Foreign Exchange Regulatory Reform (May 29 2023 to April 2024) Implications for Fintechs and other stakeholders.

Doing business in Nigeria is rewarding but can pose significant challenges, particularly concerning foreign exchange (forex) management and repatriation. Whether it’s cross-border e-commerce enterprises or digital agents like Flywire, which facilitates monetary collections in local currency for academic or medical institutions but settles in foreign currencies, or International Monetary Transfer Operators tasked with converting and disbursing foreign funds to Nigerian beneficiaries in local currency, or digital payment companies engaged by global giants like Netflix or Facebook to handle local fund collections and foreign currency settlements, adherence to Nigeria’s forex policies can be daunting.

For cross-border e-commerce ventures, the forex conversion process—especially Dynamic Currency Conversion (DCC)—presents a hurdle. When Nigerian cardholders purchase from Amazon US, discrepancies between the quoted DCC rate and actual charges can trouble global businesses. Additionally, fluctuating monthly USD spending limits by banks can impede cross-border transactions. Similarly, companies like Flywire face complexities navigating local-to-foreign currency exchange for merchant settlements.

Since assuming office in May 2023, the new government has spearheaded major forex management reforms to tackle these challenges. Key reforms include unifying the exchange rate under the Investors and Exporters (I&E) window, making all visible and invisible transactions eligible for this window, lifting restrictions on domiciliary accounts, scrapping the “Not-valid for Forex” memo, and reinstating Bureau De Change (BDC) operations. The ever-evolving regulatory environment makes working with a regulatory technology (regtech) company a valuable asset in maintaining compliance. Below, I summarise sixteen (15) foreign exchange policies announced over the past year (from May 2023 to April 2024) and their impact.

• CBN Leadership change

On June 9, 2023, President Bola Ahmed Tinubu changed the leadership of the Central Bank of Nigeria (CBN) by suspending the existing CBN governor, Mr Godwin Emefiele and mandating Mr Folashodun Shonubi to act as the Central Bank Governor.

The implication is that this signalled a significant change in Nigeria’s foreign exchange (forex) management. This leadership change paved the way for a more market-oriented forex system, from demand management and supply-side policies implemented under the past CBN governor amidst the COVID-19 pandemic and subsequent economic recession. 

• Unifying the Exchange Rate

On June 14, 2023, the CBN  issued “Operational Changes to Foreign Exchange Market, ending foreign exchange rate segmentation and adopting the Investors and Exporters (I&E) window. This move resulted in a 36% depreciation of the Naira on the official market, indicating a stance towards a market-determined exchange rate.

The implication is that moving towards a market-determined exchange rate allows supply and demand to dictate the value of the Naira. Compared to a fixed or artificially controlled rate, this is more sustainable in the long run. Businesses and individuals now have a clearer picture of the exchange rate, making international transactions more predictable. Also, by unifying the forex window, all eligible transactions can access foreign exchange through the I & E window, potentially increasing liquidity and reducing reliance on the parallel market.

• Eligibility of all visible and invisible transactions for the I & E window

On June 16, 2023, the CBN issued “Further Guidance on Operational Changes to Foreign Exchange Market”, mandating that all visible and invisible transactions are eligible for the I & E window and requesting banks expeditiously process all eligible invisible transactions. Before now, authorised dealers processed eligible invisible transactions at the CBN exchange rate, which is below the market/parallel market rate, resulting in high demand and a backlog of requests at the banks. The new operational changes granted domiciliary account holders unrestricted access to their accounts, with the ability to utilise their cash deposits for telegraphic transfers up to $10,000 per day. Before this, there were restrictions on how much account holders could withdraw from their domiciliary accounts and the channel. Previously deposited cash by the account holder could only be withdrawn as cash, and the account holder could transfer it through telegraphic transfer.

The implication is that with all transactions routed through the I&E window, there is a reduced backlog of requests for invisible transactions processed and faster processing benefits businesses and individuals who rely on these transactions. 

• Six-Point Agenda for Boosting Foreign Exchange Liquidity

On October 13, 2023, the CBN issued a Press Release titled “CBN Restates Commitment To Boosting Liquidity in FOREX Market,” outlining six priority areas of focus. These commitments are as follows:

(a) Continuing the commitment to promote orderliness in the Nigerian Foreign Exchange Market to ensure market forces determine exchange rates.

(b) Reiterating the importance of referencing prevailing Foreign Exchange (FX) rates from the CBN website and other recognised trading systems to enhance price discovery, transparency, and credibility in FX rates.

(c) Committing to boosting FX liquidity in the Nigerian Foreign Exchange Market through periodic interventions until market liquidity improves.

(d) Allowing 43 items previously restricted by the 2015 Circular (referenced TED/FEM/FPC/GEN/01/010) to purchase foreign exchange in the Nigerian Foreign Exchange Market. Further details on the rationale behind lifting the ban on these items can be found in the accompanying press release.

(e) Resolving the FX backlog with existing participants and maintaining an ongoing dialogue with stakeholders to address related issues.

(f) Pursuing the goal of achieving a unified FX market.

