CBN’s directive on destination payment for all Form M, Letter of credit and other forms of payment
CBN’s Directive on Destination Payment
The Central Bank of Nigeria (CBN) issued a Circular Ref. No. TED/FEM/FPC/GEN/ 01/005 of 24 August 2020 to the effect that authorised dealers are no longer permitted to open Form M in favour of procurement companies. CBN further stated that, going forward, Form M for letters of credit, Bills for collection and any other form of payment can only be opened for ultimate suppliers of goods or services. The aim of the new directive is to curb incidences of price manipulation, transfer pricing, over-invoicing, cost duplication and double handling charges.
We have highlighted below some of the key benefits of procurement agency arrangements which should inform the need for stakeholder engagement and the design of a mechanism to prevent its abuse:
Benefits of using procurement agents
- Coordination – Most local companies purchase several inputs, including raw materials, equipment and spare parts, from different ultimate suppliers spread across multiple jurisdictions. The procurement companies add value to the local companies by assisting them to coordinate and procure these items and thereby relieve them of the challenges of dealing with multiple vendors, logistics and handling, storage and distribution of such materials across geographies. Nigerian companies would likely incur significantly higher costs if they were to handle such matters on standalone basis.
- Discounts – Leveraging their economies of scale, procurement companies are in a pole position to negotiate and obtain volume discounts that each operating company may not be able to do as a sole buyer.
- Financing – Procurement companies also bridge the gap by financing purchases from the ultimate suppliers, especially in periods of foreign exchange crunch in Nigeria. It is also often the case that better financing terms can be obtained by such companies leveraging the group balance sheet to obtain credit from much cheaper sources than might ordinarily be available to a pure play Nigerian company.
- Contracting – Most ultimate suppliers, such as original equipment manufacturers, typically do not sell directly to individual buyers. Rather, they prefer to contract with accredited agents or entities in jurisdictions with highly efficient and effective judicial systems.
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