I do not work in the Central Bank of Nigeria. But I have access to information which may make some directors there jealous. I speak on average 10 companies in Nigeria weekly because we run the most active entrepreneurial school in Africa.
The smartest people in Nigeria are the young people, and they’re well ahead of all of us. They invent sophisticated business models and sell some to Nigerian banks. I will share one here which took off massively from July 1, 2023, after the Naira floating policy. Many banks have this product in Nigeria.
Yes, new business models evolved after the Naira floating policy last year. Some of the things the Central Bank of Nigeria is doing will take time to work as some of our lending products are cross-border in nature now with masked USD component. I have identified ten new models and will share one today.
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- CompanyA has raised $100,000 from InvestorA which is based in New York.
- InvestorA wires the funds to USBankA in California.
- CompanyA operates in Lagos, Nigeria, and needs and uses Naira for its operations.
- CompanyA approaches a Nigerian bank (NGBankB) for a loan of N50 million, using a portion of the $100k as a collateral. NGBankB asks CompanyA to wire $50k from USBankA to another bank in New Jersey (USBankC) to an account it controls. That is used as a collateral to secure the N50 million.
- Upon that wire, NGBankB releases N50m to CompanyA in Nigeria at a low interest rate since there is “no risk” on that loan (fully collateralized with US dollars).
Note: no USD fund has been imported into Nigeria. And the US dollar which shows in the balance sheet of the local Nigeria bank is a collateral on a loan issued in Naira.
Does the Central Bank of Nigeria (CBN) understand how to handle the Naira and the USD components of this transaction? I just explained one of many financial trajectories which are turning the Naira on its heads.
Nigeria was broken in 2017 but post-May 2023 policies accelerated things; everyone knows what happened. Check the rate of foreign currency importation, not the amount raised? I mean, if you do not understand this, you are 10 years behind in the Nigerian capital and banking sector. The forex market in Nigeria is so advanced that it may take the central bank years to catch up because the tools we use to regulate and monitor banks cannot understand what happens.
Stay tuned for model #2. These are new business models which are reshaping banking, FX and the broad capital market in Nigeria. Interestingly, these things are 100% legal. The challenge is the distortion in the funding equilibrium.
Yet, we can fix these issues if we get to work. The floating of Naira made Naira vulnerable and that was why I called it “One of the worst economic policies in Nigeria since 1999“.
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Will the N50 million borrowed in naira also be consumed entirely in naira, or a portion of it will still be converted to dollars to import some things in the running of the CompanyA? Either way will raise another point of conversation, making it somewhat a moving target.
I do not expect the CBN to have all the answers or even attempt to understand all the facets. What we can do is to focus on the fundamental things that trigger these moving targets, and on other hand educate and inspire the citizens to understand their roles in building a working nation. If the battle goes down to ‘them vs us’ affair, then everyone comes out scathed.
Trust is fundamental, everything else draws its life from it.