Legal basis for foreign exchange trading in parallel market

A parallel market emerges when there is control pricing and a higher demand than the level of supply of a particular commodity, if this is proscribed by law, it is then referred to as “Black Market”. In Nigeria, the parallel market is encouraged and supported by the government, because of the paucity of funds available from the sale of crude oil which is the primary source of US Dollars for Nigerian imports.

The Nigerian Foreign Exchange started being controlled by the private sector and balances abroad were maintained by commercial banks, who acted as agents for local exporters. The export of agricultural produce particularly gave Nigeria bulk of her foreign exchange receipts at this epoch. The nexus the Nigerian pound had with the British pound sterling at this era also delayed a vibrant indigenous Foreign Exchange Market.

The control of the Foreign Exchange Market only came under the confines of the Government with the establishment of the Central Bank of Nigeria in 1958 and the subsequent enactment of the Banks and Other Financial Institutions Act as well as the Exchange Control Act. These innovations brought the Central Bank of Nigeria in control of the Nigerian Foreign Exchange.

The time finally came, when the demand for Foreign Exchange became higher than the supply, and this is what led to the advent of the Black Market whereby Forex was being sold and purchased illegally in contravention of extant laws and regulations. Scarcity in the official market and bureaucracy led to an active Black Market in the Foreign Exchange in Nigeria.

In 1994, reforms were introduced into the Foreign Exchange Market. These reforms came in form of barring the Bureaux De Change from buying foreign exchange as agents of the Central Bank and conferring the absolute control of the Foreign Exchange on the Central Bank of Nigeria.

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