CBN Issues Fresh Directive To Banks Over Foreign Exchange

The Central Bank of Nigeria (CBN) has directed commercial banks to refrain from utilizing their foreign exchange revaluation gains for dividends and operational expenditures.

The directive was given in a letter dated September 11, 2023, signed by the Director, Banking Division Department, Haruna Mustafa.

The apex bank ordered commercial banks to implement the directive immediately.

FX revaluation gains refer to the increase in the value of a bank’s assets and liabilities denominated in foreign currency when there is a change in the exchange rate between the foreign and the local currencies.

While stating that it had assessed the consequences of the recent FX rate regime change on the banking system, the CBN said it identified its potential to substantially impact the Naira values of banks’ foreign currency (FCY) assets and liabilities.

The CBN emphasized that banks should utilize these revaluation gains to reinforce their capital reserves, thus enhancing the banking sector’s capacity to endure volatility and economic shocks.

The letter reads in part, “The Bank thus approved the following prudential guidance and directives for immediate implementation by banks

“Treatment of FX Revaluation Gains: Banks are required to exercise utmost prudence and set aside the FCY revaluation gains as a counter-cyclical buffer to cushion any future adverse movements in the FX rate. In this regard, banks shall not utilize such FX revaluation gains to pay dividends or meet operating expenses.

“Single Obligor Limit (SOL): Banks that inadvertently breach the Single Obligor Limit (SOL) due to the FX policy will be granted forbearance upon application to the CBN. The forbearance shall apply only to existing facilities as of the effective
date of this policy. Such banks shall be exempted from the regulatory deductions on the excess above the SOL limit in their CAR computation.

“Net Open Position (NOP) Limit: Banks that exceed the NOP prudential limits due to the FX revaluation shall be granted forbearance for the breach upon application.

“Existing prudential regulations on capital adequacy, dividend payments, and FCY borrowing limits shall continue to apply. shall be exempted from the regulatory deductions on the excess above the SOL limit in their CAR computation.

“Net Open Position (NOP) Limit: Banks that exceed the NOP prudential limits due to the FX revaluation shall be granted forbearance for the breach upon application.

“Existing prudential regulations on capital adequacy, dividend payments, and FCY borrowing limits shall continue to apply.”