CBN may move ahead with plans to stop FX sale to banks

What happens to banks when the CBN stops FX sale?

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Will banks succeed with their bold new plans?

On Friday, I shared Access Holdco’s plan to create three standalone businesses—payments, consumer lending and agency banking. The plan will have banks thinking like startups and naturally, there’s a lot of scepticism about their ability to pull it off. So it’s worth publishing this rejoinder by Adedeji Olowe on the ability of banks to see out their plans. 

“The play by the banks to become holding companies, on the surface, makes a whole lot of sense. The market is quite unforgiving with the valuation of banks – they are treated as legacy and there is nothing exoteric about what a bank can do – so the valuation is harsh. Startups, on the other hand, are a Pandora's box: it could turn out to be a banger or a banger; whichever banger you want to throw.

Carve out payments out of a typical bank, the valuation of the existing mothership wouldn’t budge but the new PayCo may become a unicorn. Well, that’s what the theory looks like. Until you discover that what makes startups successful has nothing to do with the structure but more with the DNA of those running these companies.

Do the Nigerian banks’ leaderships have the DNA to run these companies like startups? My guess is just as good as yours – nope. So most of them will struggle to get what they are looking for:

They won’t be able to attract or hold smart talent. They won’t know how to create a creative and enduring culture that drives ownership. They won’t be able to compensate well, especially young but fast-growing talent. They won’t be able to make decisions quickly. They won’t be able to take risks. They won’t know how to partner. They would be overburdened by board members that don’t know what the business is about. And they would be regulated to death.”

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The CBN may move ahead with plans to stop the sale of FX to banks 

The CBN’s pattern of confusing communication has been a theme of the newsletter a few times. Last month, the CBN governor, Godwin Emefiele said that the bank was planning to stop the sale of FX to banks.  Emefiele told journalists, “The era is coming to an end when, because your customers need 100 million dollars in foreign exchange or 200 million dollars, you now want to pack all the dollars and pass it to CBN to give you dollars. “It is coming to an end before or by the end of this year. We will tell them don’t come to the Central Bank for foreign exchange again and go and generate your export proceeds.”

The Central Bank quickly released a statement distancing itself from Emfiele’s statements, pointing out that the governor’s comments are not the basis of policy. Yet, there are some indications that the CBN will stop the sale of FX to banks this year. 

On an earnings call, Access Holdco’s CEO, Herbert Wigwe said he expects the CBN to stop the sale of FX to banks before the end of the year.

“On the complete halt on FX from the central bank, I think we take the central bank seriously and we take the word of the central bank literally as well. So the guidance that we’ve got is that by December the central bank will not sell foreign exchange into the market. I think the only caveat to that is this might come as a shock factor but it’s important. It is meant to force businesses to start looking more seriously at the export side of things. So the central bank is willing to support local businesses to have the capacity and on the back of that seek for export markets in the African continent and beyond.

Actually the central bank governor has indicated that the first steps towards ensuring that will not even be in December. It will happen from June. The idea is to get banks to basically focus on pushing non-oil exports.”

Despite Wigwe’s framing of the CBN’s impending decision as positive, there’s a lot to unpack in the possibility of the banks no longer having access to FX, especially in the wake of BDC’s also no longer having access. Will the squeeze and shocks of the policy be more than the CBN anticipates? While there are no clear answers yet, one thing is sure, the CBN needs to do a lot better communicating a policy that could have huge implications.