In an attempt to solve the weak, unstable, and unattractive naira, the CBN is now imposing several regulatory and supervisory guidelines for banks, cryptocurrencies and BDCs.
As I mentioned before, the managed-floating exchange rate system is the problem, not the market players, and I hope the government realises it sooner. Seeing that banks cannot be pushed easily, the CBN has turned its attention to the 5,690 thriving BDC businesses and crypto traders--the platform they recently brought back to the market. Like the crypto market experiment, the position of BDCs is being made almost untenable because they are being blamed for aiding forex speculation and market volatility.
There is no evidence showing these market players are to be blamed for the ongoing Naira crisis. It is the result of the faulty and controversial reforms by Tinubu and his 'Lagos boys' which they have refused to take responsibility for. We would not be here if 'they' had conducted objective research or listened to experts before making these regrettable decisions. I wish someone would tell them countries don't use trial-and-error to solve currency crises.
As an expert in the financial and economic field, I must caution the government to deter from these draconian experiments, which they call guidelines. If this continues, Nigeria may wake up one day without a financial market. It will create severe economic disruptions, including a liquidity crisis, frozen payment and trading systems, restricted credit availability and zero confidence in the economic system. Bank runs, and hoarding of physical cash and other assets will be the order of the day.
Before we get to that stage, I will provide some academic perspectives and pragmatic global practices on the potential implications and challenges of the CBN's regulations on BDCs.
Restricting certain entities like banks, government agencies and NGOs not to have ownership stakes in BDCs will limit the capital and expertise available to BDCs. Restricting BDCs from engaging in financial activities like collecting deposits, granting loans, dealing in gold or engaging in capital market activities will limit their ability to innovate and diversify revenue streams.
The CBN ought to know that diversification and diverse ownership within financial services firms enhance stability and service quality by spreading risks. The UK and Singapore--a high-income emerging economy--allow a range of entities, including banks, to invest in financial service providers, fostering innovation and stability within the sector.
Sourcing forex from a variety of entities brings the needed liquidity for BDCs to facilitate smooth financial transactions, but the new bureaucratic hurdles will lead to a liquidity crunch in the forex market. Even the Head of the BDC Association, Aminu Gwadabe, thinks this is unfair. The US allows BDCs to source forex from a wide range of channels without stringent restrictions on transaction sizes, ensuring market liquidity and accessibility. Similarly, Egypt allows an unlimited inflow of forex into the country as long as it is declared.
The stipulation that a significant portion of forex sales must be via transfer rather than cash will restrict access to forex for individuals and businesses that rely on cash transactions, particularly in regions with limited banking infrastructure. This challenges financial inclusion, as financial services are limited to certain segments of society.
In Kenya, forex bureaus operate with more flexible rules on cash transactions, enhancing access to forex for individuals in a country with a significant unbanked population, disabled persons and other vulnerable groups.
Similarly, the high minimum capital requirements for Tier 1 and Tier 2 BDCs of N2 billion and N500 million, respectively, are a barrier to entry for smaller players, which will stifle competition and innovation in the financial sector. The two-tier system will create a market divide, where Tier 1 BDCs, with their broader operational scope, will dominate the market, leading to monopolistic practices.
Healthy competition within markets is important for efficiency and innovation. Canada's approach to regulating foreign exchange entities does not impose restrictive tiers, allowing a more competitive environment that benefits consumers through better rates and services.
The complicated licensing process and strict corporate governance requirements, while intended to ensure stability and integrity, will increase operational costs and complexity for BDCs. The detailed operational and supervisory requirements will increase the regulatory burden on BDCs, which will divert resources away from core activities and make forex more scarce. Australia's streamlined licensing process for financial service providers, including BDCs. This reduced administrative burdens while maintaining high governance standards.
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Overall, these harsh regulations on BDCs will be counterproductive as they will not make the Naira any stronger nor bring stability to it. On the contrary, they will negatively affect 5,690 striving businesses, risking economic innovation, competition, stability and growth in the country.
Those familiar with policymaking know that it takes time for foreign exchange policy to have an impact on the macroeconomy through financial markets, exchange rates, and capital flows. This means the ongoing forex market volatility is the short-term consequence of Tinubu's initial reforms from nine months ago. And we are yet to see the consequences of these newly published regulatory and supervisory guidelines for banks, crypto and BDCs. So, brace yourselves.
