By Omoh Gabriel, Business Editor
The CBN is working on a new foreign exchange market arrangement in which only few banks may be eligible to participate. This is a policy recommendation to the apex bank from a study conducted by a special research vote of the CBN. The CBN had commissioned a study to be carried out on “The Impact Of Regulatory Sanctions On Banks For Non Compliance With Foreign Exchange Guidelines: A case Study of 25 Bank s”. The CBN study group who under took the research include G. C. Osaka Deputy Director, N. C. Oputa an Assistant Director, M. K. Tule a Principal Economist while H. T. Sanni, L. I. Odey and G. K. Sanni are Senior Economist in the External Sector Division of the
Research Department, Central Bank of Nigeria.
The major findings and recommendation of the study include a reform of the current foreign exchange market in which the apex bank authorities were urged to “evolve an objective criteria for licensing authorised dealers”. In other words in the reform foreign exchange market expected to be introduced “not every licensed bank should be made an authorised dealer”.
The report stated that “the re-introduction of a Wholesale DAS should be revisited as it is capable of wiping out the current arbitrage in the system. With funds sold directly to authorised dealers, the incentive to round-trip and create distortion would be very minimal, thereby, allowing the rates at the official and parallel segments to converge”.
The report also said the “Policy recommendation under the current setting of the foreign exchange market where market discipline is lacking, the need to efficiently manage the country’s scarce foreign exchange resources makes it imperative that we continue with the present rules-based— system. “When the rules are broken, sanctions must be swiftly invoked. However, it would be in the long-term interest of all stake-holders for the CBN to pursue more vigorously the campaign for self-regulation.
“To this end, the CBN should institute an annual award based on self regulation to be made at the
Annual Monetary Policy Conference. The relevant supervisory departments should work out the details of the criteria which would be used as basis for selecting winners. Such an award particularly, when given wide publicity, would serve as a major incentive for banks to stay clean in view of the
enormous potential benefits in terms of savings on advertisements, confidence building, among others”. The study further recommended “The parallel market premium remains a major incentive for perpetrating malpractice in the foreign exchange market, particularly, round tripping of funds. Therefore, the exchange rate in the official segment of the market should always be managed to reflect market fundamentals with a view to narrowing the parallel market premium to a limit of not more than 3 .0 per cent”.
The major findings of the study are that “the share of the income of sanctioned banks̓ derivable from foreign exchange transactions to their gross earnings was on the average 31.1 per cent. Therefore, in the absence of measures taken to cushion the effects of the sanctions, the banks were vulnerable to the regulatory action.
“Analysis of the major key performance indicators of the banks did not reveal the cost of the impact, partly due to aggregation bias and partly because of the alternative investment windows exploited by the banks, particularly investment in Treasury Bills. The total deposit liabilities of the banks analysed on quarterly basis showed a decline of 8.8 per cent only in the first quarter during the sanction period. “This reflected the initial panic that trailed the sanctions and the subsequent flight to safety by customers. Panic withdrawal of accounts by customers because of foreign exchange induced sanctions reflects the poor knowledge of the workings of the banking industry in Nigeria, as the customers misconstrued the sanctions for distress condition in the affected banks. The fact that the banks were able to record profits so soon after the initial shock revealed how quickly they recovered, It is also indicative that banking industry in Nigeria is very profitable and that the operators can make decent income without resorting to malpractices.
“The phenomenal increase in the holdings of NTBs by the affected banks when they were out of the foreign exchange market, and the declining trend immediately upon their return, confirms the substitutability of domestic assets for foreign assets under a positive interest rate regime. Total loans and advances of the sanctioned banks grew significantly by 54.6 per cent from the pre-sanction period, reflecting increased tempo of core banking activities. However, this quantum jump was not sustained in the period after the sanctions were lifted as growth slowed to 29.5 per cent, indicating that banks̓ foreign exchange transactions have replaced financial intermediation as the core function of banks in Nigeria”.
File Forex 13/05/05
