christmas | Finomics 101

In the first part of this “Much Ado About FX” series, we got to know what an exchange rate is, how it is derived, and some of the participants in the FX market. Now to the operational nitty gritty of how the FX markets in Nigeria work.

Anyone looking to buy or sell xZollers in Nigeria has three options to choose from:

The official market, aka Bureaux de Change (BDCs)
The parallel market, aka “Mallams”
The private market, aka “Paddy”

The Official Market

Also called the Interbank Foreign Exchange Market (IFEM). Due to the scale of its export-related activities, the FGN, through the CBN, is supposed to have the largest store of xZollers in the country (see Part I for background). This makes the CBN the biggest seller of xZollers in the market. The CBN, however, does not sell xZollers directly to end users (they used to, but they stopped in February 2015); they provide xZollers wholesale to BDCs, who in turn sell to the end users, making their profit by selling at a slightly higher rate than they received from the CBN.

A Bureau de Change (BDC) is essentially any business where people can exchange one currency for another. BDCs are usually located at banks, travel agencies, and airports (source: Wikipedia).

The BDCs are heavily regulated by the CBN, which determines (among other things):

the amount of xZollers they can receive on any specific day
the applicable exchange rate(s) they can buy or sell xZollers
who they can buy xZollers from or sell xZollers to
the amount of xZollers they can maintain in their respective accounts

So, anyone who meets the CBN’s conditions can buy or sell xZollers in this official market.

The Parallel Market

Whenever there is a restriction to the access of a critical resource, a black market usually develops. According to Investopedia, a black market is

Economic activity that takes place outside government-sanctioned channels. Black market transactions usually occur “under the table” to let participants avoid government price controls or taxes … In the financial context, the biggest black market exists for currencies in nations with strict currency controls.

Due to the strict controls placed by the CBN in the official market, a publicly accepted black market, commonly referred to as the Parallel Market, exists. The traders in this market are popularly called “Mallams,” which is a term used to refer to men from the northern part of Nigeria; historically most of them are from this region.

In addition to the absence of CBN controls in this market, some of the reasons the Parallel Market is patronised are:

there are more friendly hours; xZollers can be bought or sold at 10pm on a Wednesday or 7am on a Sunday
it aids anonymity; no form of identification is required, government-issued or otherwise
it is fast; a transaction can be completed in as little as 60 seconds with both parties happily on their separate ways afterwards

Historically there have been times when the “parallel rate” (the exchange rate in the Parallel Market) has been <5% higher than the “official rate” (the exchange rate in the Official Market). At times like this when the CBN restrictions are very tight, the parallel rate could be up to 150% higher than the official rate.

The Private Market

Simbi wants to go to Phuket, Thailand for a much-needed time away. She needs to buy some xZollers to take along for her room & board and other incidentals. Her cousin, Jide, recently received some xZollers as a birthday gift from his mum. Jide needs to exchange these xZollers for Nigerian Naira so he can go to the computer store and buy the laptop he has been wishing for. Simbi mentions to Jide her travel plans and her need for xZollers while on a visit. Jide very excitedly informs her that he has some xZollers he needs to exchange. Simbi cannot believe her luck, and they immediately agree on an exchange rate; Jide gives Simbi the xZollers, and Simbi transfers the agreed-upon amount of Nigerian Naira to Jide’s bank account.

This is the Private Market. The buyer and the seller know each other, privately agree on a rate, and transact their FX trade outside of the other two markets. The buyer is the seller’s “paddy” and vice versa. The volume of transactions that can take place here is negligible relative to the other two.

Hope this helps with your understanding of the mechanics of the Nigerian FX market. Next week, in Part III, we shall go into the “whys”:

why is the CBN taking the actions it is taking?
why are the banks taking the actions they are taking?
why is the parallel rate so far away from the official rate?
why is it so hard for me to obtain foreign currency?

Part I provides a refresher on what an exchange rate is and how it is derived. Do note that xZoller is being used here to represent primarily the U.S. Dollar, but it could also be any other internationally traded currency, like the British Pound or the Japanese Yen.

Still got questions about what you have read so far? You can drop some lines in the comments box below or send an email to comments@finomics101.com.

Merry Christmas in advance! As we celebrate the season, do remember that there will still be life next month and next year, so do not spend it all in December :).

image courtesy express.co.uk

For those of us in Lagos, Nigeria, harmattan – and Christmas – is very much in the air :-). The retailers have put on the show to draw people in and dispense the contents of their wallets, with the “mind-blowing offers,” the “you must haves,” the “must-visit places,” and the “must-do things.” It is very easy to get caught in the commercial excitement of the moment, especially because the capacity to indulge for most is also increased during this period: bonuses, gifts, and most salaries get paid earlier this month. For those who think the Joneses are the gold standard, it is an even more financially hectic period.

Here is a reality check for us all though: after December comes January, and 10 other months before the next December. January is considered by many to be a long and gruelling month, primarily because the duration between the paydays in December and January is the longest in the entire year for most – an average of 37 days according to my guesstimate. It is also because December is filled with so many activities and holidays from school and work, while January is “empty” after the 1st day of the month / year.

Here is another major reason why January is so long: school fees are due at the beginning of that month! For some, rent is due as well; these two items are the largest monetary expenses for a lot of people. In fact, for some, the financial behavior in December ruins the whole year ahead.

So, now that we have identified some of the ways financial problems are created, here are some of my proposed solutions:

Forget about keeping up with the Joneses! This will always be my number one advice because keeping up with the Joneses is not a sustainable basis for getting anything done in life because the truth is the Joneses are clueless and broke!
Image courtesy freedomfromwithin.com

Create an income-expense plan (some people call this a budget :-)). It would interest you to know that income-expense plans have been saving lives and fortunes since the beginning of time! No entity – individual or organisation – can have the kind of lasting progress a lot of us desire without one of these.

View your finances through an annual lens. It is rather easy to focus on the cash inflows and outflows of each month on a per month basis. The reality for most of us however is that both our cash inflows and outflows vary by the month, and this is the case regardless of whether we work for an employer (private or public) or we employ ourselves. An annual view will help acknowledge this reality and make your income-expense plan more representative of your situation. It will also make it a lot easier to appreciate why you cannot afford to spend it all in December.
Image courtesy thinkbeyondthedesktop.com

Save and invest. One of the outcomes of your annual income-expense plan would be the need to save and invest, as some of the current income will need to be put aside to offset an expense later next year.

Remember the reason for the season: giving and sharing our fortunes with those less fortunate than ourselves, i.e. philanthropy. He who gives shall receive even more. Let us not forget those around us who could really do with a little bit of what we take for granted. Instead of buying your child that latest electronic gadget that she does not need, you could buy the monetary equivalent in rice and give to your domestic employees, or even school bags for their kids.
Image courtesy philanthropistlist.com

And lastly, self-discipline. None of the above can be achieved without a healthy dose of self-discipline. We each need to love ourselves enough to be willing to forfeit instant gratification for a greater longer-term purpose. Just as we need to apply this to weight loss and keeping our bodies healthy, so we also need to apply this to keeping our finances healthy.
Image courtesy quotesgram.com

Do you need the assistance of a professional with (i) creating an income-expense plan (ii) creating a savings & investment plan? Feel free to drop me a line at comments@finomics101.com.

It truly is the season to be merry; my family and I wish you and yours the best of the season. Wouldn’t it be better if the merriment lasted all-year-long though? 🙂

Image courtesy motorweek.org

Finomics 101

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Tag Archives: christmas

Much Ado About FX (Part II of III): Nigeria’s FX Market Mechanics

Money Basics: Don’t Spend It All in December