CBN justifies restriction on Naira debit, credit cards

*Central Bank of Nigeria, CBN.

*Central Bank of Nigeria, CBN.

03 January 2016, Lagos — Among Nigerian bank customers today, the recent restriction on the use of debit and credit cards for foreign transactions is perhaps the most topical issue.

This is because, over the last two weeks, banks’ customers have been inundated with messages from their respective banks on the new dispensation, leaving travelers and business promoters in a state of shock.
However, to prove that the banks’ decision has the blessings of the regulators in the financial system, the Central Bank of Nigeria (CBN) last week issued a statement confirming its approval of the recent decision of Nigerian banks to restrict the use of debit and credit cards for foreign transactions. The apex bank blamed the nation’s low foreign exchange reserve for the decision. Although the CBN promised that the restrictions would be lifted as soon as the apex bank was able to increase the foreign reserve to a decent level, many Nigerians have expressed frustration for their inability to make purchases through their cards. Nigerian foreign reserves as at today are around $29 billion.
Watchers of the financial system that read the speech of the CBN’s Director, Monetary Policy Department, Mr. Moses Tule, who addressed the press recently, maintained that given the tight conditions listed for the lifting of the restrictions, the use of Nigeria’s debit and credit cards abroad has been put in abeyance.

Conditions for Return of Status quo
According to Tule, the restrictions will be lifted “as soon as we build up reserves; when you see us building reserves to $50 billion, $60 billion, $70 billion, $200 billion or more. The moment we begin to build reserves, we expect that just as these restrictions were not there most of the restrictions will be lifted, but for now every hand needs to be on deck. We need to earn foreign exchange. As a country you can improve your business processes in order to export and earn foreign exchange and that is what the country is calling on patriotic Nigerian businessmen to do.”

Tule said: “The limitation on the use of debit or credit cards outside the country was not a limitation that was placed by the CBN. They were restrictions that Deposit Money Banks (DMBs) placed because they have to settle whatever transactions you make with your debit cards with their corresponding banks in foreign currency and if the banks do not have the foreign currency to do that then you create a liability on them, which will crystallise on their balance sheets.
CBN Won’t Stop Banks

“At this point, we are in this country, the obvious answer is that the CBN cannot stop what the banks are doing now and the reason is very obvious. Our priorities as a nation for the allocation or use of foreign exchange is: 1) for the settlement of matured LCs (letters of Credit) that have been opened for importation; 2) for the importation of petroleum products until such a time either when we have our refineries fully operational and we are not in a position to import fuel again to ensure that the wheels of economic development continue turning and running and 3) for the importation of raw materials.”

By the time the CBN meets these conditions “given the level of current flow into the reserves, by the time we meet these three priority areas, you will discover that people who are using their debit cards overseas for shopping can never be on the priority list. We would then go back to the point where the foreign exchange, which is a stock dries up that is the position we are in today.”

“Whatever decisions banks take with respect to allowing their customers use debit cards overseas, those are strictly business decisions. They are looking at their balance sheets, they are looking at their capacity to settle with their corresponding banks the obligations that will crystallize on their balance sheets, rather than open themselves to the people who are out their shopping in foreign currencies, using their debit cards for one thing or another.”

The development is coming on the heels of recent difficulties of Nigerian banks in meeting $5 billion foreign exchange obligations to importers and correspondent banks, reflecting the worsening foreign exchange situation in the country.
Renaissance Capital contained the foreign exchange obligation in a report entitled: “Nigerian banks struggling for FX liquidity.”

The report stated that due to the inability to access foreign exchange from the Central Bank of Nigeria (CBN), banks, are having challenges sourcing dollars to meet outstanding foreign exchange, FX, obligations to importers and correspondents banks ranging from $2 billion to $5 billion.

The report stated: “Declining oil prices and the unwillingness of the government/Central Bank of Nigeria (CBN) to devalue the naira amidst constrained reserves continue to worsen the FX liquidity position of the Nigerian banks. We highlight the sector’s challenges across four fronts, and believe that, should this trend persist in a weak oil price environment, asset quality and international obligation default risks could be significant.

“Nigeria is dependent on imports, which Nigerian banks facilitate via the opening of letters of credit (LC). The customer typically repays these after imports are sold; the customer therefore earns naira, and then approaches the banks to source FX from the CBN (or goes to the black market), with which the correspondent bank is repaid.

“With the CBN struggling to provide sufficient FX to meet importers’ FX demands and banks prevented from accepting FX deposits, not only have importers been unable to repay their obligations, they have also struggled to keep afloat – among them import dependent manufacturers.

“As importers have struggled to access FX, the Nigerian banks have used their FX liquidity to settle with the correspondent banks (given the LCs are guarantees), in anticipation of the CBN providing liquidity.”

In what looks like an open admission of the crisis, Tule stressed the need to concentrate on the productive sectors alone. He said, “We have to produce for export we can’t continue to depend only on the export of crude oil.” “

Speaking on the restrictions imposed on the use of debit and credit cards, the CBN official said, “The banks have not said customers do not have access to their dollar accounts; what they are saying is that if you deposited cash, you can ask for cash; if the deposits in your account were by way of transfer and you want to carry out a transaction you can only transfer; that is what they are saying.”

The CBN, he said, frowns at the situation where “you benefited from cheap foreign exchange, bought imported raw materials by using the official channels and you brought in your proceeds, now you want to go and draw cash so that you can sell them in the parallel market, we will not allow you because first you generated the proceeds by accessing the official window, which was more cheaper so we wouldn’t allow you”.

“These are some of the reasons behind our saying that we placed those restrictions on even people who had dollar export domiciliary accounts background but they can have access to these accounts if they want to import raw materials and that is what we have stuck to.”

Shedding more light on the reason for the forex restrictions, Tule said that “the currency of use in this country is the naira, not the dollar; you cannot expect carrying out dollar transactions over the counter in an economy whose currency is not dollar-denominated we must learn to respect our systems and laws that govern our system.”

The law, he said, clearly states that “your deposits are in naira; if you have a domiciliary account the proceeds, if earned outside the country, you can receive foreign currency deposits into it or if you have earned foreign currency the foreign currency can be deposited in that account. I don’t see you carrying out a transaction and earning foreign currency within Nigeria; you will earn naira.

If you had a business that earned foreign currency it will come into your domiciliary account by way of transfer; it is not going to come into your account by way of cash. If you have got cash deposit in your domiciliary account, there are only two ways about it, a) either you’ve patronised the black market or you’re doing some shortchanging and that’s against the law. The CBN would not like to sit and watch our people using the legitimate channels of the financial system to promote illegality.”

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