Bureau De (Can't) Change $$$
CBN FX ban for BDCs & Mobile Money Regulatory Updates
Welcome to this edition of regulatory updates from Nigerian Regulations. If you missed our previous edition, click here to catch up.
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As I promised in the last edition, we will be discussing some activities from the Central Bank of Nigeria. (It appears they are the only one I talk about, Meffy abeg nau 😢).
A quick take.
CBN Directive stops sale of FX to Bureau De Change operators.
CBN Supervisory Framework for Payment Service Banks.
CBN Regulatory Framework and Guidelines on Mobile Money Services.
Before we go on, shoutout to the reader who sent me a token on the Abeg App from the last read! I appreciate you 🤗. And a big thanks to every one who gave feedback as well. I'm happy to read your feedback or ideas anytime. Please send me an email here: ajiboyetooni@gmail.com.
CBN Directive stops sale of FX to BDC Operators.
So yeah, Bureau De Change operators? They can’t change dollars anymore. Also, no more new licenses! As declared by Nigeria’s apex bank Governor, in a press briefing on the fallout of the CBN Monetary Policy Meeting. Is the Governor taking the B-A-N in the Central Bank’s name a little too seriously? 🤷🏽♂️
On first breath, the press briefing generated quite a number of mixed reactions from finance thought leaders that I follow. While some argued that, once again, the ban is an example of a knee-jerk, incoherent, and impulsive response to the problems identified by the CBN Governor. Others argued otherwise, that, yes, removing BDCs from Nigeria’s FX market is a good step in the right direction. I found the divide quite intriguing.
To fully grasp the regulatory directive, let’s first understand the BDC (FX) market.
I'm not great with diagrams but this is an example of what the FX market structure looks like. It's an indicator, not 100% accurate. 🙏🏽
Chill. I will try my best to explain my crude flowchart. The CBN sells FX currencies (the US $) to BDCs and Deposit Money Banks (The legit/regulated market). Out of the legit loop is where you have the Black Market (too close for comfort to the BDC part of the FX spectrum).
Staying on point, our focus is on BDCs. They have a long history that dates as far back as 1989 when they were introduced into Nigeria’s financial system. However, their relevance today is tied to the retail buy-side and sell-side of FX. That is, an individual needs to make a business trip (BAT) or a personal trip (PAT), he can easily approach a licensed BDC agent, make a naira-for-dollar trade and jet out of the country for business or a vac.
Why can’t banks do this?
BDCs have always been the go-to because of their efficiency (the sweet spot for BDCs is they can sell a currency slightly higher than the price they bought from CBN, and lower than black market rates) and network effect (currently, there are about 5689 licensed BDCs in Nigeria).
Banks on the other hand, are not as popular for retail FX transactions. Why? Frankly, because they are not as efficient (long, complex processes, and unavailability of FX). But they are optimized for large-sized transactions. Think exports and import for big corporations and FMCGs. So consider a Dangote Corp approaching a Bank for FX on a $100,000 transaction, and you a student, with a $4000 request. As a banker, I’d rather give the dollars to Dangote because more profits, obviously.
So how did the BDCs get into trouble?
The CBN Governor mentioned some reasons for its directive including; current BDCs being a front for money laundering, diverting much-needed FX into the black market pool, plus an anecdote on the high number of application for BDC licenses at the CBN. In case you applied, go and collect your money btw 💀.
From the CBN’s perspective, I understand how diversion of FX into the black market can be a problem (less liquidity on the market for people who need it, more pressure on the Naira, bla bla bla). And on the issue of money laundering, I’d argue that BDCs are licensed bodies, required by the CBN to make necessary returns and have enough KYC/AML (Know Your Customer and Anti-Money Laundering) processes in place. Rather than a scorched-earth ban, the CBN should sanction offending BDCs. Ignoring such an option is what makes a theory that “the CBN no longer has dollars to sell to BDCs”, seem plausible. Speculative, of course.
While the CBN made provisions on how to get commercial banks (DMBs) to meet up the high demand for FX and how customers can complain (including sending complaint emails, and calling a free toll line), it is highly likely that we all may be headed for a rude shock if the CBN & DMBs cannot meet the market demand for FX.
On a final note, maybe the ban is a good sign, as a predictive analysis here argues. Maybe the time is here for us to get rid of an archaic part of the Nigeria’s financial architecture. Perhaps, in coming years, we will be discussing more modern cross-border payment models such as International Money Transfer Operators, or using a central bank digital coin for transactions. PERHAPS.
CBN Supervisory Framework for Payment Service Banks
Earlier this month, the CBN released a supervisory framework for Payment Service Banks (PSBs). You can find a copy of the regulation here. The new framework is aimed at promoting the CBN’s long time vision of financial inclusion and improving the efficiency of payment service banks operating in that field (banking the unbanked by operating in rural areas like villages and other hinterland areas).
The framework focuses largely on the corporate governance, and prudential regulations such as KYC/AML provisions which a PSB must comply with in offering its services. It appears the CBN, through this regulation, is looking to standardize the operators in the financial inclusion space (see more on this in the next section).
You can find out more in-depth analysis of the regulation here. Yes, that’s my big head at the bottom of the article. 😀
CBN Regulatory Framework for Mobile Money Services in Nigeria (and the Guidelines)
The Mobile Money regulation was also released earlier this month in a bid drive financial inclusion through mobile money services. Here's a copy of the regulation.
As I noted earlier, the CBN has been snagged with the big financial inclusion problem (people in rural and hard-to-reach areas have no bank accounts). A limited number of people in Nigeria currently have BVNs and they are mostly in modern areas like towns and cities. That leaves out a whole lot of others in the rural areas without access to financial services.
Therefore, the new MM Framework creates a system of participants which allows financial services reach people who are in rural/hard-to-reach areas.
Now this is where this gets interesting.
You probably have heard of M-Pesa, the ‘king' of mobile money in Kenya. Telcos (MTN, Glo and co) argue that they can create an M-Pesa-like solution of payments for Nigerians in rural areas. Where, for example, having a phone number means you have a bank account, and you can transfer money using USSD codes without the internet. Well guess what, the CBN in the rudest way possible said:
The CBN has made itself clear. It will not allow the provision of financial services by organizations not licensed under the CBN. Rather, it will allow for a Bank-led and non-Bank-led model arrangement to run the mobile money services show. The role of Telcos will only be required in providing value added services like phone numbers, USSD and transmission of messages.
Weird fact is that non-Bank participants under the framework are expected to provide the technology (USSD) and agent networks. Question is who best to do this than the Telcos? Bear in mind that NCC data suggest that mobile penetration in Nigeria is impressive with over 200 million active GSM lines, as at December 2020. Forcing the mobile network operators to take the back seat in the financial inclusion ride will certainly slow things down and my fear remains constant that Nigerian big banks, not having an incentive to act, will not do anything.
Regardless, I hope that startups such as Opay, Paga, who are already building mobile money and agent banking infrastructure can leverage the new framework to expand their offerings. Still want to read more on the financial inclusion discourse? You can find a broader analysis from the Notadeepdive Newsletter.
That's it on Nigerian Regulations for the week!
Do have an awesome weekend.
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Editor’s Note: Look forward to our next issue on Wednesday.
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