Nigeria’s black market exchange rate is determined by multiple players and intermediaries, resulting in rapid depreciation of the exchange rate to levels thought to be devoid of market reality.
Ever since the Central Bank of Nigeria crackdown on AbokiFX (the website that organizes the parallel market exchange rate) last year, forex buyers and sellers have struggled to find a benchmark for what should be the real exchange rate.
Some BDC traders who spoke to Nairametrics lament that the lack of transparency in how these rates are determined is causing huge market arbitrage that has cost several traders millions of naira in losses.
“Before now, buyers and sellers visit AbokiFX and accept any rate published there as a benchmark. But since the CBN crackdown, it is unclear where to refer. A leading BDC trader who preferred anonymity complained when speaking to Nairametrics.
They are also quick to admit that while the central bank may have had the right to clamp down on the parallel market website over price-fixing allegations, the ban has created a void in a major aspect of forex trading. How to fill this void is what some of the traders who spoke to Nairametrics want to address urgently.
The vacuum, however, means that several players with different rules determine their own exchange rate, causing a price disparity that only leads to further depreciation of the naira at a rate that is often seen as not reflecting market reality.
Disparate rate setting
According to some traders, exchange rates are currently set arbitrarily by anyone without any form and this interaction between demand and supply also does not determine an effective price.
- According to a trader, pricing is disparate, no one knows for sure how each of the players determines the rate.
- “The risk is that you don’t know if you’re buying at the right price and when you sell, you don’t know either if it’s at the right price or the wrong price. – a trader told Nairametrics.
- Without a properly regulated foreign exchange market with limited capital controls, these challenges are unlikely to be resolved.
- There are so many operators operating with so much sail that the market is anything but efficient.
Who are the operators and how is the tariff determined?
Operators that determine black market exchange rates
Parallel market operators who sell on the street determine their prices simply by adding a premium to the prevailing exchange rate, regardless of the price at which they bought it.
- An Aboki can just set the price he likes and hope anyone will buy him at that price.
- An Aboki can sell for different prices in an hour depending on who is willing to make the transaction.
- Prices in Lagos are also different depending on whether you are on the mainland or on the island.
- The prices between states are also very different on the streets.
It’s a different story for intrabank transfers where sellers with currencies deposited in their bank account with transfer to buyers who also have domiciliary bank accounts in the same bank.
- When applying the exchange rate, sellers include an additional premium for bank charges on transfers as well as other arbitrary expenses they incurred in procuring the currencies and making the transfers.
- Sellers in this market often determine their price based on heresay or through brokers who also add their margins to facilitate transactions.
Starters – For transactions between account holders with deposits in different banks, transactions are only possible if the seller has currencies designated as a contribution.
- An inflow means that the forex has been transferred to the depositor’s account rather than an over-the-counter physical cash deposit which is limited.
- For interbank transfers such as this, the premium also includes any transfer fees, additional fees for a cash contribution and any amount the owner of the money wishes to add to facilitate the transfers.
- There are also intermediary brokers who help match buyers and sellers and add an extra naira or two to the rates that are ultimately settled.
Transfers abroad are another story. Based on our findings, the exchange rates used are determined by the region where the transfers are supposed to end.
- Cross-border transactions that see the buyer receiving in Europe or Asia are more expensive when the transfer originates from the United States.
- Transfers within European accounts also incur other fees and charges, especially when the UK is in the mix.
- Charges terminated at any bank in Europe are incurred by the assignee and the assignor. The transferring bank will invoice and the beneficiary European bank will also invoice.
- The final exchange rate is also increased by intermediaries or brokers who add their own margins.
International Money Transfer Operators (IMTO) – these are the recognized official channels for forward transfers in Nigeria and several other countries.
- IMTOs are regulated by the CBN, however, verifications by Nairametrics reveal that they also do not buy or sell using the official exchange rate.
- In most cases they don’t have any currency and when they do they ask for money in Naira rather than wire transfer.
- A source suggests it could also be a convenient way to avoid central bank polls.
- IMTOs also set their exchange rates according to their terms.
FINANCIAL INTERMEDIARIES are also financial intermediaries that operate in foreign countries such as the United States, Canada and Europe.
- Operating primarily through mobile apps, they allow Nigerians in the Diaspora to buy or sell currency in exchange for remittances to their families in Nigeria.
- To facilitate these transactions, they open several bank accounts with local banks in Nigeria through which the funds are disbursed to their Nigerian beneficiaries.
- Just like the other options, these intermediaries set their exchange rate daily but do not disclose how this is done.
- They also charge transaction fees and often attract a premium for the exchange rate used.
Cryptocurrencies also offer another alternative form of determining exchange rates via popular exchanges such as Binance.
- At Binance, traders come to the platform to post the rates at which they want to sell forex even though stablecoins such as USDT are used as a medium of exchange.
- Users of the platform for forex trading can always see current prices in a timely manner.
- Perhaps the most transparent exchange rate determination tool, prices are always determined arbitrarily because the exchange does not regulate how the price
The proliferation of the exchange rate in Nigeria is likely to persist until there is a formal market where currency can be exchanged freely. While this may not immediately lead to a stable exchange rate market, it is more likely to improve liquidity and transparency in an increasingly risky and opaque market.