Lifting cash dollar deposit restrictions means heightened expectation for banks’ LCs

After the Central Bank of Nigeria (CBN) last week lifted the ban on cash dollar deposits into domiciliary accounts, Deposit Money Banks (DMBs) sent messages to their customers asking them to resume their foreign currency deposits.

One of the messages sent by a tier one bank read: “It our pleasure to inform you that the restriction on foreign currency cash deposits on domiciliary accounts has now been lifted, effective January 11, 2016. This is in compliance with the recent directive of CBN that commercial banks can accept foreign currency cash deposits going forward.”

Customers responded immediately as a lot of them rushed to the banking halls to deposit their cash dollar.

Since the lifting of this restriction, expectation has been high among importers that they would now get Letters of Credit (LCs) from their banks, but investigation reveals that there has not been noticeable improvement in that regard.

Banks had stopped issuance of Letters of Credit as the dearth of foreign exchange persisted in the financial market, BusinessDay investigation reveals.

Nigeria is dependent on imports, which banks facilitate via the opening of Letters of Credit. The customer typically repays these after imports are sold; the customer therefore earns naira, then approaches the banks to source FX from the CBN (or goes to the black market) with which the correspondent bank is repaid.

With the CBN struggling to provide sufficient FX to meet importers’ FX demands and banks prevented from accepting FX deposits, not only have importers been unable to repay their obligations, they have also struggled to keep afloat – among them import-dependent manufacturers.

The implication of this is that businesses are beginning to crumble with the attendant job losses which trickle down to high rate of poverty.

The development has brought about uncertainty in the forex market with the attendant negative impact on naira which has continued to depreciate at the autonomous market.

Consequently, the margin between the official and parallel market is creating incentive for round-tripping or speculation.

But because the CBN cannot supply much-needed foreign exchange, banks find it difficult to meet demand of customers in their quest for importation of basic items into the economy.

Investigation shows that firms which are suffering from importation of raw materials as a result of banks non-issuance of LCs have resorted to restructuring of operations resulting in job losses.

Analysts said some of the antidotes to this development are liberalization and devaluation of currency to narrow margin and make forex available for import-dependent economies.

According to Adesoji Solanke, banking analyst at Renaissance Capital, as importers have struggled to access FX, the Nigerian banks have used their FX liquidity to settle with the correspondent banks (given the LCs as guarantees) in anticipation of the CBN providing liquidity.

Feedback from the banks remains that the CBN has been unable to meet FX demand, with estimates of the backlog at $2-5 billion and rising. The banks have therefore significantly slowed the issuance of new LCs, further hurting the general commerce and manufacturing sectors.

“With the CBN maintaining the view that the backlog of FX demand is largely speculative, it has requested that the correspondent banks submit a list of outstanding obligations, although we understand it has been unable to fully meet this FX demand,” he said in a report.

Ituah Ighodalo, a Lagos-based financial analyst, said banks non-issuance of Letters of Credit as a result of scarce foreign exchange is a temporary measure to shore up naira and build foreign reserve.

“Very soon it will open up a bit,” Ighodalo said in a telephone chat.

He said the immediate measure is for the government to start import restriction to only essential items. The long-term measure, he said, is to increase production capacity.

“We believe the banking sector can deepen its role of financial intermediation to support businesses and economic recovery. Also, we believe that the government should provide and support a market-friendly economic environment that will encourage investments. We consider this vital for economic activities to thrive,” said Olutola Oni, an analyst at WSTC Financial Services Limited.

“Banks could not open Letters of Credit for their clients as they used to do because there is no foreign exchange to back it up, which means reduced income for the industry. Credit to clients also shrank as the economic growth slows down,” Bolade Agbola, executive director, Cash Craft Asset Management, said in an emailed response.

HOPE MOSES-ASHIKE