Foreign Currency Rejection By Deposit Money Banks, Raising Risks Of Capital Inflow

THE ongoing rejection of foreign currencies’ deposit into domiciliary accounts of customers by the Deposit Money Banks (DMBs) has been greeted with a mixture of suspicion, anxiety and optimism.

The divergence in opinions may not be unconnected with individual perceptions, level of grasp of the subject matter and series of policy choices/turnover associated with the nation’s exchange rate developments, falling external reserves and its accretion drive.

Though, the regulatory authority — the Central Bank of Nigeria (CBN) — did not commission the latest move by banks, the apex bank has indicated its support for DMBs. Still, the $15.7b illegal fund flow’s claim by the Global Financial Integrity and the regulatory reactions to it may be laying credence to the new moves by banks, as a support for the fight against corruption.

Already, there are over $1b sitting idly in banks, mostly accumulated by the speculative exchange of naira for dollar through random opening of domiciliary accounts and storing of the greenback in them.

Exchange rate is one of the determinants of the strength of an economy, and though, other macroeconomic factors like fiscal developments, inflation, employment and general production level are co-influencers of rates, arbitraging and speculative activities on the legal tender must be tamed and if possible, eliminated. Of course, no policy has been without effects — positive and negative — but thought-out decisions are reached by the considerations of the greater good and in most cases, the sustainability of the economy.

Again, no policy anywhere has been generally received with open hands at first sight free of mixed feelings. Even among economists and scholars, there is rarely a consensus on one subject in its entirety.

While the banks are wittingly or unwittingly keying into the direction of joining the authorities in fighting the exchange rate course and corruption, from all indications, the current decision to reject foreign currencies is tending towards little for the defense of the Naira, little for the fight against money laundering (corruption) and big for the idle funds that are not yielding any benefit for the financial institutions.

With the barring of the 41 items from the official foreign exchange (forex) window, which subsequently, reduced demand pressure at the official segment; the recently introduced Biometric Verification Number in forex transactions; and temporary ban in wire transfer from the domiciliary account, opportunities for banks to trade short-term with the foreign currencies in their possession have been limited, hence there is no business sense in accumulating more.

The Head of Research, Afrinvest Securities Limited, Ayodeji Eboh, said the DMBs’ stance was laudable, whether or not they are doing it for personal good.

He said that the high dollar levels in banks were facilitated by speculation and panic buying in anticipation of devaluations in recent times, which pressured the naira further, as individuals were withdrawing from savings accounts and exchanging them for dollar and storing same in their domiciliary accounts.

The operation of domiciliary account allows the depositor to make withdrawals in the same currency with which the value was deposited, hence banks can only benefit from the deposit through short term trade in the currency, which currently has risen to record because they cannot let it out with the ban on wire transfer outside the country and withdrawal from it within the country.

The development turned the huge dollar deposits in the banks to idle funds. The CBN Governor, Godwin Emefiele, said there was no regulatory directive to banks to stop accepting foreign currencies, but that their initiative was a welcome development, because it is abnormal for individuals and customers to enter the banking hall to deposit foreign currencies in personal accounts for no transaction purposes.

But Guaranty Trust Bank Plc, in a note to a customer, said it stopped the acceptance of foreign cash deposit into customers’ domiciliary accounts due to “unavailability of outlets” for managing it at all branches nationwide.

It also noted that the foreign cash deposits made before now might not be eligible for outward electronic transfer, but can only be withdrawn as cash, assuring that the measures are temporary until an alternative solution is proffered.

Nevertheless, the move to stop receipt of dollars by banks has been described as strategic in containing the menace of money laundering and illegal fund flow from the country, presently put at $15.7b yearly by the Global Financial Integrity.

From the perspective of patriotism, analysts said the banks’ moves are laudable, notwithstanding creeping suspicion on why the financial institutions suddenly turned a “blind eye” on the coveted currencies, which its availability could boost their huge trade in them and earnings as well.

