As Nigeria Launches FX Scheme To Bolster Reserves

In a decisive move to shore up foreign exchange (FX) reserves and curb market volatility, Nigeria’s government has introduced a comprehensive framework to manage foreign currency assets. This new scheme, derived from Executive Order No. 15 (2023) and updated in October 2024, is spearheaded by the Ministry of Finance and the Central Bank of Nigeria (CBN).
The initiative, formally known as the Foreign Currency Disclosure, Deposit, Repatriation, and Investment Scheme, is intended to bring FX assets held by Nigerians and foreign investors into the formal banking sector. With this move, President Bola Tinubu’s administration is taking strides to boost transparency, enhance FX liquidity, and support the struggling Naira.
Effective November 6, 2024, the CBN’s guidelines, issued in alignment with the ministry of finance’s directives, are targeted at Nigeria’s commercial, merchant, and non-interest banks. These banks are collectively tasked with facilitating the scheme by opening designated domiciliary accounts to receive disclosed international tradable foreign currencies (ITFCs) from individuals and companies. For banks, this involves a significant operational shift, as they must not only manage these new accounts but also ensure compliance with the stringent regulatory framework set forth by the CBN.
At the heart of the scheme is an emphasis on transparency and regulatory oversight, which Nigerian policymakers argue will promote more robust FX flows and support market stability. The CBN’s guidelines require banks to verify participant details meticulously, including names, identification numbers, and bank verification numbers (BVNs), among other details. The data-driven approach will allow the CBN to maintain granular oversight of foreign currency movements, essential for evaluating the scheme’s impact on FX inflows and the naira’s stability.
The regulatory framework mandates that participants in the scheme must deposit their foreign currencies into specific domiciliary accounts. Once the ITFCs are confirmed and deposited, banks are obligated to submit detailed monthly reports to the CBN, tracking the number of participants and the volume of FX held under the scheme. This measure ensures that the central bank has real-time data on FX holdings across Nigeria’s banking system, enhancing transparency and regulatory control.
An essential feature of the scheme is the flexibility it affords to participants regarding access to their FX holdings. Unlike previous initiatives, participants under the new scheme are permitted to withdraw funds freely from their designated domiciliary accounts. Furthermore, individuals or companies can convert part or all of their FX holdings into Naira at the prevailing exchange rate whenever they choose. The CBN’s policy marks a shift towards a more market-driven approach, which could incentivise asset holders to repatriate funds without concerns of bureaucratic bottlenecks or restrictive policies.
Uninvested funds in these accounts can also be traded by banks in the interbank market, provided they are available to account holders on demand. This provision allows banks to bolster their liquidity and maximise the potential of dormant FX assets without compromising accessibility for account holders. Moreover, interest on uninvested funds, where applicable, will be subject to Nigeria’s banking charges guide, potentially making these accounts attractive to participants who seek returns on their holdings.
In line with Nigeria’s commitment to global financial standards, the scheme adheres strictly to anti-money laundering (AML) and counter-financing of terrorism (CFT) regulations. The guidelines mandate that banks conduct thorough due diligence on applicants, ensuring that funds are legitimate and free from illicit associations. Key AML/CFT checks will include verifying the beneficial owners of funds and screening transactions against a list of high-risk jurisdictions. Notably, the guidelines prohibit the use of funds from illegal activities, with banks required to escalate transactions from high-risk countries to enhanced due diligence protocols.
The scheme also requires banks to report any deposits under the programme that occur via wire transfers, ensuring they meet Nigeria’s AML/CFT regulations. This focus on regulatory compliance aims to enhance confidence in Nigeria’s financial system, particularly among international investors concerned about regulatory risks. With this commitment, the scheme seeks not only to attract FX but also to bolster Nigeria’s reputation in global financial markets.
Analysts suggest that this scheme is part of President Tinubu’s broader economic reforms aimed at stabilizing Nigeria’s currency amidst ongoing FX volatility. By incentivising Nigerians and foreign investors to disclose and deposit foreign currency holdings, the government hopes to buffer its FX reserves, which have faced recent pressures from declining oil revenues and increasing import costs. The scheme’s market-oriented features may appeal to asset holders, particularly those wary of restrictive FX policies in the past.
However, the success of the scheme hinges on various factors, including banks’ ability to meet compliance requirements and potential participants’ willingness to repatriate their funds. Given Nigeria’s high inflation and FX volatility, some asset holders may be cautious, seeking assurances that the scheme will protect the value of their holdings while allowing for accessible and flexible withdrawal options. Financial institutions must also adapt to the regulatory demands, particularly in regard to AML compliance, as the CBN is expected to take a rigorous approach to monitoring and enforcement.
For Nigeria’s banks, the scheme introduces both opportunities and operational challenges. While the potential inflow of FX could strengthen liquidity, banks will face an increased administrative burden due to the reporting requirements and monthly returns mandated by the CBN. Every month, each institution must submit detailed reports, which include the number of new accounts, compliance with due diligence protocols, and other participant data. Additionally, they must monitor transactions to meet AML/CFT standards, which may require enhanced staffing and investment in compliance tools.