These have several implications. While aiming for a market-driven system, the CBN acknowledged the need for temporary interventions to boost liquidity, stabilise the exchange rate and prevent excessive volatility in the short term. Relying on official sources like the CBN website and recognised trading platforms for exchange rates ensures transparency and reduces the risk of misinformation. Also, expanding access to forex for businesses involved in importing these 43 items will stimulate economic activity and reduce reliance on unofficial forex markets. Ultimately, the six-point agenda suggests a multi-pronged approach by the CBN to achieve a more stable, efficient, and accessible foreign exchange market in Nigeria. 

• Operational Framework for Bureau De Change (BDC) 

On August 17, 2023, the CBN introduced a policy titled “Operational Mechanism for Bureau De Change Operations in Nigeria” to refine the operational framework for Bureau De Change (BDC) operations in Nigeria. This directive stipulated that BDC operators must adhere to a spread of -2.5% to +2.5% based on the Nigerian Foreign Exchange market’s weighted average from the previous day. Additionally, the circular mandated BDCs to submit their statutory periodic reports.

The policy implication of defining the spread for buying and selling foreign currency promotes transparency, levels the playing field among BDCs, and provides predictable exchange rates at BDCs. The mandatory submission of periodic reports allows the CBN to monitor BDC activities more effectively and ensure compliance with regulations.

• Naira, USD, or eNaira PayOut Option for Diaspora Remittances into Nigeria

On July 10, 2023, the CBN issued a circular titled “PayOut Option in Naira for receipt of proceeds of Diaspora Remittances,” announcing that beneficiaries of international

money transfers (IMTO) could receive their funds in Naira, USD, or eNaira. This adjustment diverged from a previous circular in November 2020, which had mandated that recipients of foreign remittances from IMTOs receive their funds in USD through their chosen designated bank, either in cash or to their domiciliary account. 

This policy offers more flexibility to Nigerians receiving diaspora remittances. This would benefit the domestic economy by increasing Naira liquidity. Moreover, the unification of the exchange and its movement based on market forces makes receiving foreign currency less attractive. 

• Reviewed Guidelines of International Money Transfer Services in Nigeria

On January 31, 2024, the Central Bank of Nigeria (CBN) reviewed the operations of International Money Transfer Operators (IMTOs) by issuing a circular titled “Reviewed Guidelines of International Money Transfer Services in Nigeria.” This update replaced the guidelines set in September 2014. 

This revision aimed to update regulations and address emerging issues within the IMTO sector, introducing new requirements or restrictions that ultimately benefit Nigerians sending and receiving international money transfers. The guidelines set in 2014 are not reflective of the current landscape of international money transfers. 

• IMTOs are signalled to quote exchange rates for Naira based on prevailing market rates.

On January 31, 2024, the CBN issued another circular titled “Removal of Allowable Limit of Exchange Rate Quoted by International Money Transfer Operators,” allowing IMTOs to quote exchange rates for the Naira based on prevailing market rates in the Nigerian foreign exchange market, using a willing seller, willing buyer basis. This circular reversed their directive from 2023, which had instructed BDC operators to set exchange rates within a specific allowable limit based on the Nigerian Foreign Exchange market’s weighted average from the previous day.

This change signifies a move away from a CBN-controlled rate for IMTO transactions and towards a market-determined system, reflecting actual demand and supply in the market. This implies more competitive exchange rates for Nigerians receiving international transfers.

• Reinforcing “Willing seller, willing buyer”

On February 8, 2024, through a circular titled “Removal of Spread on Foreign Exchange Transactions,” the CBN emphasised the discontinuation of spread caps, reinforcing that banks and authorised dealers should conduct transactions on a “willing seller, willing buyer” basis, adhering to the highest ethical standards.

ebruary 23, 2024, the CBN released a circular to all Bureau De Change (BDCs) and stakeholders titled “Revised Regulatory and Supervisory Guidelines for Bureau De Change Operations in Nigeria – Exposure Draft.” This initiative aims to bolster the regulatory framework governing BDC operations, constituting a pivotal aspect of ongoing reforms within Nigeria’s foreign exchange market. 

This revision complements the CBN’s broader reforms towards a market-driven forex system. The draft proposed stricter guidelines for BDC operations in line with requirements like eligibility checks for ownership, activity limitations, and more stringent reporting procedures. The aim is to improve transparency compliance and potentially reduce risks associated with BDCs. 

• Foreign Exchange Rates for Import Duty Assessment.

On February 23, 2024, the CBN notified the Nigerian Customs Service and the general public through a circular titled “Foreign Exchange Rates for Import Duty Assessment.” The directive mandates the adoption of the closing FX rate on the date of opening Form M for imported goods as the FX rate for Import Duty Assessment, effective February 26. This circular supersedes a previous CBN directive outlined in the Central Bank of Nigeria Foreign Exchange Manual (Revised Edition) 2018. 

Following the unification of Nigeria’s foreign exchange market and the removal of the central bank’s predetermined rate, this policy change simplified the import duty assessment process for businesses in Nigeria, offering greater predictability for importers. However, it could introduce a slight disconnect from real-time exchange rate movements.

