Nigerian banks making a kill on FX , reason for FX rising. – Abayomi Odunowo
Foreign exchange (FX) has always been a lucrative source of income for banks. From transfer fees to commissions on letters of credit and charges on FX loans, banks make substantial earnings from FX transactions. However, it’s not just the immediate earnings that banks are capitalizing on – they are also taking bets on the future movements of foreign exchange rates, potentially reaping even larger profits.
For example, last month, a bank may have held $1 million in FX and declared a FX gain of N100 million because the rates moved from N1,200 to N1,300. Fast forward to January 2024, and the bank may declare N200 million exchange gains because the rate moved from N1,300 to N1,500. These massive gains are not simply the result of FX transactions, but are indicative of a larger trend – the banks are taking a bet on the devaluation of the Naira.
This is where the Central Bank of Nigeria (CBN) comes in. The CBN has raised concerns about why banks are asking for government or CBN money to service their customers when they have their own substantial FX holdings. Furthermore, the CBN questions why banks are not betting on the Naira making gains, but rather on it being devalued. The CBN is essentially pushing back against the banks, urging them to meet all their customer obligations using their own FX reserves.
By the banks’ own admission, the figures involved in these FX transactions are huge. In some cases, 60-80% of the profits declared by banks are attributed to FX gains. This underscores the significant impact that FX trading has on the banks’ bottom line.
In response to the CBN’s pressure, the banks are being asked to start selling their FX reserves as of February 1, 2024. If this directive is executed, it is anticipated that the exchange rate will crash significantly. This move by the CBN is bold and potentially game-changing. By forcing the banks to offload their FX holdings, the CBN is essentially targeting the root cause of the Naira’s devaluation. If successful, this could lead to a more stable and stronger Naira in the long run.
However, the implications of this move extend beyond just the Naira’s value. If investors have been deterred by high exchange rates, they may now be more inclined to stay in the market due to the anticipated reduction in rates. This could have a positive impact on the country’s economy, encouraging more investment and boosting economic growth.
In conclusion, the FX landscape in Nigeria is currently at a pivotal moment. The CBN’s move to compel banks to sell their FX reserves is a bold step that could potentially reshape the foreign exchange market and the broader economy. If successful, it could lead to a more stable and stronger Naira, as well as a more favorable environment for investors. The banks, on the other hand, will need to reconsider their FX strategies and adapt to the changing dynamics in the FX market. This development is a testament to the complex interplay between financial institutions, government intervention, and market forces in shaping the FX industry.
Otunba Abdulfalil Abayomi Odunowo
National Chairman AATSG
1st February, 2024.
