Beyond recapitalising BDCs
Financial reforms and the resulting policy prescriptions are an age-long trend. They characterize the diverse transformations, policy adjustments and overhaul that are directed at financial institutions and markets overtime. They are also prescribed in response to the need for operational improvement and growth of both the institutions and the general economy.
In Nigeria’s economic history, the strides of the last few years, which have been internationally commended, have been exceptional. The many reforms that have provoked the current success have largely included those in the financial sector, particularly, the positive policy shifts in the domestic money market as a first step towards a more robust and enduring sector. Thus, the new guideline released by Central Bank of Nigeria (CBN), for the operations of Bureaux de Change (BDCs) in Nigeria is timely and welcome.
According to the CBN, the new guidelines are meant to correct observed deficiencies in the operation of BDCs in Nigeria which have led to gross inefficiencies and sharp practices in the foreign exchange market. BDCs, long seen as a source of foreign exchange leakage, have served as a conduit for capital flight and money laundering.
The modifications to the BDC guidelines include the increase of the minimum capital requirement for their operation from N10 million to N35 million; and the mandatory cautionary deposit of N35 million to be deposited in a non-interest yielding account with the CBN.
However the Association of Bureaux De Change Operators of Nigeria (ABCON) argues that the new requirements will lead to the liquidation of many operators, which in turn would result in loss of jobs, among other things. According to them, up to 75 percent of 3,208 registered BDCs may not meet up with the new capitalisation requirements and will subsequently lose their operating license at the expiration of the July 31, 2014 deadline set by the apex bank.
Though the plight painted by ABCON is real we urge the CBN not to renege on the deadline. Besides the deadline for the recapitalization was extended by two weeks; especially because BDCs are small players in the financial sector. Reform is defined as change that is intended to correct a situation that is wrong or unfair, or make a system work more effectively. The growing incidence of rent-seeking, depletion of external reserves, financing of unauthorized transactions and dollarization of the economy are clearly wrong and prevent the economy from working effectively.
Analysts note that tighter regulations of BDCs has eased the pressure on reserves and kept the naira-dollar exchange stable, i.e. within the plus or minus three band. They also see the new measures as part of anti-money laundering strategy and will make large transfers of unregulated cash difficult (money made from stolen oil is laundered through BDCs).
The CBN also expects that these modifications will create the emergence of well-capitalised and structured entities that can effectively perform the roles of BDC in the economy; partnership between BDCs and renowned companies engaged in inward and outward money transfers in Nigeria; and the creation of robust and sustainable business franchises that are not dependent on rent-seeking activities but are properly situated to compete in the foreign exchange market, and deliver superior values and returns.
Beyond the new guidelines on recapitalization, the CBN should develop a system to effectively monitor the activities of banks, finance houses and BDCs in order to ensure a proactive supervision.
Furthermore, for a country that depends mostly on oil revenues for its foreign exchange falling output alongside demand for dollars put pressure on the foreign reserves. A stable naira is good in the near-term. In the long-term oil theft has to be checked; the decline in output reversed and the promotion of a value-adding non-oil export sector.