• Friday, March 01, 2024
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BusinessDay

As banks, discount houses explore ways of accessing forex through conversion

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s the need for the elusive foreign exchange to meet the growing competitive environment heightens, some banks are devising means of accessing the forex through cutting corners and conversion.

The development is also informed by tight regulations and dwindling interest margins, among others, making some banks, discount houses and investment and asset management companies convert to ancillary banking services such as merchant and Islamic banking, BusinessDay investigations have shown.

The development is part of the survival strategies of some of this institutions for 2014.

While Sterling Bank was recently granted an operating licence by the Central Bank of Nigeria (CBN) to commence non-interest banking services, Associated Discount House Limited (ADHL) is said to be putting finishing touches to its proposed plan of converting to a merchant bank, joining First Securities Discount House (FSDH), which brazed the trail early last year.

The implication is that on conversion, the merchant banks will have access to the foreign exchange through active participation in the CBN’s Retail Dutch Auction System (RDAS) so as to cushion the effect of losses being incurred in some aspects of their operations.

BusinessDay further gathers that the CBN is currently processing some applications for conversion, a development attributed to the apex bank’s tight monetary policy and in furtherance of the financial inclusion strategy.

“We expect the emergence of robust ancillary financial services such as mobile money, merchant banking, Islamic banking, agency banking, etc, as a result of the various CBN policies to eliminate cost of banking. These will drive the financial inclusion of the CBN further,” say analysts at Afrinvest.

Merchant bank is a bank that mainly deals with international financial activities such as foreign real estate investment and long-term company loans. Although the banks do not provide regular banking services to the general public, nowadays they provide underwriting and consultancy services for wealthy institutions, as well as individuals. Issuance of letter of credit, international fund transfer, foreign corporate investment and foreign real estate investment are some examples of services offered by a merchant bank.

In a response to BusinessDay’s inquiry on the performance of economy in the outgoing year and outlook for 2014, the analysts say: “Nigerian economy has been resilient so far in the year 2013, amid the global happenings. The relative stability in the key macro-economic indicators played a very vital role in attracting foreign portfolio and direct investments to the country.

“In addition, the tight monetary stance of the CBN to ensure price and foreign exchange stability yielded positive results. The tight monetary policy in the last 15 quarters has also helped to stabilise the naira spurring huge flows of Foreign Portfolio Investments (FPI). Compared to the foreign exchange losses in other emerging markets (Indian rupee [-18.5%], Indonesian rupiah [-15.4%], Brazilian real [-13.7%], South African rand [-9.9%]) as a result of the capital inflow reversal in July against the dollar, the naira lost only 3.4 percent within the same period. This outperformance certainly reflected the FPI dynamics within the same period.”

A top industry operator told BusinessDay last week that although the various policies of the CBN were aimed at eliminating high cost of banking services, the tight monetary policy measures had put some financial institutions in a tight corner.

“The recent 50 percent hike in cash reserve ratio (CRR) and likely further hike in the new year has put some banks in tight liquidity situation, as their accounts are usually low following efforts to meet the foreign exchange requirements of their customers at the Retail Dutch Auction System (RDAS). On the other hand, it has engendered tough operating environment for Discount Houses,” said the industry source.

Basheer Oshodi, Sterling Bank’s group head, non-interest banking, says in a release Tuesday that the bank had in the last two years invested in human and material resources to justify its clamour for this specialised banking service, making it to emerge the pioneer national commercial bank to fully explore the non-interest banking space as an effective means towards achieving wholesome financial inclusion in the country.

“Given our understanding of the need to address a huge market of adult Nigerians presently excluded from access to formal banking services and support, Sterling Bank started looking at this specialised market about two years ago and embarked on an in-depth research to stay ahead of competition in servicing customers in a manner that positively exceed their expectations with resultant delight. It is our belief at Sterling Bank that non-interest banking can seriously contribute to wealth creation in the country, while in the same breath reducing poverty and unemployment,” Oshodi says.

By: John Omachonu