CBN Abolishes Spreads on Foreign Exchange Transactions, Embraces Market Forces
Lagos, Nigeria (February 8, 2024): In a significant move towards a more market-driven foreign exchange (FX) system, the Central Bank of Nigeria (CBN) has announced the removal of all restrictions on the spread charged by authorized dealers on interbank foreign exchange transactions. The announcement, made in a circular issued on February 8th, eliminates a previous cap and allows market forces to determine the cost of exchanging currencies.
Governor Olayemi Cardoso, represented by Director of Financial Markets Department, Dr. Omolara Omotunde, stated that this decision aligns with the CBN's ongoing forex reforms, aiming to establish a market-based price discovery system. This system relies on supply and demand to determine the exchange rate, instead of government intervention.
Key takeaways of the new policy:
- No limits: Authorized dealers (banks) can now set their own spreads on forex transactions, allowing for potential competition and potentially lower costs for customers.
- "Willing buyer, willing seller" principle remains: Transactions continue to be conducted based on mutual agreement between buyer and seller, ensuring fairness and transparency.
- Ethical conduct emphasized: The CBN urges authorized dealers to maintain high ethical standards and provide clear price disclosures for all transactions.
- Reporting requirements unchanged: All forex transactions must still be recorded and reported to the authorities as per existing regulations.
Potential impacts:
- Increased competition among banks could lead to narrower spreads and more competitive rates for customers.
- Greater flexibility and responsiveness to market conditions could improve market efficiency.
- However, some concerns exist about potential increased volatility in exchange rates.
The CBN's decision marks a major step towards a freer and more market-driven foreign exchange market in Nigeria. The impact on individuals and businesses remains to be seen, but it is a significant development with the potential to improve access to foreign exchange and boost economic activity.
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