The Central Bank of Nigeria (CBN) has issued a directive barring deposit money banks (DMBs) from utilizing the gains resulting from recent foreign exchange (forex) policy reforms to fund their operations.
This announcement, made by Haruna Mustafa, Director of the Banking Supervision Department of the CBN, comes as the central bank closely monitors the impact of its forex market reform initiatives.
In a statement dated September 11, 2023, titled “Impact of Recent FX Policy Reforms: Prudential Guidance to the Banking Sector,” Mustafa emphasized that the CBN recognizes that the ongoing reforms in the forex market may yield gains or losses for banks.
As part of the guidelines outlined in the statement, the CBN instructed banks that have realized profits from the policy to refrain from using these proceeds for dividend payments or operational expenses.
The CBN’s recent forex policy reforms, implemented in June, encompassed the devaluation of the naira and the unification of multiple exchange rates in the official market, leaving only the Investors’ and Exporters’ (I&E) rate as the benchmark for trading dollars in the official window.
The central bank’s statement elaborated on the implications of the FX policy reforms on the banking sector: “The Central Bank of Nigeria has reviewed the impact of the recent foreign exchange (FX) rate regime change on the banking system and observed its potential to significantly increase Naira value of banks’ foreign currency (FCY) assets and liabilities, resulting in varying levels of FX revaluation gains or losses across the industry.”
The CBN has introduced specific measures for banks to address these potential impacts:
- Treatment of FX Revaluation Gains: Banks are required to exercise prudence and set aside the FCY revaluation gains as a counter-cyclical buffer to mitigate any future adverse movements in the FX rate. These gains should not be used for dividend payouts or operational expenses.
- Single Obligor Limit (SOL): Banks that unintentionally breach the Single Obligor Limit (SOL) due to the FX policy will be granted forbearance upon application to the CBN. The forbearance applies only to existing facilities as of the policy’s effective date, and such banks will be exempted from regulatory deductions on the excess above the SOL limit in their Capital Adequacy Ratio (CAR) computation.
- Net Open Position (NOP) Limit: Banks that exceed the NOP prudential limits due to FX revaluation will also be granted forbearance for the breach upon application to the CBN.
- Continuation of Prudential Regulations: Existing prudential regulations on capital adequacy, dividend payments, and FCY borrowing limits will remain in force.
