Deposit Money Banks are required to sell their excess dollar stock by February 1, 2024, at the latest, by the Central Bank of Nigeria, which is taking further steps to stabilize the country’s unstable exchange rate.
In addition to disclosing the information in a fresh circular that was made public on Wednesday, the CBN cautioned lenders against accumulating surplus foreign exchange for financial advantage.
Officials said the central bank thinks certain commercial banks maintain long-term foreign exchange holdings in order to take advantage of the unpredictable fluctuations in exchange prices. A new set of instructions intended to lower the risks connected to these behaviors is included in the circular.
In the circular titled, “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks”, the CBN raised concerns over the growing trend of banks holding large foreign currency positions.
Less than 48 hours had passed since the CBN issued a circular cautioning banks and foreign currency dealers not to report fictitious exchange rates, among other things.
The latest development also coincided with the FMDQ Exchange’s modification of the process for determining the country’s official exchange rate.
The official exchange rate of the Nigerian Autonomous Foreign Exchange Market was around N900/dollar before the review, but it is now N1,480/dollar. In the parallel market on Tuesday, the naira finished at 1,450 per dollar.
Economists and other interested parties have applauded the action, which aims to harmonize the currency values on the official and black markets.
They however challenged the CBN to clear FX backlogs estimated at over $5bn and also fund FX demands at the official market. This, they said, would forestall a situation whereby the parallel market rate would move away from the official rate again.
Apparently as part of the moves to fund FX request at the official window, the CBN in its latest circular released on Wednesday accused banks of holding excess foreign exchange positions.
As a result, the central bank gave lenders until February 1, 2024 (today) to sell off excess dollar positions. The circulated, dated January 31, 2024, was signed by the Director, Trade and Exchange, CBN, Dr. Hassan Mahmud, and representative of the Director, Banking Supervision, CBN, Mrs. Rita Sike.
The circular read in part, “The Central Bank of Nigeria has noted with concern the growth in foreign currency exposures of banks through their Net Open Position (NOP). This has created an incentive for banks to hold excess long foreign currency positions, which exposes banks to foreign exchange and other risks.”
To address these issues, the CBN in the circular issued prudential requirements that banks must follow. A key focus of these requirements is the management of the Net Open Position (NOP). The NOP measures the difference between a bank’s foreign currency assets (what it owns in foreign currencies) and its foreign currency liabilities (what it owes in foreign currencies).
The circular mandates that the NOP must not exceed 20 per cent short or 0 per cent long of the bank’s shareholders’ funds.
This calculation, the apex bank said, must be done using the Gross Aggregate Method, which provides a comprehensive view of the bank’s foreign currency exposure.
Furthermore, banks with current NOPs exceeding these limits are required to adjust their positions to comply with the new regulations latest by February 1, 2024. Additionally, banks must calculate their daily and monthly NOP and Foreign Currency Trading Position (FCT) using specific templates provided by the CBN.
The CBN also directed banks to maintain adequate stocks of high-quality liquid foreign assets, such as cash and government securities, in each significant currency.
According to the circular, all banks are required to adopt adequate treasury and risk management systems to provide oversight of all foreign exchange exposures and ensure accurate reporting on a timely basis.
Banks are expected to bring all their exposures within the set limits immediately and ensure that all returns submitted to the CBN to provide an accurate reflection of their balance sheets.”
Finally, the CBN warned banks that non-compliance with the NOP limit would result in immediate sanction and suspension from the foreign exchange market.
