How Nigeria’s Central Bank disrupted the disruptors trying to cut remittance fees

Iron Law No. 1 of Nigeria: Don’t assume that, just because things are bad they cannot get worse.

Consider an international airline that flies to Nigeria. It collects payments from Nigerians in Nigeria in naira. As its bills are in US dollars, it needs to convert its naira to dollars and take them out of the country. The normal way to do this is through the Central Bank of Nigeria (CBN). The CBN takes the airline’s naira and sells it dollars. This arrangement works fine in normal times and everyone is happy.


The trouble starts when oil prices collapse and the CBN no longer has the dollars it used to have. All of a sudden, the CBN is forced to ration dollars because it does not want to let the currency find its true price based on demand and supply. In the absence of price as a mechanism to clear the market, other factors come into play like what “sectors” of the economy the CBN considers a priority for foreign exchange. Now our airline can’t get its money out of the country as it used to do. It now has way more naira than it knows what to do with. The combination of runaway inflation and a deteriorating exchange rate mean the naira the airline holds are losing value by the day.

Meanwhile, over in London, a scrappy startup has decided on a way to make money from Nigerian migrants in the country who send money back to Nigeria everyday. The market for sending money back to Africa is crowded and competitive—you need something innovative and cost-effective to gain a foothold in that space.

The scrappy startup hears about the difficulty the airline in Nigeria is facing getting its money out of the country. So it reaches out with a value proposition. The scrappy startup will take money from Nigerians abroad who want to send it to Nigeria, and pool it. It will then agree a rate with the airline to exchange the money. The scrappy startup has a bank account in Nigeria into which the airline pays its unwanted naira. Scrappy startup then transfers the equivalent in pounds sterling to the airline’s UK bank account.

This arrangement solves several problems at once without really inventing anything new. It reduces the demand for dollars from the CBN. The CBN cannot meet all the demand for dollars anyway so this is one less thing for it to worry about. The airline can also continue its business as normal in the knowledge that its funds will no longer be trapped in Nigeria. As the scrappy startup is not actually moving the money it collects in London across international borders, its costs are dramatically reduced. It can then pass this cost savings to the Nigerian migrants in London in the form of reduced remittance costs.

Further, this arrangement allows scrappy startup to deliver the naira to the bank account of recipients in Nigeria in double quick time as it has naira in Nigeria ready to deploy as opposed to waiting to send pounds it has in the UK to Nigeria. The Nigerian sending money to Nigeria from London only notices that the money gets there faster and costs him less.

I have lived in the UK for 13 years now. When I first moved here, the only way to send money back to Nigeria was through Western Union or MoneyGram or simply handing the cash to someone going back home. Western Union and MoneyGram were expensive and painful to use. You had to find a store to fill the form and hand your money over. Once sent, you then contacted the recipient in Nigeria and gave them the ‘control number’ with which they went to a designated bank, with relevant ID, and collected the money.

It has now been at least five years since I used Western Union to send money home. There simply is no need to anymore. These days I can send money from an app on my phone and watch it get to the person in about 30 minutes. I can see the rates upfront and decide if I like it. I can also use any number of one-man band remittance services who will take my pounds and credit me with naira in Nigeria in a matter of hours.

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You might think that this happy arrangement will please everyone. Afterall, this is one of the mysteries of how markets form – they just happen and keep getting refined everyday. It’s not everyday you get a market that leaves both sides happy. No one feels like they don’t have other options – the Western Union option remains and many people still use those services.

The only people who might be unhappy here are the Western Unions and MoneyGrams who have lost market share to the scrappy startups and one-man businesses. But they had a good run and are hardly about to go bankrupt anytime soon being the global businesses they are.

But somehow and for some reason, CBN has found a way to be unhappy about this arrangement. In a move that would be completely outrageous were it not Nigeria, the CBN effectively cornered the market for three big players – Western Union, MoneyGram and Ria.

In a recent circular, it warned Nigerians to beware of ‘unlicensed international money transfer operators whose modes of operation are detrimental to the Nigerian economy’. The harm being done to the Nigerian economy with their mode of operation remains unclear. In a subsequent circular, the CBN claims that it has not stopped anyone from operating in Nigeria. It merely asks them to come register with it based on the requirements it wrote in 2014. The problem is those requirements were written clearly for big players. You need to be worth $1 billion and have offices in 20 countries to qualify. Scrappy startups in London will never make the cut based on these rules.

It is difficult to explain just how infuriating this move by the CBN really is. It is nakedly using its powers to benefit big players who were deservedly losing market share due to their costs and bad service. It has rolled back all the progress of the last five years and taken Nigerians hostage to achieve its aim. All of a sudden, people in Nigeria now have to go to the bank again to get money sent to them. I can no longer sit at my desk and send money to Nigeria through an app on my phone. All the annoyances we thought we had left behind are back again—once again the choices are terrible exchange rates or high fees.

The CBN might argue that the swap arrangement between the airline and scrappy startup means that the actual foreign exchange does not get into Nigeria. But the effect of this is to reduce demand for forex. At worst, the effect is neutral. There is no good reason why the CBN is doing this.

Nigeria is going through an economic crisis that is as deep as any Nigerians have been through in recent memory. Oil prices stubbornly refusing to go anywhere near their 2014 highs have played a big part in bringing about this state of affairs. But an increasingly erratic CBN has played its part in making things worse. Inexplicable moves are announced and then reversed as quickly as they were announced. Bad ideas are replaced with worse ones. So out of touch is the CBN that it now thinks it can tell Nigerians abroad who work for their money how to send their own money to Nigeria by forcefully narrowing their choices. Indeed, this is an easy move for it to make as a deep distrust of markets runs right through the CBN all the way up to its governor, Godwin Emefiele. Where things are going ok, it can always invent a new problem to shake things up.

The tragedy in all of this is that the CBN can do this and get away with it. Nigerians in the diaspora are a soft target. Even though they send $21 billion back home every year, they do not really have a voice as they are scattered around the world. They also do not vote and are unlikely to take their money elsewhere given that they are typically sending money to support family and friends back home. No one is happy at having their choices reduced to say nothing of having to pay more for a service they had walked away from many years ago.

Except of course CBN and its friends.



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