The Central Bank of Nigeria (CBN) has introduced new directives aimed at strengthening the Nigerian banking sector and mitigating the impact of volatile foreign exchange (FX) rates. In a circular distributed to all banks, the CBN has instructed banks to prudently manage the gains derived from forex revaluation.
As part of this proactive measure to safeguard against potential adverse FX rate movements, banks are now required to set aside their foreign currency revaluation gains. These gains will serve as counter-cyclical buffers and cannot be utilized for dividend payments or operating expenses.
The CBN has taken into consideration recent FX policy changes that could result in regulatory breaches, including exceeding Single Obligor Limits (SOL) and Net Open Position (NOP) limits.
The CBN’s statement, dated September 11, 2023, emphasized that the recent reforms in the forex market may lead to gains or losses for banks. In response, the CBN has instructed banks that have profited from these policy changes not to use the proceeds for dividend payouts or to fund their operations.
The statement, titled “Impact of Recent FX Policy Reforms: Prudential Guidance to the Banking Sector,” highlighted the potential implications of the FX policy reforms, including the risk of breaches in single obligor and net open position limits, potential increases in asset quality risks, and pressure on industry capital adequacy.
The guidelines provided by the CBN include the following:
- Treatment of FX Revaluation Gains: Banks are required to exercise utmost prudence and set aside foreign currency revaluation gains as a counter-cyclical buffer to cushion against future adverse movements in the FX rate. Banks shall not utilize these gains for dividend payments or operating expenses.
These measures are designed to enhance the resilience of the banking sector and ensure that banks maintain adequate buffers to withstand potential FX rate fluctuations. Banks are also encouraged to seek forbearance from the CBN if they exceed certain limits due to the impact of FX policies.
The CBN’s focus on prudent management of FX gains reflects its commitment to maintaining financial stability and regulatory compliance within the banking industry.