The Central Bank of Nigeria (CBN) has issued a directive to banks, instructing them to reserve foreign exchange (FX) revaluation gains as a safeguard against potential economic shocks.
Banks are prohibited from using these gains for dividend payouts or covering operational expenses.
The CBN conveyed this directive in a letter titled “Impact of Recent FX Policy Reforms: Prudential Guidance to the Banking Sector,” dated September 11, 2023, and addressed to all banks.
The letter, signed by Mr. Haruna Mustafa, the Director of Banking Supervision at CBN, noted the significant impact of recent FX rate regime changes on the banking system.
These changes have the potential to increase the naira value of banks’ foreign currency (FCY) assets and liabilities, resulting in varying levels of FX revaluation gains or losses across the industry.
To address these potential challenges, the CBN introduced prudential guidance and directives for immediate implementation by banks, including:
- Treatment of FX Revaluation Gains: Banks are required to exercise caution and allocate FCY revaluation gains as a counter-cyclical buffer to mitigate future adverse FX rate movements. Such gains should not be used for dividend payments or operational expenses.
- Single Obligor Limit (SOL): Banks that unintentionally breach the Single Obligor Limit (SOL) due to FX policy changes can request forbearance from the CBN. Forbearance applies only to existing facilities as of the effective date of this policy, and banks will be exempt from regulatory deductions on the excess beyond the SOL limit in their Capital Adequacy Ratio (CAR) computation.
- Net Open Position (NOP) Limit: Banks exceeding the NOP prudential limits due to FX revaluation can apply for forbearance from the CBN.
The CBN encourages banks to build capital buffers to enhance resilience against potential volatility and economic shocks. The regulator also commits to monitoring emerging vulnerabilities and taking appropriate regulatory actions as needed.