Here’s the background to this story. Sometime last year when the naira started to come under pressure, the bankers and the Central Bank of Nigeria (CBN) sat down in the Bankers Committee (BC) and decided on some measures to stabilise the naira.
One of the things they agreed on was a fixed spread in rates. Banks would not buy forex at the interbank market at more than 50kobo higher than the official rate. They would also not sell at more than N2 above the official CBN rate. Based on current published rates on the CBN website, this means that a Nigerian bank cannot buy US dollars from any source at more than N197 to $1. They are also not allowed to sell for more than N199 to $1.
Now, this was not written down via a circular because the CBN did not want to be seen as fixing rates. But it has been in force and you can see it when you check the Interbank rates (the market where banks trade with each other). The interbank rates haven’t moved beyond that 50kobo and N2 band if you check going back to the last time the CBN devalued the naira.
It goes further. Banks cannot report to CBN that they sourced forex at more than N197 to $1. Or that they sold for more than N199 to $1. That will trigger an automatic fine from the CBN. I am told of a bank that got fined simply for extending the rate it bought at to 4 decimal places. Say something like N197.4567. Once you round that up, it takes you to N198. The bank got fined by CBN immediately.
Another point to note — The interbank market in Nigeria used to trade around $300m per day when oil prices were good. Now it barely does $30m per day because most people who would have brought money in have run away given that no one believes N199 is a realistic rate. That is to say, banks are currently sourcing up to $30m per day at N197 to $1. It’s hard to believe that there are some mad people out there selling their forex at this rate but it is happening.
What this implies is that even if banks are sourcing forex at more than N197 to $1, they cannot legally report it to CBN without getting a fine.
Nigerian banks are NOT allowed to participate in the black market.
The Big Question
All of the above leads us to ask an important question — how on earth are Nigerian banks getting away with charging card users rates as high as N350 to $1 for card payments?
As stated above, this cannot legally be reported to CBN. A bank cannot say it sold US dollars at N345 to $1 to a customer who bought books on Amazon using their naira debit card. They cannot also say they bought forex from somewhere at N330 to $1. In both cases, the CBN will slap a fine on them immediately. The CBN cannot allow this to happen for obvious reasons as it will mean they have devalued unofficially.
But this is what is happening. Nigerians using their debit cards online or abroad to make purchases are getting charged black market rates by their banks.
So how are the banks reporting this to CBN?
There are 2 possible but insufficient answers to this puzzle.
- The banks have resurrected their old ‘NIBBS and Drafts’ trick. I havepreviously written about this ruse.
Again, the attempt to ‘control’ the exchange rate gave rise to all sorts of funny games. Since the rate at which banks could sell their forex was fixed, they simply complied with this rate at the IFEM but then collected an extra payment outside the system to make up the difference with the ‘real rate’ at which they were actually selling. Some bankers called this game ‘NIBSS and Drafts’ i.e you pay the official rate via NIBSS but settle the difference with a bank draft.
That is, they buy the forex from say an oil company at a more realistic rate of N300 to $1. Since they can only tell CBN they paid N197 to $1, they have a side agreement with the oil company to pay them N197 officially and then cut them another cheque for the remaining N103 to $1 on the side.
This is still illegal by CBN’s rules but it is possible that it is happening.
2. The second possible answer from what I have been told is that when the banks report their forex transactions to the CBN, they load all sorts of charges on it ‘seperate’ from the actual rate to bump up the total charge. So they might report that they sold US dollars to Mr. Lagbaja at N197 to $1 but then include charges like ATM fee, card fee, switch fee, oxygen fee and so on until they get to the rate they actually sold it to him.
But this will be quite tricky to pull off in practice. The gap between the official rate and what the banks are charging was so high at one point that its hard to see how they could have loaded charges to get from N197 to N400 which is where the rate peaked at a couple of weeks ago.
Please note that this is only happening to card payments. It is only through card payments that Nigerian banks are currently selling forex at black market rates. In the forex jungle that is Nigeria’s current monetary policy, people who pay for foreign purchases using their cards are at the bottom of the food chain.
It’s the ordinary (middle class) guy who is being taken for a ride here. In today’s papers for instance, the latest forex allocation to banks from CBN showed that GTBank got the highest amount at $31m (of which it sold $15m to Alhaji Putin alone). None of that money is sold at more than N199 to $1.
All of this is of course down to the foolishness of Aso Rock running monetary policy. Even on Sunday in church right after taking communion, Nigerian bankers cannot be relied upon to tell the truth regarding something as mundane as the weather. So it is to be expected that they will grab such a gift with both hands. Everytime Nigeria has experimented with such forex controls, people have gotten superbly rich. ‘Twas ever thus.
Using some rough numbers — imagine a bank settling $1m per day in card payments (not an unreasonable figure). If it makes N100 on each dollar, that can easily come to N36bn in a year. It’s pretty cool money and will fund more than a few Range Rovers.
So back to the original question — how are banks getting away with charging black market rates on card payments? Are they really round-tripping in broad daylight?
If you have answers, I would like to hear them.