CBN to stop forex sales to banks not issuing LCs

Henceforth, any bank in Nigeria that deliberately refuses to issue Letters of Credit (LCs) to manufacturers would be denied access to the official foreign exchange window.

The Central Bank of Nigeria (CBN), at an emergency meeting of the Bankers’ Committee, took this decision last Monday in Lagos.

The Bankers’ Committee is an association of Chief Executive Officers (CEOs) of banks, discount houses, the CBN and other financial institutions such as the Nigeria Deposit Insurance Corporation (NDIC), which meets bi-monthly to discuss the state of affairs of the industry.

At the emergency meet-ing, which was called last Sunday by the CBN governor, Godwin Emefiele, he was said to have registered his displeasure over the rate at which lenders were refusing to open LCs for their customers, particularly manufacturers. But some bankers said the acute forex scarcity in the system had forced them to stop opening LCs.

A letter of credit is a document issued by a bank to another bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.

A top official of a first tier bank, who spoke on condition of anonymity, said that the lender stopped opening new LCs because it had a huge backlog of LCs that it had not been able to process due to the forex scarcity.

He said: “There is just no forex in the system. We already have a huge backlog of LCs that we cannot process because forex is not easily available, so there is no point opening new LCs when the forex situation is becoming more difficult.”

He said that the CBN had not been able to meet all legitimate forex demands despite the dwindling external reserves, which stood at $27.143 billion as at March 1st, 2016.

The Federal Government is shielding the naira after the 42 per cent decline in the price of crude in the past year has decimated Nigeria’s revenues.

The naira has been pegged at N197-199 per dollar since March last year, while in the unofficial parallel market, otherwise known as the parallel market, the naira is some 43 per cent weaker, and traded at about N320 per dollar last Friday.

With far fewer dollars circulating in the country, the lenders are struggling to access enough foreign exchange to facilitate imports, settle accounts with correspondent banks, keep up with customers’ use of credit cards internationally and meet maturing debt obligations, according to Adesoji Solanke, Renaissance Capital’s head of research in Nigeria in a recent report.
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Moody’s Investors Service said in a recent report that with 24 per cent of banks’ loans to oil and gas companies and rising credit costs, banks face lower profits in the next 12 months to 18 months.

“It will become increasingly difficult to source enough forex to service debt repayments and a default will trigger a banking crisis,” said Robert Besseling, a Johannesburg-based executive director at business risk consultancy Exx Africa.

“If a default is going to happen, it will probably happen this year. It only takes one bank to hit the wall to create panic.

“Nigeria remains Africa’s most populous country and its biggest economy. Even though its growth has slowed, the economy may expand 3.2 per cent this year and 4.9 per cent in 2017 if the government prioritizes infrastructure investment, the International Monetary Fund (IMF) said penultimate Wednesday.

“Investors may be reconsidering their presence in Nigeria, but those with a longer-term view won’t withdraw completely, Besseling,” said.

“Looking from the outside, it’s a highly underpenetrated market and valuations on assets like the banks are pitiful – they’re so cheap you could buy them without having to get board approval,” Gadhia said.

“But it boils down to a need for clarity. So far, President Buhari seems to have ad-hoc policies and you would need a lot more clarity before investors gain confidence again.”

Also, in a chat with this newspaper, financial analyst and Principal Consultant, Henates & Associates, Mr. Henry Atenaga, said while it is obvious that the country is passing through tough times, banks have to adequately account for the utilisation of forex purchased from the CBN for industry watchers to believe that they cannot meet legitimate demands for dollars.

He said: “It is quite possible that given importers’ current desperation to obtain foreign exchange, they will want to open as many LCs as possible.

The fact is that if the CBN had not introduced forex restrictions, by now there will be no dollars to sell to anybody.”

The IMF had called on Nigeria to stop pegging its currency and to remove curbs on access to foreign exchange.

To try and conserve declining reserves and boost local manufacturing, the CBN last year imposed restrictions on access to foreign currency, but businesses dependent on imports suffered and foreign portfolio inflows waned.

Adding to the pain is inflation at 9.6 per cent in January, which is above the banking watchdog’s 6-9 per cent target range As part of measures to check sharp practices in the forex market, the CBN directed banks to start publishing their returns on the utilisation of forex exchange purchased in the newspapers.