Foreign Exchange Structure and Management
The structure of Nigeria’s foreign exchange market mirrors the Central Bank of Nigeria’s (CBN) evolving approach to foreign exchange management, market development, and the pursuit of macroeconomic stability. Over the years, the framework has shifted from a tightly regulated, administratively controlled system to a largely market driven regime. This transition has been underpinned by successive policy reforms and carefully designed measures aimed at enhancing transparency, deepening liquidity, and improving overall market efficiency.
1986–1999: Market Liberalization
The liberalization of Nigeria’s foreign exchange market began with the introduction of the Second Tier Foreign Exchange Market (SFEM) in September 1986, marking a departure from a fixed and highly controlled exchange rate regime. This was followed in 1987 by the creation of a unified official foreign exchange market, which sought to streamline FX transactions and reduce distortions.
In 1989, Bureaux de Change (BDCs) were licensed to broaden access to foreign exchange for small end users and deepen the retail segment of the market. Although formally recognized at this stage, the BDC segment had existed informally since the exchange control era. The licensing of Bureaux de Change (BDCs) brought informal FX activities into a regulated framework with exchange rates largely determined by market forces.
Further reforms led to the establishment of the Autonomous Foreign Exchange Market (AFEM) in 1995, designed to allow market participants greater flexibility in FX sourcing. By 1999, the Interbank Foreign Exchange Market (IFEM) was introduced, establishing the foundation for an inter-bank FX market and strengthening the inter-bank trading of foreign exchange. This period was characterized by enhanced access to foreign exchange through formal channels, development of basic and foundational inter-bank FX trading infrastructure and enhanced transparency relative to the exchange control era.
2002–2015: Exchange Rate Stabilization and Allocation Efficiency
During this period, CBN adopted a series of auction based and interbank mechanisms to allocate foreign exchange, manage exchange rate volatility, the limited depth and thin liquidity of the FX market. These included the Retail Dutch Auction System (RDAS), the Wholesale Dutch Auction System (WDAS), and the Interbank Exchange Rate regime.
Under the RDAS, foreign exchange auctions were conducted twice weekly, with bids submitted on behalf of customers. In contrast, the WDAS also involved twice weekly auctions but allowed banks to bid for foreign exchange on their own accounts, which they subsequently sold to customers. A key distinction between the two systems was the transferability of funds among banks under the WDAS, a feature that was not permitted under the RDAS. These mechanisms were intended to improve allocation efficiency, reduce speculative demand, and narrow the gap between official and parallel market rates. However, there was heavy reliance on the Bank for market stability.
2016–2023: Market Deepening, Liquidity Enhancement, and Investor Confidence
In June 2016, the CBN adopted a managed floating exchange rate regime to improve market efficiency, address FX illiquidity, and enhance transparency in the foreign exchange market. As part of this reform, the Investors’ and Exporters’ (I&E) Foreign Exchange Window was introduced to provide a transparent, market driven platform for eligible FX transactions.
To further deepen market liquidity and support effective risk management, the CBN—working with FMDQ OTC Plc—introduced naira settled over the counter FX futures, enabling market participants to hedge foreign exchange risk and improve confidence in the market.
During this period, the CBN also conducted periodic FX spot sales to Authorized Dealers (banks) whose transactions were executed using a two way quote system on the Refinitiv platform. In addition, the Bank maintained FX Sales to BDC operators to meet retail demand and address specific market segments.
2023-Date: Market Unification and Price Discovery
On 14 June 2023, the CBN introduced a “willing buyer, willing seller” model for the conduct of transactions in the domestic foreign exchange market. This reform marked a decisive step toward market unification, reinforcing transparency and strengthening the role of demand and supply in exchange rate formation process. Under this arrangement, the multiplicity of foreign exchange windows was eliminated, and all market segments were consolidated into a single framework now referred to as the Nigerian Foreign Exchange Market (NFEM). The reform aimed to eliminate fragmentations in exchange rate, improve price discovery, enhance investor confidence, and establish a more coherent and efficient FX market structure.