WHY LAUNCH A DOMESTIC CARD SCHEME, ANYWAY?

After yesterday’s newsletter, where we discussed the Domestic Card scheme to be operated by the Nigeria Inter-Bank Settlement System Plc (NIBSS), I got a question from a reader;

“…why do we need the NIBSS if Visa, Mastercard already serve as a link between banks and customers?”

Today, I am going to answer that question, but I will answer it as a different question. Yes, this is me totally setting my own question and answering it because I do not like the examiner's question. Okay, I am just kidding, I am rephrasing the question because it is a little flawed. 

Mastercard, Visa, etc are card payment schemes and they do not actually link banks and customers. They, more accurately, link merchants who sell goods and services to consumers who need to pay for goods and services. They just go through the banks that already bank both merchants and consumers. We already discussed what card schemes do in an earlier newsletter.

However, there is a question similar to what the reader asked, that I think we need to ask. The question is;

“Why do we need the NIBSS Domestic Card Scheme if Visa, Mastercard already serve as card payment schemes?”

It’s time for another game of educated guesses. You know…where we look at what we know about the law and about finance to arrive at the most plausible explanation for the government’s policies. So what do we know?

We know that the Central Bank of Nigeria (CBN), issued a statement announcing the Domestic Card Scheme. In that statement, a particular line stands out for me. It hints at the rationale for the domestic card scheme. The CBN said:

“Domesticating our card scheme also enhances data sovereignty, enabling the development of locally relevant products and services and reduces demands on foreign exchange”.

If you have been following our conversation on card payments, I repeatedly stated my reasonable belief that the reason for our international payment woes is simply that Nigeria lacks foreign exchange reserves. Nigeria has also made so many policies whose key ideological backing is the “reduction of demand for foreign exchange”. Remember when Nigeria famously banned the importation of rice even though local production could not meet the demand for rice? Or when Nigeria cut down trees in order to remove shelter for black market dollars? Those kinds of policies.

It would seem that at least one reason for the Domestic Card Scheme is also to tackle Nigeria’s foreign exchange problems. While I find it futile on the first examination, it is still great to learn exactly how foreign card payment schemes could possibly put pressure on foreign exchange, if it does anyway.

In a previous episode, we learned that banks have to provide foreign exchange to Mastercard and Visa in exchange for the settlement of international spending. However, now that banks have limited international spending limits on cards, then the need for foreign exchange for that purpose has been reduced. If there is a need to reduce it further, then banks can just totally stop international payments. So I reckon that the Domestic Card Scheme cannot possibly be meant to target that demand for foreign exchange. Besides, if the Domestic Card Scheme should support international spending, then it immediately creates a demand for foreign exchange because they would need to settle international payments. So we have to look elsewhere.

This is where we enter the realm of Foreign Direct Investment (FDI). FDI is simply all monies in foreign exchange that come into a country because foreigners come to invest in the country.

Let us take a rough financial analysis. If you want to leave the United States and come invest your dollars in Nigeria, you generally expect that;

1. You can bring the dollars into the country, say $1,000,000

2. You can convert the dollars into naira at a specific rate, say for instance 300 naira for every dollar. So 300,000,000 naira.

3. You can then do business in the country in naira since that is what everyone spends here

4. You can take your earned money and convert it to dollars at the same rate you changed your dollars to naira or better. This is called repatriation in legal speak.

This makes sense because you came from the US and you measure your profit in dollars. If after doing business in Nigeria, you have a total of 600,000,000 naira, then you can say that you have made a profit, or can you? It depends, if you convert your 600,000,000 naira to dollars at 750 naira, you are going back to America with $800,000. That is a loss of $200,000 because you came to the country with $1,000,000. Now, that is not pretty.

In order to encourage the flow of foreign exchange into the country, the government offers some assurances. Particularly, that the government will exchange your naira profit for dollars at the same rate as when you brought in dollars. So if you bring in foreign exchange through official channels, and you get something called a Certificate of Capital Importation, the government promises to provide you with dollars when you want to need to take out money. There are technicalities, of course, but this is a fair legal overview.

So if you came in $1,000,000 and exchanged it at 300 naira for 300,000,000. When you make 600,000,000 naira, the government has promised to take it and give you $2,000,000. Or would it? Well, in the aviation industry, foreign airlines stopped operations because Nigeria could not provide them with over $500,000,000. Yup, after operating and earning, Nigeria could not provide dollars to match the expected returns.

So, here is what we know, again. Mastercard and Visa are foreign-owned and expect all their profits to be converted to dollars when they want to repatriate profits. So yes, the CBN is right to the extent that their operations put some form of pressure on foreign exchange when it is time to return dollars to investors? Yet, it makes no sense because it means every foreign direct investment puts pressure on foreign exchange. Which makes no sense because you need foreign direct investment to earn foreign exchange anyway! But if you can cut down trees to curb foreign exchange problems, you can make such arguments, can’t you?

However, there is a tiny part that I could understand. I could understand it but I do not agree with it. This is the fact that we only really need Mastercard and Visa for international payments because they have the international presence needed for international payments. To that extent, card payments for local transactions can be sufficiently handled by a domestic card scheme. This would mean that there are lesser profits for Mastercard and Visa to convert to dollars right now as Nigeria does not have dollars… I guess?

Yet, it is futile. It is akin to treating symptoms instead of treating the main sickness, which is we need to earn more foreign exchange. Nigeria has been doing this for far too long. I hope the CBN gets it right because my Amazon Prime subscription is about to be canceled and I have nowhere to turn to.

There is a final question I have been pondering on but I am too afraid to dive into it. Is there a possibility that, like it happened in the aviation industry, investors in the financial sector are not able to repatriate their profits as foreign currency?