Again, the latest efforts against corruption and the advent of BVN in the foreign exchange system may have enthroned a regime of checks, as well as caution for those who deal illegally in foreign currency, hence a reduction in transactions and the glut in banks.

But the Managing Director of Cowry Asset Management Limited, Johnson Chukwu, though acknowledged that banks’ decision is not sustainable, but harped on the need for everyone to understand the moves, as well as the positive side of it, even though there worrisome aspects too.

According to him, banks did not stop the transactions of importers and payments for legitimate bills, but there is a renewed drive for full disclosure of details of transactions before transfers are made.

He specifically pointed out that the measure means that banks at the moment, would not accept the foreign currencies for keeps in the domiciliary accounts, unless it is meant for immediate transactions, which full details must be disclosed for returns rendition to CBN.

Chukwu however said that it is the right of individuals to keep their valuables in whatever form as long as it does not violate the law of the land, adding that free falling value of the Naira is enough incentive for people to choose to save in dollar denomination, as no one would want lose.

For example, he noted that in recent months, the currency lost value from N157 to N197 to a dollar at the official exchange window and a range of N182-N185 to N235-N245 at the parallel market, which invariably is capable of enriching some with substantial amount of dollar in the domiciliary account.

To him, the continued rejection of the foreign denominations by banks would encourage people to device further ways of moving the money outside the country, which might be worse.

He pointed out that though the initial market response to the bank’s rejection of foreign currency lodgments pushed up the local unit, the tide is turning now over the temporary nature of the measure. “It is obvious that the banks cannot continue that way because it is not sustainable.

The real problem lies with the faltering fundamentals like rising speculations over the inability of reserves accretion drive. If people were sure that they could get their foreign exchange for legitimate transaction when needed, why would people want to buy now for the future.

In fact, the person might be investing for loss,” he added. Of course, the Nigerian experience in the fight against the persistent sliding fortunes of the Naira and External Reserves in the wake of volatile international prices of crude oil speaks volume. For some analysts, it has indeed been a tale of torrents of circulars to banks and other financial market operators, which they say has not given way for quietness in the financial system’s space.

CBN, in managing the country’s foreign exchange developments and External Reserves that had been on a downward trend since the plunge in oil prices in the second half of 2014, introduced a number of demand-restrictive measures at all segments of the market.

But this was not until the effects begin to wear out the acclaimed “invincibility” of the economy. The tightening rules included the closure of the Wholesale Dutch Auction System (wDAS) and switch to Retail Dutch Auction System (rDAS) windows in February 2015.

Simultaneously, the introduction of an order-based two-way quote system in the Interbank market followed, which was targeted at moderating the volatility swing of the local unit, enhance transparency and curb speculations.

The CBN then allowed the Naira to depreciate officially within the same period by 22 per cent, followed by the most recent- exclusion of 41 items from the official forex window.

But economic principles suggest that for devaluation to be effective, it must achieve real exchange rate depreciation, and not simply nominal. With a monoculture export and heavily import-dependent economy, achieving this condition became a tall order in the short-run.

Currently, the forex tightening measures taken by the apex bank, according the recently released External Sector Development report, caused a reduction in utilisation by Deposit Money Banks in the first quarter of 2015.

The report, which showed a 4.9 per cent year-on-year and 6.4 per cent quarter-on-quarter decline in forex utilised by DMBs for ‘valid’ visible (or tangible) imports to $8.4 b; also showed a 38.1 per cent year-on-year and 32 per cent quarter-on-quarter contraction in forex utilisation by DMBs for ‘valid’ invisible (or services) imports to $5.7b.

Afinvest Securities Limited in a note to The Guardian, said that consequent on the recent exclusion of 41 items from the list of items valid for accessing forex from all segments of the market, there would be a further drop in visible and invisible imports’ forex utilization in the second quarter and second half of 2015. “This is on the back of the quantum the newly excluded products, estimated at 20 per cent of total forex utilisation by DMBs in the previous quarter.”