Issues, perspectives on forex and money transfer operations

The Nigerian foreign exchange (forex) market has been in the eye of the storm recently. For a fact, Naira has lost so much on the streets and keeps losing, as currently, the gap between the official exchange and the parallel market remain wide.

In a space of two years leading to June 2016, the value of the naira depreciated by nearly 40 per cent at official rate of N165 to the dollar from December 2014. The rate of depreciation at the parallel market too has been more alarming.

Of course, the pressure on the forex market aggravated by the declining profile of Nigeria’s major source of foreign exchange- crude oil, at the international market. It has been on the ride of free fall, but simultaneously impacting heavily on Nigeria’s revenue base and forex reserves. Presently, the reserves have fallen to $25.4 billion from about $34.46 billion late 2014. The last two years has indeed, not been easy for the economy.

But the quest for effective allocation of the scarce item in the economy led to several measures, yet not without mixed reactions. First, capital control measures were activated to reduce the rate of foreign exchange outflow from the reserves. This was followed by a list of 41 items that are classified as ineligible for official forex allocation. Till date this remains, and by the indications of the Central Bank of Nigeria (CBN), it also served the purpose of import substitution. Local companies are gradually taking advantage of the opportunity created. The next was the substitution of the Wholesale Dutch Dutch Auction System with the Retail Dutch Auction System (rDAS), as a measure to ascertain propriety of the demand. Both ran weekly and both have now been closed.

There was a reduced daily and annual limits on naira cards outside the shores of the country from $150,000 to $50,000 annually and $300 daily. Although the bank’s claimed the action, but it also got CBN’s backing. At another point, banks stopped accepting foreign currency deposits.

Besides, the Bureau De Change (BDC) operators had their fair share of the sweeping changes. From a weekly foreign exchange sale to BDCs of $30,000 to $10,000 and eventual stoppage, the money changers were rattled. There were mixed feelings, as well as spike in the parallel market exchange rate. Till now, the forex challenge has remained.

The CBN Governor, Godwin Emefiele, said: “In view of these headwinds heralded by the sharp drop in oil prices, the CBN witnessed a significant decline in our FX Reserves from about $42.8 billion in January 2014, to about $25.7 billion today. Despite these outcomes, the demand for forex has risen significantly.

“For example, in 2005 when we had oil prices at about $50 per barrel for an extended period of time, our monthly average import bill was N12.4 billion. In stark contrast, our average import bill for 2015 stood at about N76.5 billion per month. Unfortunately, the interplay between reduced forex supply highlighted above and rising forex demand accounted for a substantial drain on our reserves.”

Experts have however, been unanimous in enlisting increased export earnings, foreign direct investments and Diaspora inflows, as the solution to the current foreign exchange shortfall.Of all these three sources, Diaspora inflows appear the most readily available source the country can harness to solve the macro-economic challenges posed by foreign exchange shortfall. This is because remittances are the second largest source of foreign exchange in Nigeria after the oil sector.

In 2015, an estimated $21 billion flowed into the country, including $5.7 billion sent from the United States and about $3.7 billion from the United Kingdom. For 2016, the World Bank estimates that nearly $34 billion in remittances will flow into Sub-Saharan Africa from the more than 30 million Africans living outside their countries of origin. Nearly two-thirds of this expected inflow in 2016, according to World Bank data, will come into Nigeria.

Of these amounts, CBN top source has said that major part has no record in the country, because they are illegally transferred, hence there is need for reform.Perhaps it is this huge significance of the money transfer sector to the nation’s economic life that informed the recent efforts by CBN to ostensibly clean the sector. Of course, the money transfer operators in the country have so far, been enmeshed in serial racketeering and rent seeking.

CBN advised citizens to “beware of the unwholesome activities of some unlicensed International Money Transfer Operators” currently plying their trade in the country. Citing “the greater economic good of Nigeria,” the Central Bank stated that it would “not condone any attempt aimed at undermining the country’s foreign exchange regime”.

Consequently, the regulator first revoked the licences of all but three money transfer companies that had been doing money transfer business in the country, before later approving a second batch of eleven other new international money transfer operators to bring the total number of approved operators for now to 14.

The three MTOs that first passed the CBN litmus test were Western Union, MoneyGram and RIA. The second batch of newly registered eleven operators included Trans-East Remittance LLC; WorldRemit Limited; UAE Exchange Centre LLC; Home Send S.C.R.L; Cashpoint Limited; Weblink International Limited; DT&T Corporation Limited; Wari Limited; Small World Financial Services Group Limited; Fiem Group LLC and CP Express Limited.

According to industry watchers and analysts who have lauded CBN’s recent steps, the operators’ previous practices have not added much value to the Nigerian economy or benefit an average Nigerian, but helps the parallel market to survive and flourish as individual accounts are mostly used during transactions.

CBN in its bid to ensure the money transfer is legal and transparently beneficial to the Nigerian economy has restated that all licensed IMTOs will remit foreign currency from Diaspora to respective agent banks in Nigeria for disbursement in naira to the beneficiaries, while the foreign currency proceeds are to be sold to BDCs for retail sales to end users. The apex bank also ordered all IMTOs to only send 50% of their remittance going forward.

