The Central Bank of Nigeria (CBN) is set to implement a policy against Open Account trading (also known as Cash Against Document) on exportation from Nigeria. This policy has the tendency to slow down export growth and prevent Nigeria from being part of the $16 trillion trade transactions, which amount to about 85% of global trade. It will reverse the upward trend that is expected to be seen in the non-oil export volume based on the current support from the federal government and make the signing of and plans to take advantage of the African Continental Free Trade Agreement (AfCFTA) a waste of time.
This policy is being done on one hand through the recently released foreign exchange manual that omitted Open Account as a payment method for exportation from Nigeria. On the other hand, it is being enforced by omitting Open Account as a payment method on the recently launched application developed by the CBN to automate the processing and documentation of non-oil exportation from Nigeria. Both the manual and the application stated that the payment method for export out of Nigeria will not be Letter of credit (LC), Bill for Collection (BC) and Advance Payment (AP).
By way of definition, Open Account trading is said to happen in international trade when an exporter ship goods to the buyer abroad and send the shipping documents with which the buyer clears the goods and effects payment for the goods at a later date. This method leaves the exporter exposed to the risk of payment defaults. This then prevents the exporters from being able to repatriate the funds for the shipped goods, back to the country. Since CBN has technically ban this payment method by omitting it both in the foreign exchange manual and the application being developed, we are then left with other payment like Letter of credit, Bill for Collection, Advance Payment.
This policy will negatively affect the volume of non-oil export trade from Nigeria because the other payment methods now allowed constitute less than 15% of global trade
Even though CBN has the right intention (to reduce the incidence of non-repatriation of export proceeds) but putting a stop to Open Account trading is like throwing the baby away with the bath water. I think what CBN should be asking is how are traders around the world able to use this method and yet mitigate the payment risk?
Even though LC helps to secure payment what is the use of this instrument if it is not going to help Nigeria to grow its trade volume. The fact that, this trade finance instrument is very slow in operation and therefore is no more fashionable in this fast-paced world. Can you imagine the fact that CBN is allowing Bill for Collection but will not allow open account trading? BC a payment method that equally exposes an exporter to the risk of non-repatriation of export proceeds and can best be described as a glorified open account because the expected payment from the buyer is not guaranteed despite the involvement of the banks.
The philosophy behind this policy of ban on open account trading is to ensure that all the export proceeds resulting from shipment of goods out of Nigeria are duly repatriated. As good as this philosophy is, I think the way the CBN is going about the enforcement of the repatriation policy is wrong. This is because this policy will negatively affect the volume of non-oil export trade from Nigeria because the other payment methods now allowed constitute less than 15% of global trade.
According to the report of Society for Worldwide Interbank Financial Telecommunication (SWIFT), in 2010, the LCs issued for trade transactions in the world constitute about 9.3% of total volume of world trade while BCs constitutes just 1.4%, Open Account is about 85% while other payment methods including AP constitute about 4%. The 2019 global trade finance report of the International Chamber of Commerce (ICC) showed that from 2013 to 2017, there has been about 12.7% reduction in the usage of LCs for trade transactions across the world.
The report of Unicredit Group in 2015 showed that the ratio of LCs to Open Account usage, which used to be 80% to 20% in 1978, reduced significantly to ration 19% to 81% in 2013. The report went further to state that, that “the world trade volumes have seen a startling increase in open account transaction over the recent years. Already today more than 80% of the total world trade volume (export) is settled by clean payment. This impressive ratio is expected to grow even further in the future. As a consequence banks are compelled to offer their corporate clients products that support fully automated processing as well as cost savings combined with payment assurance and financing options”.
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