increased FX supply for the informal sector of the economy. Mr Emefiele, during last week's press conference, indicated that banks would be asked to sell the FX that will be redirected to them "to meet legitimate FX demand for ordinary Nigerians and businesses, whether for small-scale imports, medical bills, educational expenditure, personal and business travel, or any other legitimate needs as prescribed by the CBN's foreign exchange manual". 

4. Banks will make more money. If they start selling FX to CBN-designated eligible end users, this will serve as a new income stream for the banks. Again, this will depend on what the CBN directs them to do in the circular being awaited.

5. Bankers may become the new BDCs. If this new policy is implemented, cases of bank workers starting to sell/buy dollar to/from customers unofficially may likely be on the rise. And a lot of these customers they will transact with will likely be BDC operators. Already, this has been a well known problem with the Form Qs that banks have been administering on behalf of the CBN. However, banks can be monitored, and strict guidelines should be created to minimize or control such possible excesses from bank staff.

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Paul Anunaso is a civil/structural engineer based in Lagos, Nigeria. He is also the editor of The Paul Anunaso Blog, and can be reached at anunaso.cp@gmail.com