An Analysis of the Problems of Foreign Exchange Management and its Impact on the Banking Industry

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.

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.

TABLE OF CONTENTS

Title page ii.
Certification iii.
Dedication iv.
Acknowledgement v.
Abstract vi.
Table of contents viii.

CHAPTER ONE: INTRODUCTION

1.1 Background of the Study 1.
1.2 Statement of the Problem 4.
1.3 Objective of the Study 5.
1.4 Significance of the Study 6.
1.5 Research Hypothesis 7.
1.6 Scope and Limitation of the Study 8.
1.7 Organization of Study 9.
1.8 Definition of Terms 10.
References 13.

CHAPTER TWO: REVIEW OF RELATED LITERATURE

2.0. Introduction 14
2.1 Exchange Control 15.
2.2 Foreign Exchange Control Act – Historical Background 16.
2.3 Foreign Exchange – An overview 18
2.4 Evolution of the Foreign Exchange Market 20.
2.5 The Dutch Auction System 27.
2.6 Structure of the Nigerian Foreign Exchange Market 28.
2.7 Foreign Exchange Management 33.
2.7.1 Foreign Exchange Management in the CBN 35
2.7.2 Foreign Exchange Management in the Second- tier Foreign Exchange Market Era 38
2.8 Rationale behind the Introduction of Second-tier Foreign Exchange Market (SFEM) 42.
2.9 Examining the Foreign Exchange Management Problems in Nigeria and the Strategies for Correction by the CBN 44.
2.10 Foreign Exchange Theories and models applicable to Nigerian Foreign Exchange Management 53.
2.10.1. The Models include 57.
2.11 Exchange Rate Concept 61.
2.11.1 Exchange Rate Strategy 62.
2.11.2 Causes of change on Exchange rate in some developed and developing countries 63.
2.12 Methods of Payment under Nigerian Foreign Exchange Management 67
2.13 The Impact of the foreign Exchange Management on the Nigerian banks and the economy 68.
References 71.

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Research Design 73.
3.2 Sample Size/Population of the Study 74.
3.3 Sampling Techniques 75.
3.4 Nature and Sources of Data 75.
3.5 Techniques for Data Analysis 76.
3.7 Validity and Reliability of the Instrument 77.
References 78.

CHAPTER FOUR : DATA PRESENTATION AND ANALYSIS

4.1 Data Presentation 79.
4.2 Data Analysis 81.
4.3 Correlation/Regression Analysis 83.
4.4 Hypothesis Testing 89.

CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION

5.1 Summary of Findings 95.
5.2 Conclusion 97.
5.3 Recommendation 98.
Bibliography 100.
Appendix A: Introductory Letter 103.
Appendix B: Questionnaires 104.

INTRODUCTION

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.

BIBLIOGRAPHY

Agene, C. E. (1991): Foreign Exchange and International Trade in Nigeria: Lagos,     Gene publication Limited.

Babajide, K. (2009): “Naira in free fall” Vanguard News Paper.

Central bank of Nigeria, (1998):  The Foreign Exchange Market and   its    Management     in Nigeria; CBN Research Department. Series No 98/06.

Central Bank of Nigeria, (1997-2000): Publications on Forex Market

Central Bank of Nigeria, (2000): Statistical Bulletin

Central Bank of Nigeria, (2000):  Publications on the Dutch Auction System.

Chikeleze, B.E. (2000): International Trade and Finance, Enugu;     Precision        Printers        and publishers.

Dipo & Kolawole (1999): Economic and Financial Review CBN.    Bullion    magazine.    Vol    3 No1.

Mcknnom, (1993): The Role of the Game: International Journal.

Nigeria Deposit Insurance Corporation, (1997): “Review of  Development in Banking and finance in the 1^st Quarter of 1997”, Research Department. Vol. 7 No 1.

Nigeria Deposit Insurance Corporation, (1998): “Review of Development in Banking and Finance in the 1^st and 2^nd Quarters of 1998”; Research Department Vol 8.

Obaseki, P. J. (1991): “ Foreign Exchange Management in Nigeria, past, present and the future”, CBN Economic and Financial Review; vol. 29, No 1.

Ogbazi, & Okpala, (1994): Research Methodology in Nigeria, Owerri,Alvana Press Ltd.

Ogundipe, S. O, (1989): SFEM in Nigeria: Ibadan Heinemann Education.

Okolo, J. E. (2000): A Systematic Approach to Reports Writing in Tertiary Institutions, Onitsha, Innosco Publishers.

Olukole, R. A (1991): Foreign Exchange Policy and Management; Bullion CBN Magazine vol. 15.