One of the biggest challenges of doing business in Nigeria and broad Africa is how to build a business that would not be crippled by a government policy. When I examine moats and competitiveness, I also look at policy-shift risks. At Tekedia Capital, when we see those risks as fully localized, with no way to overcome them through jurisdictional shifts, we do not invest. So far, we have been lucky that no policy has crippled any of our portfolio’s operations.
Good People, when Nigeria put a cash withdrawal limit of N100k per individual , you can conclude that cash-based bureau de change (BDC) business will go extinct over time. Yes, that business is done. Sure, the electronic ones will continue to operate: you credit them in Naira account, they credit your dorm account, or vice versa.
Indeed, the Central Bank of Nigeria (CBN) has artificially created a system to depress interests in foreign currencies by making it hard to transact on cash. It possibly observed that most Nigerian firms have not really cared about the exchange rate; high or low, every company passes the forex risks to the next customer or client.
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But with this new playbook, ephemeral demand for forex may dry up, and could help the apex bank achieve its grand vision: total control of forex movement by moving all forex transactions to bank halls, not in hotel premises, airports or BDC hubs.
First, provide e-naira and move more Naira transactions to the electronic domain. Secondly, mop all the informal cash vaults and bring them into the official vaults by redesigning Naira. Now, make it impossible to transact in cash by setting a limit on withdrawals unless you want to lose some money: N100k weekly and N20k on POS daily. With that, we have an end-to-end fiat execution of digitization.
CBN – 1
Bureau de change (cash) – 0
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Comment: Prof, the BDC operation is far from dying as you envisaged. The operators are smart and dynamic. What happens now is that they leverage mobile bank transfers to credit customers while receiving forex in cash and vice versa. No domiciliary account is involved here. Nigerians are already on their own going cashless due to increased security concerns before CBN recent intervention. The policy modification introduced recently will not make any much difference from their earlier versions.
My Response: “What happens now is that they leverage mobile bank transfers to credit customers while receiving forex in cash and vice versa” – your assumption is that BDC does not have a cap on how much cash it can withdraw. I am not saying that BDC will die, I am saying cash-based ones will struggle. Why would you arrive from New York into Lagos to give BDC $5, 000 to get a bank credit in an account you do not have or even sure that it is working? Then to withdraw that money, you cannot pick more than N200k in cash.
If that is the playbook, why bother with BDC no matter what since the bulk of the expense will be electronic. What I expect to happen is this: you sell only $100 to BDC in airport (for taxi, etc) and visit a bank the next day to deposit the rest of the money. You want to be sure that credit is valid! In the past, there was no risk since BDC will give you cash for that $5,000 but today he does not even have cash.
Comment 2: My Aboki is years ahead of CBN Prof. Since 2018, he accepts Naira by transfer only!
My Response: But he has to do the reverse also – pay cash for USD. Why would someone arrive at the Lagos airport from New York to give someone $5,000 for an alert in a bank account? People do that because once you have the cash, you have the cash and deal closed. Period. Going forward, you need to ask yourself: would that electronic transaction be reserved? Cash-based BDC has to attract new $$$ cash for its business to thrive.
Comment 3: From what I am aware of, most times when people arrive without having functional bank account, they usually change small amount, then sort out the account and then convert. If you convert 5000 dollars at a bdc shop to naira in cash, taking it home is very risky. People don’t do that anymore Prof. However, I am not saying there will never be those looking for cash, just as there will be those looking for cash frow within the country but my arguement is that I dont see how this policy correlates with diminished ability of the BDC to operate freely with those trying to chnage money as a result of their inability to supply cash. Rather, where I see this policy having strong effect will be in the new reporting policy, as anyone moving and depositing cash now have more scrutiny and bank transfers will provide more traceability of bribery and corruption. Which in effect will affect local dollar demand in the negative. Also, vote buying and those looking to spray money will have more difficulty.
My Response: Your comment has not addressed how the seller will source USD in cash. That was the focus of my comment. CBN is not focusing on using Naira to buy USD. The focus is how the new USD cash comes into the system. CBN wants that to happen in the bank. Alternative is you arrive from New York, somebody sends you alert to a bank account and you handover USD. I am not sure many will do that for a high amount.
..you created a new question and focusing on that. In my piece, I made it clear that cash-based BDC will go extinct. In your response, you are telling me how they will use a bank account. I am not sure I wrote otherwise.
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No single bullet to kill the malady in the land, so we can tick this as one of the policy’s accessories.
Any policy you put up in Nigeria, most people are more interested in the negatives than positives, so the first instinct is looking for how to undermine it. They will tell you why it will not work, but not ready to help you make it better…
The naira moved from N400/$ to N800/$ not because we suddenly have 100% increase in forex needs, but rather we are too hyperactive and cynical. And then people who have no need for forex started saving in dollars. This is our story, we speculate a lot.
The CBN needs to show character and do what it needs to do, without paying attention to too many side talks, if it wants to succeed. Tighten things where they are needed, as people complain, profile those complaints and analyze the quarters they are coming from; that would tell you if you are doing something right.
There’s never a right time to fix anything in Nigeria, just get going, if you succeed, the same people who condemned and vilified you will still applaud you.
Never allow Nigerians to bully you, else you will forget your purpose.
I think this policy will cause some inconvenience for a short term during which most people will be withdrawing far more cash from the banks than they deposit. Cash vaults outside the banks will grow bigger and bigger. Most BDCs already have huge safe. They will get even bigger ones. In essence regulated banks will handle less cash and lay off staff while an informal clubhouse parallel banking will grow.
Cash in king. To kill cash, cbn should make all electronic transfers free, insured, safer and instant, and charge heavily all cash transactions.