Nine Nigerian financial institutions (United Bank of Africa, First Bank of Nigeria, Diamond Bank, Sterling Bank, Skye Bank, Fidelity Bank, Keystone Bank, First City Monument Bank, Heritage Bank) were suspended on Tuesday from the inter-bank Forex market by the Central Bank of Nigeria (CBN) for failing to remit $2.3 billion to the government’s Treasury Single Account (TSA). The TSA was established last year in a bid to combat corruption and to bring more transparency to government finances.
President Muhammadu Buhari’s administration imposed strict rules on how banks needed to remit funds, one of those rules stipulates that Nigerian banks must send government dues in US dollars.
This policy decision by Buhari’s administration may not seem very problematic at first glance, but the scarcity of dollars in the country has placed many banks in an untenable position.
In June, the CBN decided to allow the Nigerian naira to float on the open market. The move was aimed at stimulating foreign investment, but president Buhari’s continued opposition to the devaluation has scared off foreign investment. Political instability and uncertainty has created very difficult foreign exchange conditions for banks in Nigeria. The naira has taken a sharp nosedive the last few months and outside investment in the country has been minimal.
A representative from Diamond Bank, Mike Omeife, explained that many banks in Nigeria were looking to pay the CBN in naira, given the shortage of dollars in the country, “Because of the crash in the local currency, the banks expected the CBN would have allowed them to pay in naira instead of dollars,” said Omeife, in a phone interview with Bloomberg.
According to a report by This Day Live, Fidelity Bank representatives also confirmed Omeife’s sentiments regarding the inadequate dollar liquidity in the country:
“We got a repayment schedule which we have been meeting. Our original indebtedness was about $500 million and it was only in June we were unable to make a refund based on the schedule due to the dollar scarcity,”United Bank of Africa managed to pay its $530 million dollar debt to the CBN yesterday and was allowed back into the inter-bank forex markets today. Diamond Bank, which owes about $287 million, is still in discussions with CBN, according to statements by Mike Omeife.
While some of the affected banks have been scrambling to appease the CBN with rapid repayments, some market analysts have begun to question why the CBN is taking such heavy-handed measures against Nigerian banks.
One analyst tells news outlet This Day Live:
“I do not understand the benefit of taking dollars from Nigerian banks and sending them abroad to the CBN’s account with JP Morgan.”Not only does JP Morgan benefit directly from this whole debacle, the inter-bank FX penalties will deprive Nigerian banks of trading fee revenue, as well as loan origination fees as less capital is available for lending.
“So by asking the banks to refund the dollar deposits to the TSA, the government must understand that the CBN does not domicile dollars and will have to export it to JP Morgan abroad, effectively strengthening those banks and weakening Nigerian banks,” he adds.The CBN was very quick to impose harsh penalties, yet the central bank completely ignored the present foreign exchange conditions in the country, which greatly contributed to this mess.
Image credit: TheGuardian