In a major development for Nigeria’s financial landscape, the cost of obtaining a Bureau De Change (BDC) license dropped to N15 million following news of the country’s transition towards a single exchange rate.
On Wednesday, following the Central Bank of Nigeria (CBN) announcement that it has floated the Nigerian Naira, the Naira experienced a significant drop of up to 38% on the Investors and Exporters (I&E) window, marking its largest slide in four years.
However, the shift towards a unified exchange rate is expected to have adverse effects on the profitability of Bureau De Change operators, who have traditionally benefited from arbitrage opportunities and Nigeria’s multiple exchange windows.
Historically, BDCs have thrived by capitalizing on the disparity between exchange rates and leveraging the arbitrage opportunities presented by Nigeria’s complex currency market. However, with the introduction of a unified exchange rate, the market has already begun to react, and interest in BDC licenses has cooled significantly.
Reliable sources have revealed that the registration cost, which previously stood at N35 million, has dropped to N15 million, and it is anticipated to decrease further.
A market expert explained, “Until now, BDCs received a weekly allocation of $20,000 at the official rate, allowing them to sell it on the parallel market at a nearly 100% margin. This substantial arbitrage made their business highly profitable and led to an influx of BDC dealers. However, with the unification of rates, the motivation to hold on to these allocations diminishes.”
BDCs have enjoyed tremendous profitability, with the Central Bank receiving an overwhelming 500 requests for BDC licenses on a weekly basis. However, the recent floatation of the Naira by the CBN has caused the USD exchange rate to reach N700. As a result, the activities of BDCs, which largely operate in the parallel market, are expected to slow down significantly.
Explaining the implications of rate parity, a financial analyst said, “With a floating Naira, BDCs will no longer have a monopoly on readily available foreign exchange. Rate parity means that whatever a BDC offers will be similar, if not the same, as what the banks provide. This will drastically reduce the assurance that BDCs are the exclusive source of accessible FX, as anyone can obtain it from any bank.”
While the move towards a unified exchange rate holds potential for the long-term stability of the market, it presents significant challenges for BDCs that heavily rely on arbitrage. The CBN had previously threatened to halt the issuance of BDC licenses in 2021, but even with a unified exchange rate, the underlying issue of the FX demand backlog in Nigeria remains unresolved.
As Nigeria continues to navigate its path towards a single exchange rate, the future of Bureau De Change operators hangs in the balance. While the potential benefits of rate unification are evident, the profitability of BDCs, once considered “insanely profitable” businesses, now faces uncertainty and disruption. The financial landscape in Nigeria is undergoing a transformation, and the fate of BDCs will depend on their ability to adapt to the changing market dynamics.