AN ANALYSIS OF THE PROBLEMS OF FOREIGN EXCHANGE MANAGEMENT AND ITS IMPACT ON THE BANKING INDUSTRY

ABSTRACT

This   study  is  aimed   at  analyzing   the   problems   of  foreign   exchange management with a view to evaluating the belief of the public that the Central Bank of Nigeria was to blame for the foreign exchange problems and to examine if indeed there were other factors responsible for the frequent instability in the external value of the domestic currency – the Naira. Thus the focus on the  Apex bank – The Central Bank of Nigeria. Management of nation’s foreign exchange resources is important to reduce the adverse effect of foreign exchange volatility. This is because of the strong allegation that the instability in the foreign exchange is from the poor management at the apex bank. Foreign exchange control act was looked into in the second chapter of  the work. Foreign exchange is a process of converting a particular countries’  currency into that of another country and this is done in a foreign exchange  market whose structure was looked at in the same chapter. The study however was analytical. Secondary data were collected and used for analysis  and  for  testing,  inferences  made  and  conclusions  arrived  at  based  on observations made from the calculations on the collated data. The conclusive part of the  work  reveals  that  the  instability  experienced  is  attributed  to  the  ineffective implementation  of  the  regulatory  policies  of  the   CBN  and  the  “unwholesome practices” by the operators. However, in order to arrest the dwindling fortunes of the naira and ensure the stability of the exchange rate, the operators of the economy have to look at the programs, policies which the scope of this work is not meant to cover. A further study on this is therefore recommended.

CHAPTER ONE INTRODUCTION

1.1      BACKGROUND OF THE STUDY

The Governor of the Central Bank of Nigeria, Professor Charles Chukwuma Soludo was quoted in the year 2006 as saying “that the Central Bank of Nigeria is planning to ensure full liberalization of the nations’ foreign exchange market pointing out that “for over 20 years we have moved gradually towards deregulation of the foreign exchange market” (Soludo 2006).

It  is  important  to  note  that  foreign currency known as  foreign exchange  has  been variously defined by different schools of thought, but these definitions tilt towards the same meaning.  The  encyclopedia of social sciences  for  instance defines  foreign exchange as  “a mechanism by  which  payments  and  receipts  between two  points  or  areas operating  under different systems are effected without the passing of actual money or articles that have intrinsic value”.

Because countries engage in international trade, the need for management of foreign exchange became imperative. This need is underscored by the economic theories of comparative advantage, comparative cost as well as differences in international resource endowment and imbalance.  Unless  there  is  a  policy  framework  and  effective  management  of  the  foreign exchange market, a country runs the risk of balance of trade or balance of payment problem.

According to Whiting (1981) “There must exist financial transaction between two countries whether they are in respect of the sale and purchase of goods and services or relative to capital transactions, which do not involve physical movement of currency from one country to another. These transactions are carried out through the banking systems of the two countries involved and this is made possible because the banks keep account in foreign currency with other bank throughout the world”.

Foreign Exchange management strategy attempts to achieve macro-economic objectives. Exchange rate is one of the principal policy tools a country would properly use to align its economic and financial activities with those of the rest of the world to achieve satisfactory growth in income and employment. When there is disequilibrium in the foreign Exchange market which is caused by inadequate supply of foreign Exchange Reserve, pressure may be exerted on the foreign exchange reserves where the reserves are inadequate, balance of payment problems may arise.

There is therefore, the need to manage nation’s foreign exchange resources so as to reduce the adverse effects of foreign exchange volatility. The management of foreign exchange market would guarantee adequate supply in relation to the demand for foreign exchange resources. Since resources are limited and scarce, the need for policy formulation geared towards adequate  management  of  resources  becomes  inevitable.  Developing  countries  like  Nigeria depend mostly on imported goods. This led to the establishment of the foreign exchange market by the law for the buying and selling of foreign currencies (Decree No. 36 of 1986).

The foreign exchange market provides adequate information for policy decisions while exchange control is directed towards both the balance of payments and development needs. Usually, Nigeria has chosen to determine her exchange rate through basket of currencies. Naira was also pegged to the U.S dollar and British pound in a bid to ensure that the rates have some bearing with the factor that affect the balance of payment and domestic economy.

The liberalization advocated by the CBN therefore means allowing the value of our currency to be determined by the forces of demand and supply in the FOREX market with a view to achieving a viable exchange rate, achieving balance of payment equilibrium and overall economic stability in the country.

This  research  study  will  look  at  the  impact  the  problems  of  foreign  exchange management has on the banking industry.

1.2.     STATEMENT OF THE PROBLEM

There is no gain saying that when there is appropriate foreign exchange management, it can impact significantly on the banking industry as it can go a long way to help correct financial and structural imbalances in the economy. There is currently a strategy in place that allows the market forces to determine the international value of the currency in Nigeria and this has resulted in its massive depreciation.

The problem that this work is aimed at is analyzing the problems of foreign exchange management with a view to finding out its impact in the banking industry. Because it is often said that the government of the Central Bank and the Nigerian government over the years have not adopted mechanisms that are effective for the mobilization of the foreign exchange resources and ration same  for the settlement  of her  international transactions in accordance with her supposed priorities. With the earnings of the oil boom era of the mid 1970’s, which led to the over estimation of availability of foreign exchange and affected the general price level, it has been observed that the value of the Naira keeps on depreciating despite the efforts by the government in enacting policies that are geared towards realizing a good value for the Naira.

