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CBN tightens noose around FX sale, bars MFBs

CBN Headquarters

To enhance transparency in the sale of foreign exchange and strengthen corporate governance, the Central Bank of Nigeria (CBN), has warned microfinance banks (MFBs) against exceeding the mandate of their operating licence to engage in foreign exchange (FX) transactions.

The warning follows an observation by the apex bank of the activities of some MFBs, which “have gone beyond the remit of their operating licences by engaging in non-permissible activities especially wholesale banking, foreign exchange transactions and others.”

This latest action comes an earlier one in July banning Bureaux De Change (BDC) operators from official FX sales on the grounds of facilitating graft and corruption in the financial services system.

In a circular issued by the regulator titled: “Cessation of Non-permissible Activities by Microfinance Banks,” the CBN reiterated that “Given the comparatively low capitalization of MFBs, dealing in wholesale and or foreign exchange transactions are a significant risk with dire consequences for financial stability.”

The circular, referenced, FPRD/DIR/PUB/CIR/01/020, and signed by Ibrahim Tukur, of the Financial Policy and Regulatory Department, said given the underlying risk to the stability of the financial system; it became imperative for MFBs to operate strictly with “the extant revised regulatory and supervisory guidelines for microfinance banks in Nigeria 2012.”

MFIs and FX risks

MicroRate and Enterprise Research Institute in one of its reports on how Microfinance Institutions (MFIs) handle FX risk noted that operators face higher risk particularly those in developing countries where financial markets are underdeveloped.

Also, because the sums involved are small, the well-established methods of the international financial markets to deal with this issue are rarely useful.

Given the comparatively low capitalization of MFBs, dealing in wholesale and or foreign exchange transactions are a significant risk with dire consequences for financial stability.

According to the report titled: Foreign Exchange Risk and Microfinance Institutions: A Discussion of the Issues, while the number and popularity of MFIs are growing as they are largely instruments for poverty amelioration, they are still not able to deal with foreign exchange risk.

“In addition, because of financial market underdevelopment, domestic liquidity in most developing countries is notoriously variable and in many cases, expensive.”

Therefore, the CBN threatened to revoke the licence of any MFB that fails to comply with the regulation, and underscored that:

  • MFBs are strictly prohibited from foreign exchange transactions
  • MFBs are to primarily focus on providing financial services to retail and/or micro- clients.
  • Micro-credit and retail transactions carried out by MFBs were limited to N500,000 per transaction for Tier 2 Unit MFB and N1 million for other categories.
  • Micro-credit facilities shall constitute a minimum of 80 per cent of total loans for MFBs.
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