In a surprise (?) move, the Central Bank of Nigeria has clamped down on money transfer operators by restricting the movement of legal money transfers to three companies only, namely Western Union, MoneyGram and Ria. CBN has now forced all other money transfer operators as illegal and has issued notification to banks to suspend money transfer operations of all operators other than the above-mentioned MTOs. Read a feature on this issue by Ian Allison at IBTimes.
To understand why the CBN took such drastic measures, one has to understand the mindset that’s prevalent in Nigeria with respect to money transfers. There are literally tens of dozens of money transfer operators working in Nigeria. However, as is the policy of taking inward foreign exchange and then surrendering the same to the central bank for Nigerian naira, most MTOs are selling their currency notes in the Lagos Parallel Market (open market) and then crediting the beneficiary’s account via a local deposit.
This is hindering the central bank’s reserves because they’re not seeing this currency being accounted for in their foreign exchange reserves, while the bureaux de change operators are netting off the proceeds (i.e. selling the foreign exchange currency) to those who wish to buy it (for purposes of investment/savings or those wanting to bypass the currency outflow limits as set by the central bank).
This parallel market (as it’s rightly called) created appreciating pressure on the foreign currencies against the naira, hence the Lagos Parallel Market rate, which is much higher than the official rate.
The disparity in pricing between the official and open market (or parallel market) rate is significant, which results in preference for the latter rather than the former.
By essentially shutting down operations of all other MTOs, there’s no sure shot method for MTOs outside Nigeria to send money to the bureaux de change operators. The only method of receiving money is by a person sending foreign currency directly into a Forex account in Nigeria to that of another person. Presumably, this channel will also be overly misused and then clamped down.
The competition has already started crying foul. I for one sympathise with them, but then again, if I were the governor of the Central Bank of Nigeria, I would sympathise more with the steps he has taken (albeit I don’t fully agree to the control mechanisms they have set in place).
MTOs who have been sending money into Nigeria have been able to hack the system to their advantage (and rightfully so). When a sender can get nearly 400 naira for each US dollar sent, why in their sane minds would they want to covert at the official rate, which nears 300 naira? It just does not compute well for the sender.
Quite honestly, the sender doesn’t give two hoots if the money is being sent via an official channel, a grey channel or even a black channel. They simply want most bang for their buck.
Nigeria is no spring chicken when it comes to remittances. With an annual inflow in excess of US $21bn, every penny coming into the official coffers counts.
In view of the plummeting price of oil (as of 3 August 2016), where it’s under US $40 a barrel, economically Nigeria is in a pretty pickle. Being an oil-dominant economy, Nigeria has experienced an unprecedented boom from a higher oil price. It was the unforeseen answer to Nigeria’s economic woes, which is rife with a low industrial output (other than oil), high unemployment, unabated corruption, religious divide, a political and bureaucratic system that uses corruption as if it were oxygen, oil-based revenue was a godsend (regardless of your particular faith preference or not).
President Muhammadu Buhari had resisted for months on making the Nigerian naira a free-floating currency. He reluctantly agreed to let the market decide the free (and fair) price of the naira earlier in June 2016. The hope was that the widening gap between the parallel market rate and the free-floating naira would narrow down, and the liquidity in the market, of which hopefully there should be plenty, will help the naira appreciate against the greenback.
That didn’t happen. Since January, the currency has lost 35% of its value against the major foreign exchange currencies (namely USD, EUR and GBP). The unpegging that was necessary hadn’t gone in the direction President Buhari had hoped.
Analysts still say the naira is overvalued and has to shed about 20% more before it becomes stable. This has led to a lot of people now hoarding foreign currency in Nigeria. With interest rates at 14% and inflation hovering at 16%, it’s no wonder the Benjamins are so adored.
Future of money transfer operators?
There are a couple of ways this can play out. For starters, the government will do all it can to increase the liquidity of the US dollar and other currencies in the market. It has already issued a circular in this regard: Sale of Foreign Currency Proceeds of International Money Transfers to Bureaux De Change Operators.
The fear is that such a clampdown unilaterally always creates a back channel for money to flow. Innovative ways of netting off money transfers is likely to increase. Entrepreneurial Nigerians will seemingly overnight switch to the informal money transfer trade. The parallel market rate isn’t going to go down, nor will the gap between the official rate and the open market rate narrow down in the mid- to long-term. As there’s big pressure on the market for outflows as well, informal netting off trades are expected to rise.
The future of other money transfer companies isn’t clear. Personally, I think the list would be expanded to include the likes of Transfast, TransferWise, XpressMoney, WorldRemit et al. Smaller players would most definitely be shunned away. For the time being, it’s game over for them (in any official manner).
For many Nigerian diasporas who were used to sending money via TransferWise and similar money transfer services, they would essentially see themselves locked out. Their only option would be the “big three” or revert to informal channels. The latter is more likely.
The road to an economic recovery isn’t an easy one for Nigeria. The steps taken by CBN, while perhaps harsh, are perhaps much needed. Other medium-sized players needn’t worry. I think CBN will eventually open the doors for them.
It will be interesting to see over the next quarter how all these steps, as taken by the Central Bank of Nigeria, will play out. Looking at the macroeconomic indicators and the behavioural psychology of the Nigerians, I personally don’t see much improvement in the broader scheme of things.
Hoping for the best for fellow Nigerian friends and colleagues.
– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Photo: ppart, Shutterstock.com