A data story of BDCs in Nigeria
You can listen to this story as a podcast here - https://open.spotify.com/episode/7MTVoz2Huo40aUVkFBdYqr?si=08ff947741474904
Bureaux de Change (BDC) in Nigeria have become instrumental for access to foreign currencies such as the British Pounds, US dollars or the Euro. Due to the lasting macroeconomic challenges in Nigeria, this financial institution has become more popular and useful since the Central Bank of Nigeria (CBN) came under the leadership of former Governor Godwin Emefiele. Under the past CBN Governor's reign, the official and black market currency exchange rates increasingly created an arbitrage system and premiums for those operating BDCs in the country. This decision to make dollars cheap (or to literally subsidise the dollars for the naira) has created further problems for the country and the current CBN administration led by Governor Yemi Cardoso.
For context, it is difficult to change currencies in Nigeria today through banks due to waiting time or cumbersome processes. As an alternative, numerous Nigerians prefer to go to the parallel market ("black market") to exchange their naira for foreign currencies or vice versa. As a result of this, BDCs have become very key for certain businesses and individuals who need foreign currencies to do business and sustain their livelihoods.
The analysis I will be making in this article is one that deals with the CBN data on licensed and revoked BDCs
The data story before the CBN revoked the licenses (pre-1st March, 2024)
According to the data provided by the Central Bank of Nigeria (CBN), Nigeria had a total of 5,682 BDCs in the country (see Figure 1). The distribution of these BDCs were largely concentrated around Lagos State, Kano State and Abuja (FCT). Lagos State accounted for 52% of all the BDCs in the country with 2,956 BDCs. 20.7%, or 1,178, of the BDCs in the country were located in Abuja while Kano State had 980 BDCs or 17.2% of the entire BDCs in the country (see Table 2).
Regionally, that is based on the regional zones in Nigeria, the distribution of BDCs is also driven by Lagos, Kano and Abuja. In Table 1, we see that the South West with 52.6% (where Lagos is located) has the most BDCs, followed by the North Central with 21% (where Abuja is located) and then the North West with 18.6% (where Kano is located). Furthermore, before the 1st of March, Adamawa, Taraba, Yobe, Jigawa, Zamfara, Ekiti, Ondo and Osun states did not have even one BDC. On the other hand, the entire states in the North central, South East, and South South regions had at least one licensed BDC.
The data tells a different story however when we remove Lagos, Abuja and Kano as we can see in Table 3. Without Lagos, Abuja and Kano, the South East has the greatest share of BDCs in the country with 61.4% of the entire BDCs in the country (that is 349 BDCs). Without Abuja, the North Central has only 20 BDCs; without Lagos, the South West has 35 BDCs; and without Kano, the North West has 80 BDCs. This shows us the clear necessity of Lagos, Abuja and Kano in their respective regions. Lagos accounts for 98.8% of the BDCs in its region. Abuja accounts for 98.3% in the North Central region whilst Kano accounts for 92.4% of all the BDCs in the North West.
The data story after the CBN revoked the BDC licenses (post-1st March, 2024)
The CBN's Press Release gave three reasons why the BDC licenses were revoked. According to the CBN, the revoked institutions failed to observe one of the following regulatory provisions:
It should be noted that the CBN had issued an Exposure Draft for the revised regulations for BDCs on February 23rd, 2024 - one week before they revoked the BDC licenses. Some important things to take note of regarding the February 23rd Exposure Draft includes:
As Figure 2 above shows, the licenses revoked affected many states in Nigeria. The state that had the most licenses revoked was Lagos State with 2,213 revoked BDC licenses. Equally, the South West was the region with the most licenses revoked (see Table 4). Abuja had 967 of its BDCs licenses revoked while Kano State had 605 revoked licenses. The regions which were affected the most, in terms of increased states without BDCs, are the North Central, South East and the South South regions. All three regions previously had all their states with at least one BDC but upon the March 1st BDCs revocation by the CBN, the North Central (Benue, Nasarawa, Plateau) and South South (Akwa Ibom, Bayelsa and Cross River) had 3 states each without BDCs while the South East had one state (Imo State) without a single BDC.
