On Monday, the Central Bank of Nigeria (CBN) issued a new regulation urging commercial banks to stop using their foreign exchange (FX) revaluation profits for dividends and operating expenses.
The new direction was sent in a letter dated September 11, 2023, written by Haruna Mustafa, Director of the Banking Division Department, and it is anticipated to be implemented immediately. After the CBN shifted to a float controlled system in June after years of hard currency peg, a rising number of local deposit money banks with big net FX holdings realized large revaluation profits.
FX revaluation gain indicates a rise in the value of a bank’s assets and liabilities denominated in foreign currency for commercial banks that compile reports using international financial reporting standards (IFRS).
In reaction to the trend in the banking sector, the CBN said it had assessed the consequences of the recent FX rate regime change on the banking system and identified its potential to substantially impact the Naira values of banks’ foreign currency (FCY) assets and liabilities.
The FX reforms negatively affected some businesses in the first quarter of 2023, but Nigerian banks were largely profitable. According to the lender, FX revaluation gains must serve as a counter-cyclical buffer to safeguard against potential adverse FX rate fluctuations.
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.”