Of the three approved IMTOs earlier, MoneyGram, has Lagos as its operational hub for Anglophone West Africa, while both Western Union and MoneyGram have strong partnership with almost all deposit banks, in addition to a large pool of agents across the country. The three IMTOs control over 70 per cent of the market now. Given the fraud-prone nature of the money transfer business, the need for the operators to have traceable presence in the country cannot be over-emphasised.

Again the operation of the IMTOs is now raising new proposition for innovative technology, which is changing the way customers meet their financial needs. This brings about the importance of mobile money and preference for strong digital platform against virtual or physical network presence by IMTOs.Already, an assessment by stakeholders and the regulator, affirmed that the operators’ suite of self-service products and offerings coupled with the strength of their physical network have in no small measure promoted the culture of mobile money as strength of the cash-less economy, championed by CBN.

The mobile money culture expectedly brings financial inclusion to millions of people – allowing them to perform financial transactions with a new level of ease and convenience. Mobile money has emerged as the primary payments system in countries where there was limited or no access to formal financial services.The World Bank estimates that less than a quarter of Africa’s 1.4 billion people have a bank account, but 70% have a mobile phone. That has made the continent particularly fertile ground for the mobile-payments business.

In its 2015 figures, one of the two foremost operators said its digital channel showed impressive growth throughout the year, with fourth-quarter transactions up 42% and revenue growth of 48%. Additionally, it revealed that 14% of its money transfers transactions and 12% of its total money transfer revenue came from digital in the quarter, representing over $163 million when annualizing fourth-quarter revenue.

The noticeable trend in the operations of this IMTO, of note, is its significant progress toward its declared goal to have 15% to 20% of its money transfer revenue from the digital in 2017. By working hard to completely overhaul on-line experience, launch kiosks and add millions of mobile wallets with a view to connecting to almost two billion bank accounts, this operator aims at pushing digital capabilities further into the physical world through customer profiles and new point of sale technologies, which will ensure delivery of a more seamless customer experience.

The issue of compliance and the need to curb fraud and terrorism financing, appear to be the most pressing justification for the effective regulation and control of money transfer business. This is perhaps more so as countries continue to grapple with growing influence of terrorism and other global crimes.

Stronger AML/CFT systems have been identified as being able to help improve the ability to trace and monitor transactions, improve financial inclusion, reduce remittance costs and reduce the use of cash transactions that are inherently risky in nature. This provides strong evidence that there is an overlap between AML/CFT and consumer protection.

In the guidelines for IMTOs operations CBN stated that “All money transfer operators in Nigeria shall comply with the provisions of the Central Bank of Nigeria’s ‘Anti-Money Laundering and Combating the Financing of Terrorism in Banks and Other Financial Institutions Regulations 2013’ and all other applicable laws and regulations”.

While the basic rule is for individuals who remit money to perform secure money transfers and avoid common fraudulent mistakes, the regulator, in partnership with the Ethics and Professional Subcommittee of the Bankers Committee meet at least once a month to discuss and assess customer complaints about bank services that include remittance payments to underscore the importance of consumer protection as an element in the regulation of remittance businesses in the country.

There is also enough evidence that the major MTOs in the country, on their part, commit enormous resources to fraud prevention. For instance, Ria Money Transfer, with a worldwide agent network of more than 280,000 locations in more than 145 countries, prides itself in taking costumer protection seriously through its investments in the highest level of security and protection against fraud.

As a company incorporated in the United States, MoneyGram, the world’s second largest IMTOs and a frontline player in the Nigerian market, is always expected to comply with requirements set by OFAC of the Department of Treasury, U.S.A.

OFAC maintains a list called the Specially Designated Nationals and Blocked Entities List. Therefore, it is a rule that MoneyGram’s software should review and check all names listed on money transfer transactions against the SDN List and any transaction with a name that matches to a prohibited person or entity must be blocked and reported to OFAC to alert agents of transactions from known criminals or suspicious customers.

In addition to OFAC, MoneyGram also has to comply with sanction lists issued by other jurisdictions, of the EU, UK, UN, Canada, Singapore and Australia as well as all local regulations of each country where it does business such as Nigeria.

For customer protection, the network also has in place a number of security checks to protect customers as each transaction has a unique reference number, which is communicated to the sender. Agents are required to authenticate both senders and receivers, and locally recognized identification documents must be produced when sending or receiving a transaction.

As an added security measure, each transaction carries a “test” question – the sender has the opportunity to ask a question only the receiver will know the answer to and should MoneyGram become suspicious regarding a transaction, it is suspended immediately.  And specifically for Nigeria, MoneyGram has deployed a solution that allows transactions to be locked into specific locations thereby cutting teller fraud significantly

Success in money transfer services relies on convenience, safety, reliability and all of these at an affordable price. While it is true that the money transfer opportunity here in Nigeria and with Nigerians in Diaspora is immense, it is imperative for CBN and the licensed/preferred IMTOs to continue to fine-tune transaction processes to help consumers find more value in the sector.