CBN Endorsees A More Flexible Approach to FX Challenges
By Patience Ikpeme
The Central Bank of Nigeria (CBN) has endorsed a more flexible method determined by the market to find the true value the foreign exchange (FX).
This was contained in a recent circular FMD/DIR/PUB/CIR/001/012 signed by Director, Financial Markets Department, Dr. Duke, Omolara Omotunde, addressed to “All Authorized Dealers” saying “the CBN has removed the spread on foreign exchange transactions”.
Dr. Duke Omolara Omotunde stated that “the bank hereby discontinues any cap on the spread on interbank foreign exchange transactions and restrictions on the sale of interbank proceeds”.
She further noted that “Authorized Dealers are to continue to conduct their foreign exchange transactions on a “Willing Buyer and Willing Seller” basis. In addition, they are to strictly adhere to high ethical standards in their dealings in the foreign exchange markets.
Omotunde noted that this includes but “is not limited to adopting appropriate price disclosures and transparency for transactions”.
What this implies is that the market will be the determinant of the price of foreign exchange.
This move aims to enhance transparency, efficiency, and flexibility in the FX market, ultimately benefiting individuals and businesses.
In the past, the CBN imposed limits on the difference between buying and selling prices for FX, known as the “spread.” However, these caps have now been lifted, enabling banks to establish their own prices based on supply and demand.
This allowed the market to determine the “fair” price for foreign currencies, particularly the US dollar.
Further more, Banks now have more flexibility to sell FX to anyone they choose. This change could result in quicker and more convenient access to foreign currency for both businesses and individuals.
In spite of the increased freedom for banks, the CBN has also emphasized the importance of transparency. Banks are now required to clearly display their prices, desist from deceiving customers, and report all transactions to the CBN.
The CBN anticipates that this new approach will: Promote fairness and efficiency in the FX market. By allowing the market to determine prices, the CBN aims to eliminate artificial distortions and ensure that everyone can access FX at a reasonable price.
The intent of the Central Bank is to encourage greater foreign investment. That is by simplifying the process of buying and selling FX, the CBN wants to attract more foreign investors, which could stimulate the Nigerian economy.
The CBN is also hopeful that by making official FX more accessible and transparent, it will discourage the use of the black market, which can be risky and illegal.
With banks determining their own prices, customers may find better deals on FX compared to the previous system: also, before conducting a transaction, customers should be able to easily compare the prices offered by different banks, as prices are set by the market, FX rates may become more volatile.
The CBN in the circular noted that it will continue to monitor the market and make adjustments as required.
