Naira gains continue, as CBN sells dollar to BDCs at N1,101/$1
…Apex Bank prohibits use of Foreign currency as collateral for loans
In a decisive move to tackle currency volatility, The Central Bank of Nigeria has once again announced the sale of dollars to Bureau De Change (BDC) operators, according to a circular uploaded to its website on Monday.
In its latest directive, the apex bank disclosed its intention in a circular to sell $10,000 to each BDC at a rate of N1,101 per US dollar.
Furthermore, it directed BDC operators to adhere to a selling spread not exceeding 1.5 percent above the CBN rate.
This move follows a similar initiative in March, where the CBN sold $10,000 to BDCs at a rate of N1,251 per US dollar.
In that instance, BDCs were instructed to sell to eligible customers at a rate not exceeding 1.5 percent above the purchase price (N1,269 per US dollar).
The proactive measure aims to curb speculative activities and stabilise the market amid recent fluctuations, with data from the Nigerian Autonomous Foreign Exchange Market (NAFEM) showing a rate of N1,251.05/$1 at the close of last week.
According to the circular, “We write to inform you of the sale of $10,000 by the Central Bank of Nigeria (CBN) to BDCs at the rate of N1101/$1.
“The BDCs are in turn to sell to eligible end users at a spread of NOT MORE THAN 1.5 percent above the purchase price.”
In its circular, CBN identified 1588 eligible Bureau De Change operators (BDCs), hinting at a potential expenditure of about $15.88 million if all BDCs were to purchase their allocated dollars from the CBN.
This marks the third effort by the CBN to provide foreign exchange (FX) to BDCs after a prolonged suspension in 2021. The ban, lifted earlier this year, followed the revocation of licenses for over 4173 BDC operators in February.
The initial attempt in February saw the CBN offering $20,000 to each BDC at a rate of N1,301/$. Subsequently, the allocation was halved in the second attempt, with FX sold at a rate of N1,251/$1.
Also, within a span of less than three months, the CBN has influenced an 18.17 percent appreciation of the naira against the US dollar.
Amidst a historic moment where the parallel market rate of N1,235/$ dipped below the official rate of N1,252/$ for the first time in 15 years, the Association of Bureau De Change Operators of Nigeria (ABCON) has made a fervent plea to CBN
ABCON urged the apex bank to reconsider its stance and lower the applicable exchange rate, currently pegged at N1,251/$ for BDC operators, citing concerns over affordability.
This appeal from BDCs comes against the backdrop of a significant shift in policy as the CBN resumes forex sales to BDCs, signaling a strategic shift towards bolstering liquidity in the retail forex market segment.
Notably, the resumption of forex sales to BDCs marks a departure from previous directives during Godwin Emefiele’s tenure, where forex sales were prohibited due to concerns over price arbitrage in a fixed exchange rate environment.
However, with the exchange rate now being “market-determined” under a new forex regime, the apex bank believes that operators no longer have the incentive to engage in arbitrage by purchasing at lower rates from the CBN and selling at higher rates in the parallel market.
…Apex Bank prohibits use of Foreign currency as collateral for loans
In the same vein, the CBN has implemented a ban on the use of foreign currency-denominated collaterals for naira loans.
This directive, outlined in a circular dated April 8, 2024, and directed to all banks by the CBN’s Acting Director of Banking Supervision Department, Adetona Adedeji, aims to address prevailing concerns and streamline lending practices.
The circular, issued by the apex bank, highlights two exceptions to the rule: Eurobonds issued by the Federal Government and guarantees of foreign banks, including Standby Letters of Credit.
The decision comes as the CBN seeks to regulate and standardise lending practices amidst evolving market conditions.
“The Central Bank of Nigeria has observed the prevailing situation where bank customers use Foreign Currency (FCY) as collaterals for Naira loans,” the circular stated, signaling the rationale behind the new policy.
“The Central Bank of Nigeria has observed the prevailing situation where bank customers use Foreign Currency (FCY) as collaterals for Naira loans,” the circular partly read.
“Consequently, the current practice of using foreign currency-denominated collaterals for Naira loans is hereby prohibited, except, where the foreign currency collateral is:
“Eurobonds issued by the Federal Government of Nigeria; or
“Guarantees of foreign banks, including Standby Letters of Credit
“In this regard, all loans currently secured with dollar-denominated collaterals other than as mentioned above should be wound down within 90 days, failing which such such exposures shall be risk-weighted 150 percent for Capital Adequacy Ratio computation, in addition to other regulatory sanctions.”
