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AN ANALYSIS OF THE PROBLEMS OF FOREIGN EXCHANGE MANAGEMENT AND ITS IMPACT ON THE BANKING INDUSTRY

CHAPTER ONE
INTRODUCTION
1.1 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
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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. When there is disequilibrium in the foreign Exchange market
which is caused by inadequate supply of foreign Exchange Reserve, pressure may be exerted on
the foreign exchange reserves where the reserves are inadequate, balance of payment problems
may arise.
There is therefore, the need to manage nation’s foreign exchange resources so as to
reduce the adverse effects of foreign exchange volatility. The management of foreign exchange
market would guarantee adequate supply in relation to the demand for foreign exchange
resources. Since resources are limited and scarce, the need for policy formulation geared towards
adequate management of resources becomes inevitable. Developing countries like Nigeria
depend mostly on imported goods. This led to the establishment of the foreign exchange market
by the law for the buying and selling of foreign currencies (Decree No. 36 of 1986).
The foreign exchange market provides adequate information for policy decisions while
exchange control is directed towards both the balance of payments and development needs.
Usually, Nigeria has chosen to determine her exchange rate through basket of currencies. Naira
was also pegged to the U.S dollar and British pound in a bid to ensure that the rates have some
bearing with the factor that affect the balance of payment and domestic economy.
The liberalization advocated by the CBN therefore means allowing the value of our
currency to be determined by the forces of demand and supply in the FOREX market with a view
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to achieving a viable exchange rate, achieving balance of payment equilibrium and overall
economic stability in the country.
This research study will look at the impact the problems of foreign exchange
management has on the banking industry.
1.2. STATEMENT OF THE PROBLEM
There is no gain saying that when there is appropriate foreign exchange management, it
can impact significantly on the banking industry as it can go a long way to help correct financial
and structural imbalances in the economy. There is currently a strategy in place that allows the
market forces to determine the international value of the currency in Nigeria and this has resulted
in its massive depreciation.
The problem that this work is aimed at is analyzing the problems of foreign exchange
management with a view to finding out its impact in the banking industry. Because it is often
said that the government of the Central Bank and the Nigerian government over the years have
not adopted mechanisms that are effective for the mobilization of the foreign exchange resources
and ration same for the settlement of her international transactions in accordance with her
supposed priorities. With the earnings of the oil boom era of the mid 1970’s, which led to the
over estimation of availability of foreign exchange and affected the general price level, it has
been observed that the value of the Naira keeps on depreciating despite the efforts by the
government in enacting policies that are geared towards realizing a good value for the Naira.
1.3. OBJECTIVE OF THE STUDY
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The objective of this study is to analyze and examine the problems and impact of the
foreign exchange management on the banking industry. It aims at the following objectives:
i) Examination of the way the central bank of Nigeria allocates
foreign currency.
ii) Examination of the way the policy of the Government Exchange
control Act is being used.
iii) It also aims at examining if enough foreign currency is allocated
to users of funds.
iv) Finding out the roles of the participants in the foreign exchange
market.
1.4. SIGNIFICANCE OF THE STUDY
The significance of this research work includes but not restricted to the fact that in a
developing country like Nigeria, the economy is import oriented and therefore, the need to
ensure that the foreign exchange participation in the market is guided towards the rules that are
set down for an effective performance. The source of Nigerian foreign exchange depends largely
on crude oil earning, which has to be properly used.
Secondly, the study will also add to the available literature and research material on
foreign exchange management in Nigeria and thus enable people who may want to look further
on this issue or related issues have a point of reference.
The study also will give necessary suggestions towards the achievement of the country’s
main foreign exchange objectives. Oil is seen as the main source of revenue for the country. It is
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therefore important to look into the management of the foreign exchange of the country and see
how it can be improved upon to enhance the growth of the economy.
1.5. RESEARCH HYPOTHESES
Hypothetically, the researcher will like to keep the following questions in view as a
guiding principle in the course of this research.
Ho: (Null Hypothesis): The inadequacy of foreign exchange and improper
management has not affected the economy.
Hi: (Alternative Hypothesis): The inadequacy of foreign exchange and improper
management has affected the economy.