1.3.     OBJECTIVE OF THE STUDY

The objective of this study is to analyze and examine the problems and impact of the foreign exchange management on the banking industry. It aims at the following objectives:

i)          Examination of the way the central bank of Nigeria allocates foreign currency.

ii)         Examination of the way the policy of the Government Exchange control Act is being used.

iii)        It also aims at examining if enough foreign currency is allocated to users of funds.

iv)        Finding out the roles of the participants in the foreign exchange market.

1.4.     SIGNIFICANCE OF THE STUDY

The significance of this research work includes but not restricted to the fact that in a developing country like Nigeria, the economy is import oriented and therefore, the need to ensure that the foreign exchange participation in the market is guided towards the rules that are set down for an effective performance. The source of Nigerian foreign exchange depends largely on crude oil earning, which has to be properly used.

Secondly, the study will also add to the available literature and research material on foreign exchange management in Nigeria and thus enable people who may want to look further on this issue or related issues have a point of reference.

The study also will give necessary suggestions towards the achievement of the country’s main foreign exchange objectives. Oil is seen as the main source of revenue for the country. It is therefore important to look into the management of the foreign exchange of the country and see how it can be improved upon to enhance the growth of the economy.

1.5.     RESEARCH HYPOTHESES

Hypothetically, the researcher will like to keep the following questions in view as a guiding principle in the course of this research.

Ho:     (Null Hypothesis): The inadequacy of foreign exchange and improper management has not affected the economy.

Hi:      (Alternative Hypothesis): The inadequacy of foreign exchange  and improper management has affected the economy.

Ho:     (Null Hypothesis): The fall in the value of the Naira through market forces has not affected the foreign exchange policies over the years.

Hi:      (Alternative Hypothesis): The fall in the value of the Naira through  market   forces  has affected the foreign exchange policies over the years.

Ho:     (Null Hypothesis): The continued fall of the Naira through the strategy  of  allowing market forces determine the value of currency has  not  helped to  achieve  balance  of payment equilibrium.

Hi:      (Alternative Hypothesis): The continued fall of the Naira through   the strategy of allowing market forces determine the value of currency has helped to achieve balance of payment equilibrium.

1.6.     SCOPE AND LIMITATION OF THE STUDY

For this study to be meaningful, it is imperative to leave out some aspects which might not be too important for consideration given the fact that Foreign Exchange Management is very wide.

This study shall look into the problems of Foreign Exchange Management in the past, the present day activities of the Foreign Exchange Market and the economy owing to the fact that yesterday  cannot  be  complete  without  today,  just  like  today  cannot  be  complete  without yesterday and tomorrow.

The research procedure will involve the use of secondary data. This will enhance the quantity, reliability and the validity of the findings.

On the part of limitations to the study, constraints were encountered from different quarters in the course of this research, which ranges from unavailability of current information and  a  systematic  approach of refusing  me  access  to  the  relevant  information/data  for  this research. And this did not in any way help in the work. Some information cannot easily be accessed from the internet especially when they concerns serious matters like the economy of a country. The researcher therefore used data transaction in foreign exchange market for the years

1993 to 1998.

1.7.     ORGANIZATION OF STUDY

The study is divided into five chapters:

Chapter one is the introductory part of the study and it consists of background of the study; statement of problems, objective of the study, significance of the study, research hypothesis, scope and limitation of the study, and definition of terms.

Chapter two captioned “Literature Review” is where the works and write ups by various people on the subject are looked into. Several textbooks, professional journals, write-ups and other publications are reviewed to get a more detailed theoretical framework as it relates to the subject matter.

Chapter three is the Research Methodology. It presents research design, sample size/population of the study, sampling techniques, nature and sources of data, techniques for data analysis, description of variables, analysis of the methodology employed.

Chapter four is the presentation, interpretation and analysis of data collected in chapter three.

Chapter  five  which  is  the  last  chapter  is  where  the  summary of  findings  is  done. Recommendations and conclusion form part of this chapter also.

1.8.     DEFINITION OF TERMS Forex:

This is the acronym of Foreign Exchange defined by the International Monetary Fund (IMF) as monetary authorities’ claims on foreigners in the form of bank deposits, treasury bill, short-term and long-term government securities and other claims arising from inter-Central bank and Inter- governmental arrangement without regards to whether the claim is denominated in the currency of the debtor or creditor.

Foreign Currency

Any currency, and includes notes, which are or have at any time been a legal tender in any territory outside Nigeria. Also included are postal orders, bills of exchange, promissory notes, drafts, letters of credit and traveler’s cheque payable or expressed otherwise than in Nigerian currency.

Bureau De Change

A French name which means “Office for the exchange of currencies” in Nigeria, Local currencies are changed for foreign ones and vice versa here.

Central Bank of Nigeria (CBN)

This is the apex financial institution in Nigeria. It is an institution set up by the Federal Government of Nigeria to print and mint money. It also sees to the control of the flow of currency in Nigeria. It is the banker to the Federal Government.

Exchange Rate

This is the price/rate at which a domestic currency exchanges with other foreign currencies.

Foreign Exchange Market.

This is a market established by law for the buying and selling of foreign Exchange at market determined rates.

International Trade

The exchange of goods and services between countries involving business enterprises and individuals domiciled in the different countries of the world.

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