International remittances remain one of Nigeria’s biggest foreign revenue sources, surpassing oil revenues for four consecutive years from 2014 to 2018. The $24.3billion received in 2018 was the country’s highest to date, accounting for over a third of remittances flowing into sub-Saharan Africa.

However, in 2020, direct remittances into Nigeria dropped sharply by 71% from that of 2019. According to the Central Bank of Nigeria (CBN), remittance inflow for 2019 was $5.5billion – the lowest since 2013.

Prior to the drop, the World Bank already predicted a 23.1% reduction in Sub-Saharan African remittances in 2020. The drop owes largely to the economic impact of the COVID-19 pandemic on countries housing the highest numbers of African immigrants. The US, which alone, made up about a third of remittances to Nigeria, saw its GDP shrink by 3.5% within this period.

The Drop, in Remittances: CBN’s View and New Regulation

The Central Bank of Nigeria, on the other hand, identified the arbitrage arrangement practices of International Money Transfer Operators (IMTOs) as the additional reason for the significant drop in direct remittance into the country, next to COVID-19. 

Other reasons include the use of unaccounted channels to move money into, and outside the country. This aids the diversion of remittance meant for Nigeria.

To this end, the CBN introduced a new international money transfer policy designed to boost remittance into Nigeria. This was an anticipated and welcomed move by the CBN.

Not only would it make for proper accounting of foreign exchange inflow into Nigeria, but it would also greatly improve the country’s foreign reserve. The abundance of foreign currencies inflows into Nigeria would translate to an increase in the supply of the US Dollar, which helps strengthen the Nigerian Naira.

Yet, as noteworthy as the new policy is, it is still not entirely free of obvious infrastructural challenges. The obvious being the challenge certain operators and remittance service providers face integrating their platforms with commercial banks. 

The need for such comprehensive integration cannot be overemphasized, but the accomplishment of such a feat by operators is indeed an enormous task given the resources, and the time needed by each outfit to achieve this. Although the CBN is working assiduously to resolve this, it would take more than just the efforts of the apex bank to cross this bridge. 

While the integration problem sits visibly on the shelf, a far more serious challenge lurks within the current Nigerian remittance space waiting to interrupt the system in inconsequential ways – this is nothing other than the problem of liquidity.

The Lurking Liquidity Challenge(s)

Ten years ago, money sent across borders would take a few days of clearing before it got to the destination country. The US Dollar sent is equally the US Dollar received across; availability of liquidity on the ground to process payments was not much of an issue.

Today, with advancements in remittance and banking technologies, money is sent and received across borders within hours, even minutes. However, the Dollar sent is NOT the same as the Dollar received. Behind the rapid-fire system of same-day delivery of remittance are the enormous reconciliations of accounts between IMTOs, banks, and investors. So while the Dollars sent by remitters are in transit, IMTOs need to source Dollars in the recipient’s country to make the payouts.

With the previous system of receiving the Naira equivalent of Dollars sent, it was much easier for remittance service providers to source the Naira needed for payouts, compared to sourcing U.S. Dollars needed for payouts in Nigeria –  which is the current format that modern systems operate in. 

But, where do IMTOs get the US Dollars? 

This simple answer is – from Commercial Banks.

Commercial banks in Nigeria could offer post-funding to operators to cover the dollar shortfall. However, with a remittance space worth over $22 billion per annum, and projected to reach US$34.89 billion by 2023, where would the banks get all that Dollars from?

Source: KNOMAD, PwC Projections

 

The Effects of the Looming Liquidity Challenges

Aside from needing to have physical dollars available in Nigerian banks to settle payouts, remittance companies still need to spread their Dollars across several Nigerian banks since their customers are not sending money to just one bank, but multiple banks, and at unique intervals. Therefore, IMTOs are not even sure of where to correctly allocate their Dollars at any time, given traffic fluctuations.

Moving US Dollars across banks presents its own challenge. IMTOs don’t have the luxury of moving their US Dollars across banks to balance their liquidity against transactions done. The US Treasury regulates the movement of US Dollars across international banks to protect against money laundering purposes. This regulation would definitely slow down the speed of account reconciliations among IMTOs and banks, eventually contributing to the scarcity of liquidity. 

In the long run, the logistical problems of sourcing US Dollars, the lurking post-funding ceiling, and the hunch in account reconciliations might ultimately create setbacks, particularly to same-day payouts of US Dollar remittances. Already there are fears of the Dollar shortage leading to foreign takeovers.

This slows down the CBN’s objective of accelerating the flow of US Dollars into Nigeria.

The Songhai Exchange Platform: Easing the Liquidity Challenges

Since the introduction of the new CBN policy on US Dollars, the liquidity challenges have been overshadowed by the more obvious integration problem.

In themselves, the CBN regulations are ingenious and beneficial to the Nigerian economy, but without the proper placement of intricate infrastructures necessary to ‘oil’ the wheels of the systems put in place, the policy might not be sustainable.

 

This is why the Songhai Exchange platform, in partnership with CSL Capital, intends to lend a helping hand to solving these liquidity challenges. 

Songhai Exchange is a long-standing Africa-centric remittance technology facilitating remittance and payments across, and into Africa. Since the existence of the integration problem between commercial banks and remittance companies, the Songhai Exchange platform has helped ease the problem through an auto-account creation feature that grants IMTOs access to all DMBs in Nigeria simply by integrating our technology.

The liquidity problem poses a threat to every player within Nigeria’s remittance space. To this end, we have built necessary relationships with Nigerian banks as well as external partners to assist with liquidity. We believe that by creating innovative technology and strategic partnerships, working within the CBN guidelines, the Songhai Exchange platform will help accelerate the flow of remittance into Nigeria.

The objective of boosting remittance into Nigeria – to strengthen the Naira against the Dollar – would be tremendously difficult to achieve if liquidity shortfalls continue to lurk within the current financial system.