Ho: (Null Hypothesis): The fall in the value of the Naira through market forces has not
affected the foreign exchange policies over the years.
Hi: (Alternative Hypothesis): The fall in the value of the Naira through market forces has
affected the foreign exchange policies over the years.
Ho: (Null Hypothesis): The continued fall of the Naira through the strategy of allowing
market forces determine the value of currency has not helped to achieve balance of payment
equilibrium.
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Hi: (Alternative Hypothesis): The continued fall of the Naira through the strategy of
allowing market forces determine the value of currency has helped to achieve balance of
payment equilibrium.
1.6. SCOPE AND LIMITATION OF THE STUDY
For this study to be meaningful, it is imperative to leave out some aspects which might
not be too important for consideration given the fact that Foreign Exchange Management is very
wide.
This study shall look into the problems of Foreign Exchange Management in the past, the
present day activities of the Foreign Exchange Market and the economy owing to the fact that
yesterday cannot be complete without today, just like today cannot be complete without
yesterday and tomorrow.
The research procedure will involve the use of secondary data. This will enhance the
quantity, reliability and the validity of the findings.
On the part of limitations to the study, constraints were encountered from different
quarters in the course of this research, which ranges from unavailability of current information
and a systematic approach of refusing me access to the relevant information/data for this
research. And this did not in any way help in the work. Some information cannot easily be
accessed from the internet especially when they concerns serious matters like the economy of a
country. The researcher therefore used data transaction in foreign exchange market for the years
1993 to 1998.
1.7. ORGANIZATION OF STUDY
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The study is divided into five chapters:
Chapter one is the introductory part of the study and it consists of background of the
study; statement of problems, objective of the study, significance of the study, research
hypothesis, scope and limitation of the study, and definition of terms.
Chapter two captioned “Literature Review” is where the works and write ups by various
people on the subject are looked into. Several textbooks, professional journals, write-ups and
other publications are reviewed to get a more detailed theoretical framework as it relates to the
subject matter.
Chapter three is the Research Methodology. It presents research design, sample
size/population of the study, sampling techniques, nature and sources of data, techniques for data
analysis, description of variables, analysis of the methodology employed.
Chapter four is the presentation, interpretation and analysis of data collected in chapter
three.
Chapter five which is the last chapter is where the summary of findings is done.
Recommendations and conclusion form part of this chapter also.
1.8. DEFINITION OF TERMS
Forex:
This is the acronym of Foreign Exchange defined by the International Monetary Fund
(IMF) as monetary authorities’ claims on foreigners in the form of bank deposits, treasury bill,
short-term and long-term government securities and other claims arising from inter-Central bank
and Inter- governmental arrangement without regards to whether the claim is denominated in the
currency of the debtor or creditor.
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Foreign Currency
Any currency, and includes notes, which are or have at any time been a legal tender in
any territory outside Nigeria. Also included are postal orders, bills of exchange, promissory
notes, drafts, letters of credit and traveler’s cheque payable or expressed otherwise than in
Nigerian currency.
Bureau De Change
A French name which means “Office for the exchange of currencies” in Nigeria, Local
currencies are changed for foreign ones and vice versa here.
Central Bank of Nigeria (CBN)
This is the apex financial institution in Nigeria. It is an institution set up by the Federal
Government of Nigeria to print and mint money. It also sees to the control of the flow of
currency in Nigeria. It is the banker to the Federal Government.
Exchange Rate
This is the price/rate at which a domestic currency exchanges with other foreign
currencies.
Foreign Exchange Market.
This is a market established by law for the buying and selling of foreign Exchange at
market determined rates.
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International Trade
The exchange of goods and services between countries involving business enterprises and
individuals domiciled in the different countries of the world.
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REFERENCES
Central Bank of Nigeria,(1999-2000): Publications on Forex
Market.
Obaseki, P.J. (1991):’’Foreign Exchange Management in
Nigeria, past , present and the future , C.B.N Economic and
Financial review; Vol .29,No 1.
Whiting, D. P. (1981): Finance of Foreign Trade; Phymouth
McDonald & Evans Ltd.

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