Nigerian banks queried over illegal fixing of forex rates

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The Nigeria Economic Summit Group (NESG) has queried the 22 commercial banks over it describes as illegal fixing (cap) of the interbank foreign exchange rate.

Among other things the group complained that the cap on the interbank foreign exchange rate is impacting negatively on member companies and contravenes the Foreign Exchange Act of 2004.

The Group also alleged that the development is been exploited by some banks to engage in unethical practices such as extorting customers in a bid to maintain the stagnation.

Titled, “Reports by the Organised Private Sector on the Current Practices by Banks in the Nigerian Foreign Exchange Market”, the query was signed by the Chief Executive of the NESG, Mr. Laoye Jaiyeola.

Copies of the query were also sent to Central Bank of Nigeria (CBN), Chartered Institute of Bankers of Nigeria (CIBN), Financial Market Dealers Quote (FMDQ) OTC Securities Exchange and the Nigerian Bar Association (NBA) Section on Business Law.

The query stated, “Our members have brought to our attention certain issues and practices in the Nigerian foreign exchange market which are impacting negatively on their business activities and the economy as a whole.

“We are informed that over the last year (February 13, 2015 to date) the foreign exchange rate quoted by banks to Authorised Sellers (such as, International Oil Companies (IOCs), importers, etc.) has remained consistent at N197/$ regardless of the transaction amount or timing of the transaction. Despite recent events in the FX market which has led to exchange rate volatilities, the purchase price quoted to Authorised Sellers has remained stagnant- thus not providing a true reflection of the current state of the FX market.

“Our members have also reported that the apparent cap in FX rates have also motivated some banks to indulge in unethical practices, such as extorting customers in a bid to maintain reconciliation with the perceived rate cap.

“Upon thorough review of the CBN guidelines and circulars, we find no indication of any regulatory action/directive imposing a cap on the rate at which banks can buy foreign currency from Authorised sellers. Indeed, section 9 of the Foreign Exchange (monitoring and Miscellaneous Provisions) Act 2004(The FEMM Act) provides that The rate at which each transaction in the market shall be executed shall be the rate mutually agreed between the applicant and purchaser and the Authorised Dealer or Authorised Buyer concerned.

“The foregoing provision suggests that the purchase rate ought to be based on bilateral agreements and, as such, is inconsistent with the current practice of quoting a fixed FX rate.

“Based on the foregoing, we request an explanation of your institution’s adherence to this practice, despite there being no precedent or directive to this effect. We would be grateful to receive your response within 48 hours of receipt of this letter.

“Please note that our position on this matter is informed by the mandate of the NESG to ensure that the environment remains conducive for doing business.”

Investigations however revealed that the cap in the purchase FX rate in the interbank market was one of the outcomes of a secret meeting between the CBN and some banks few days to the general election of last year.

Few weeks to the general elections, the foreign exchange market experienced volatilities occasioned by the uncertainty about the general election and the exchange rate of the naira.

To address these volatilities, the CBN, according to industry sources, held a secret meeting with the Chief Executive Officers of some banks.

The CBN was said to have prevailed on the bank CEOs to assist in pegging the interbank rate to a maximum of N2 above the CBN rate. The Bank CEOs were to direct their treasurers not to trade and the foreign exchange dealers not to deal in the two-way quote interbank market.

Consequently, the banks involved stopped offering Two-Way quote in the interbank market and offered only One-Way Quote.

By so doing they controlled or determined the rate at which anybody can sell foreign exchange in the market.

According to a top banker aware of the agreement, “the banks could do so and in fact they were selected based on their dominant status in the market”.

Investigation however revealed that the arrangement was informal with no circular or directive to that effect and it was supposed to be temporary, till after the general election. But it has remained in force for more than a year due to the indisposition of the CBN to revert to status quo.

Also the arrangement created opportunities which many banks have exploited to either extort customers or engage in round tripping of foreign exchange

Investigations reveal that though banks purchase foreign exchange from authorised sellers like IOCs and exporters at N197 per dollar, they however sell the same dollars at exchange rate as high as N300 per dollars through overseas ATM withdrawal or PoS transaction made by customers via their debit MasterCard or debit Visa card.

Confirming this, an importer who spoke on anonymity, said that the exchange rate charged for his debit card transactions has always been above N300 per dollar.

A top bank treasurer also confirmed this development  on anonymity, saying that the records will not indicate the exact exchange rate; the difference is usually recorded as sundry charges.

Investigations also revealed that some bankers are exploiting the scarcity of dollars and difficulties of accessing CBN dollars via banks, to extort customers in desperate need of foreign exchange.

The Chief Executive Officer of a non bank finance company confirmed this development on condition of anonymity.
He said, “Some bankers demand up to N50 per dollar from customers to enhance their bid for CBN dollars. And because the customers desperately need foreign exchange to keep their businesses alive, they have no option than to pay.”

Culled from Vanguard NGR

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