Determined to bring transparency into the foreign exchange market that will engender confidence and eliminate malpractices, the Central Bank of Nigeria, CBN, has removed the spread on Foreign Exchange Transactions.
This was contained in a statement from the Central Bank of Nigeria Financial Markets Department, signed by Duke Omolara Omotunde.
The statement sent to all authorised dealers and dated February 8, 2024, was titled ‘removal of the spread on Foreign Exchange Transactions’.
According to Omotunde, “the Bank hereby discontinues any cap on the spread on interbank foreign exchange transactions and restrictions on the sale of interbank proceeds.”
“Authorized dealers are to continue to conduct their foreign exchange transactions on a “Willing Buyer and Willing Seller” basis. In addition, they are to strictly adhere to high ethical standards in their dealings in the foreign exchange markets. This includes but not limited to adopting appropriate price disclosures and transparency for transactions.”
This means that they’re letting the market decide the price of foreign exchange.
This move aims to enhance transparency, efficiency, and flexibility in the FX market, ultimately benefiting individuals and businesses.
Previously, the CBN imposed limits on the difference between buying and selling prices for FX, known as the “spread.”
However, these caps have now been lifted, enabling banks to establish their own prices based on supply and demand. This allows the market to determine the “fair” price for foreign currencies, particularly the US dollar.
Banks now have more flexibility to sell FX to anyone they choose. This change could result in quicker and more convenient access to foreign currency for both businesses and individuals.
Despite the increased freedom for banks, the CBN has also stressed the importance of transparency. Banks are now required to clearly display their prices, refrain from deceiving customers, and report all transactions to the CBN.
The CBN anticipates that this new approach will: Promote fairness and efficiency in the FX market. By allowing the market to determine prices, the CBN aims to eliminate artificial distortions and ensure that everyone can access FX at a reasonable price.
The apex bank also intends to encourage greater foreign investment. That is by simplifying the process of buying and selling FX, the CBN wants to attract more foreign investors, which could stimulate the Nigerian economy.
In addition, the CBN hopes that by making official FX more accessible and transparent, it will discourage the use of the black market, which can be risky and illegal.
With banks determining their own prices, customers may find better deals on FX compared to the previous system: also, before conducting a transaction, customers should be able to easily compare the prices offered by different banks, as prices are set by the market, FX rates may become more volatile.
The CBN in the circular noted that it will continue to monitor the market and make adjustments as required.
