Nigerian Foreign Exchange Crisis: Central Bank Issues Warning to Microfinance Banks

The Central Bank of Nigeria (CBN) has threatened punitive sanctions against microfinance banks that violate the conditions of their operating license through the performance of foreign currency-related transactions. In its latest circular, the CBN claims that microfinance banks have a very low capitalization hence their handling of such transactions threatens the stability of the financial system.

CBN Takes Fight to Regulated Institutions

The new warning from the central bank is the third time since the CBN’s last monetary policy committee meeting that the apex bank has warned or taken action against financial institutions failing to adhere to its forex regulations.

As previously reported by Bitcoin.com News, the CBN announced the end of forex sales to Bureau de Change operators after it accused them of helping to prop up the foreign exchange black market. More recently, the CBN announced the freezing of bank accounts of fintech firms that are similarly accused of fueling the naira’s plunge.

However, in a circular sent to Nigeria’s microfinance banks, the CBN threatens to revoke the operating license of a microfinance bank that is caught red-handed. The circular states:

The CBN will continue to monitor developments in the Microfinance Banking [MFB] sector and apply severe regulatory sanctions for breaches of regulations, including revoking the licence of non-compliant microfinance banks.

CBN’s Ineffective Threats

Still, despite the CBN’s threats and past sanctions, Nigeria continues to experience shortages of foreign exchange on the formal market. In fact, some of the threats appear to have worsened the naira’s already precarious position.

For instance, immediately following the CBN’s decision to bar forex sales to Bureau de Change operators, the naira’s exchange rate on the parallel market plunged to a new low of US$1 for N525. This unofficial rate is 25% lower than the CBN’s official rate of US$1 for N411.

Although it is not immediately clear how the latest threat is going to impact the naira’s exchange rate, it is highly unlikely this will kill the parallel market. It now remains to be seen if the CBN intends to also use its largely ineffective threats policy against commercial banks and other, larger financial institutions.