- New directives issued by the Central Bank of Nigeria (CBN) has provide further guidance to Deposit Money Banks (DMBs) on operational changes in the foreign exchange market.
- Key directives include eligibility of all transactions for the Investors’ and Exporters’ window, unrestricted access to funds in domiciliary accounts, reduced cash withdrawal and lifted transfer restrictions, etc.
- These policy changes aim to promote transparency, liquidity, and price discovery in the FX market, improve supply, discourage speculation, enhance customer confidence, and ensure overall stability.
Following the initial circular issued by the Central Bank of Nigeria (CBN) last week, more directives were released to give further guidance to Deposit Money Banks (DMBs) regarding operational changes to the foreign exchange market by the CBN.
Key directives in the circular include the eligibility of all visible and invisible transactions for the Investors’ and Exporters’ window, unrestricted access to funds in ordinary domiciliary accounts by account holders, reducing cash withdrawal and lifting transfer restrictions to allow amounts not exceeding US$10,000 per day or its equivalent via telegraphic transfer.
Also included are the elimination of the restriction of cash deposits into domiciliary accounts, orderly settlement of any committed FX forward transactions by the CBN and normalization of the CBN’s CRR maintenance processes to ensure equity in its implementation across the banking industry.
According to the CBN, these further policy changes aim to promote transparency, liquidity, and price discovery in the FX market to improve supply, discourage speculation, enhance customer confidence, and ensure overall stability.
For a long time, domiciliary account holders faced many restrictions ranging from stringent withdrawal limits to the inability to transfer FX across dorm accounts in different banks to the imposition of ridiculous spending limits and restrictions on the amount that can be deposited into domiciliary accounts. Lifting these restrictions is a breather for holders of such accounts and should facilitate easy movement of FX and consequently liquidity.
Besides the benefits for owners of domiciliary accounts, lifting or reducing the restrictions around FX deposits, withdrawals and transfers bode well for the bank’s fee and transaction income. However, we note that the extent of these gains will be dependent on the availability of FX. Removing spending limits and increasing withdrawal limits without sufficient FX liquidity will not amount to much.
Again, many banks have effective CRR significantly above the stipulated 32.5%. Ensuring that all banks are within the required limits means either releasing funds or ceasing to debit the banks till they fall short of the required 32.5%.
This in our view, is good news for the banks as they will have more funds earning real income. The
incessant and discretionary debits of banks’ deposits previously not only restricted Interest
Income growth but also sometimes created liquidity problems for many banks.
That said, many of these restrictions were put in place previously to avoid the dollarisation of the economy, which was becoming a real threat. In our view, the new administration needs to put other policies in place to avoid this threat.
The pro-market policies of the new administration have elicited interest in the stock market, leading to a re-rating of many fundamentally sound stocks especially in the banking sector. While we expect continued interest in fundamentally sound names, we believe Foreign Portfolio Investors (FPIs) will remain on the sidelines for a little while longer to access the sustainability of these policies before bringing in fresh funds.