What happens if we take out Lagos State, Kano and Abuja from the picture? Then the region with the most revoked licenses is the South East (see Table 5). As the same table shows, removal of licenses from Lagos, Abuja and Kano was very influential in their respective regions. The share of the removal of licenses from Lagos State relative to its region (the South West) was 98.9%. In Abuja (North Central) it was 98.4%, while it was 93.2% in Kano State relative to the North West.
The regional implications of the revoked licenses
It might seem irrelevant to look at the regional distribution of BDCs but that assumption is quite flawed for at least three reasons, amongst others:
Most importantly ... how has the revoked BDCs changed the distribution of licensed BDCs in the country?
As we can see from Figure 3 below, there are clearly more states without BDCs now. In total, 15 Nigerian states do not have a single BDC because of the 1st March revocation. Additionally, Nigeria only has about 1,588 BDCs distributed across the country as at today. The CBN revoked the licenses of 72% of all BDCs in the country (4,094 BDCs in total, see Further Explanation section for why it's not 4,173). This makes it much more difficult to exchange foreign currencies for both individuals and businesses as the dollar was "scarce" even with 5,682 BDCs. More so, Lagos, Abuja and Kano particularly suffered the most. Abuja had 82% of all its BDCs revoked whilst Lagos and Kano had 74.8% and 61.7% of its BDC licenses revoked respectively (see Table 6).
What about the regional distribution post-1st March? The first clear insight we get from Table 7 is that the percentage share of BDCs in Lagos and Abuja, relative to their region, has declined marginally. Abuja's share declined the most, with a decline of 7% compared to pre-1st March. While Lagos State's share declined by 5%. On the other hand however, Kano State has more BDCs, relative to its region, compared to before the BDC licenses were revoked. This is because, as can be seen in Table 6, only 61.7% of Kano's BDC licenses were revoked. This data also suggests that BDCs in Kano State might be more compliant than BDCs in Lagos State and Abuja, generally. When we remove Lagos, Abuja and Kano, we see that the South East has a greater share of BDCs compared to any other region and compared to their pre-1st March levels (see Table 8). Without Lagos, Abuja and Kano, the South East would account for 7/10 BDCs in the country.
So what is the plot of this story after all?
Well, the plot is that the CBN is very serious about its intention to ensure the dollars is controlled as that affects inflation in the country (which is a core mandate of the CBN). Figure 1 and Figure 3 are telling very clear stories about control and attempts to avoiding more FX distortions. The revoked BDC licenses show that the CBN will do nearly whatever it takes to ensure this control is in place, even if that means more states and key regions like Lagos, Abuja and Kano lose access to exchanging dollars. Compared to inflation, the CBN will rather cut the wings of the dollars. But... the FX issue is also not as straightforward due to the multidimensional problems the country is facing so the actions taken by the CBN can also be understood somewhat.
In the short term, the implication of the CBN revocation will move a lot of individuals and businesses to pressure banks to be much faster in releasing their dollars. But, there is really so much banks can do if the CBN guidelines and regulations keeps limiting their ability to succumb to consumer' pressures. In the long term, the CBN needs to understand that its enemy is not Nigerian businesses or individuals but the bad economics and lack of production which is affecting both their fight against inflation and the dollars. The greatest way to fight the dollars might actually be to pressure the executive arm of the government to ensure farmers can go back to farming as food inflation drives a significant amount of Nigeria's inflation. In February, 2024, the food inflation in Nigeria was 37.92% according to the National Bureau of Statistics (NBS). Insecurity might be the greatest enemy to the CBN's mandate in the long run and not BDCs.
Further explanation on the data analysis process for the two CBN BDCs List
The CBN official BDCs list (pre-1st March) and Revoked BDCs list (post-1st March) both come with some errors which make it necessary to properly clean the data before analysing. Below, I'd explain certain points that must be taken into account when working with the two CBN lists.