• Emphasising Mandatory Reporting

On February 26, 2024, the CBN issued a circular titled “Mandatory Reporting on Foreign Exchange Transactions,” instructing all authorised FX dealers to input all their Foreign Exchange Transactions into the Forex blotter, the CBN’s real-time reporting system. 

The CBN’s mandatory reporting policy for foreign exchange transactions implies a more robust and transparent forex market in Nigeria. By requiring real-time data from authorised dealers, the CBN can monitor activity effectively, identify potential irregularities or imbalances, and make better-informed decisions on policies and interventions. This increased transparency also benefits the market by reducing opportunities for manipulation.

• Making sales to eligible BDCs transparent 

On February 27, 2024, the CBN announced FX sales to eligible BDCs to meet the demand for invisible transactions. The CBN would sell $20,000 weekly, which the BDCs would then resell to end-users within the specified spread margin. 

• 4,173 Bureau De Change (BDC) Operational Licenses revoked!

On March 1, 2024, the CBN revoked the operational licenses of 4,173 BDCs through a circular titled “CBN Revokes Operational Licenses of 4,173 BDCs.” The CBN took this action due to the failure of the BDCs to meet one or more of the following regulatory provisions:

(a) Payment of all necessary fees, including license renewal, within the stipulated period outlined in the Guidelines.

(b) Submission of required returns by the Guidelines.

(c) Adherence to guidelines, directives, and circulars of the CBN, especially about Anti-Money Laundering (AML), Countering the Financing of Terrorism (CFT), and Counter-Proliferation Financing (CPF) regulations.

This circular signifies a shakeup in the Bureau De Change (BDC) sector. This aims to clean up the BDC sector, improve transparency, and reduce the risk of illicit activities. 

• No more foreign currency as collateral for Naira-denominated loans

On April 8, 2024, the CBN issued a directive to all banks titled “The Use of Foreign-Currency Denominated Collateral for Naira Loans,” prohibiting banks from accepting foreign currency as collateral for Naira-denominated loans. The only exceptions allowed are Eurobonds issued by the Federal Government of Nigeria and guarantees from foreign banks, including letters of credit. The CBN instructed the banks to phase out all Naira loans secured using foreign currency collateral within 90 days. 

By prohibiting foreign currency (except for specific exceptions) as collateral for Naira loans, the CBN aims to lessen banks’ exposure to fluctuations in exchange rates, potentially making loan repayments more predictable. It also seeks to discourage borrowers from relying on foreign currency and promotes the use of Naira within the domestic financial system.

• Naira is appreciating

On April 8, 2024, the CBN communicated the “Sales of FX to BDCs to Meet Market Demand (Retail-End) for Invisible Transactions.” The CBN sold USD to 1,583 BDCs in this communication at N1,101 per USD. 

Furthermore, on April 22, 2024, the CBN continued its efforts to meet market demand by selling USD to 1,583 BDCs at N1,021 per USD. The CBN communicated

this through a press release titled “Sales of FX to BDCs to Meet Market Demand (Retail-End) for Invisible Transactions.”

The implication of a press release specifying the latest rate of sales of Forex to BDCs for Invisible transactions is to communicate the latest rate to the public. By injecting dollars directly into the BDC system, the CBN hopes to dampen demand pressures and potentially slow down any depreciation of the Naira. 

Conclusion

These reforms, analysed across over a dozen policies implemented since June 2023, have far-reaching implications for fintechs, remittance companies, and global merchants operating in Nigeria. The ever-evolving regulatory environment makes working with a regulatory technology (regtech) company a valuable asset in maintaining compliance.

The most significant implication is the shift towards a market-determined exchange rate system. This eliminates the complexities of a segmented market and fosters greater transparency. Fintechs can leverage real-time exchange rate data (as the CBN mandates) to develop innovative financial products and services. Remittance companies can offer more competitive rates to Nigerians receiving funds abroad. For global merchants, a market-driven exchange rate allows for more transparent pricing strategies when selling goods and services in Nigeria.

Yet, the new regulatory landscape presents challenges and opportunities for fintechs and remittance companies. The revised guidelines for IMTOs, requiring them to set rates based on market conditions, will necessitate adjustments to their operations as the currency remains relatively volatile.

The long-term goal of the CBN’s reforms is to have a more stable and efficient foreign exchange market. While the short-term may involve fluctuations and adjustments, focusing on transparency and market forces is a positive step. As the market matures, fintech and remittance companies can enhance financial inclusion and facilitate cross-border transactions in Nigeria. Global merchants can benefit from a more predictable foreign exchange environment, potentially increasing trade opportunities.

About the Author: Kenechi Yvonne Umeh is a business development professional based in Lagos, Nigeria, with extensive experience in omnichannel fintechs focused on Pan-African merchant acquiring. She specialises in sales, partnerships, and driving business growth for tech products. She is currently an employee of BudPay. Bud Infrastructure Limited (BudPay) is a digital technology company dedicated to building modern payments infrastructure that allows businesses to receive payments globally.