Central Bank of Nigeria (CBN) issued a directive on Monday, instructing commercial banks to refrain from utilizing their foreign exchange (FX) revaluation gains for dividends and operational expenditures.
The directive, which is expected to be implemented immediately, was conveyed in a letter dated September 11, 2023, and was signed by Haruna Mustafa, the Director of the Banking Division Department at the CBN.
FX revaluation gains pertain 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 currency and the local currency. The CBN underscored the significance of these gains as a counter-cyclical buffer to safeguard against potential adverse FX rate fluctuations.
The recent FX rate regime change had consequences for the banking system, with the potential to substantially impact the Naira values of banks’ foreign currency (FCY) assets and liabilities. While these reforms did have negative effects on some businesses in the first quarter of 2023, Nigerian banks remained largely profitable.
In the letter addressed to all commercial banks, the CBN outlined specific prudential guidance and directives:
1. Treatment of FX Revaluation Gains: Banks are required to exercise utmost prudence and set aside FCY revaluation gains as a counter-cyclical buffer to cushion against any future adverse movements in the FX rate. In this regard, banks shall not utilize such gains to pay dividends or meet operating expenses.
2. 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 regulatory deductions on the excess above the SOL limit in their Capital Adequacy Ratio (CAR) computation.
3. 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.
The CBN emphasized that existing prudential regulations on capital adequacy, dividend payments, and FCY borrowing limits shall continue to apply. This directive reflects the CBN’s commitment to safeguarding the stability and resilience of the Nigerian banking sector in the face of evolving economic conditions.
Banks are expected to promptly adhere to these directives, ensuring the prudent management of their FX revaluation gains and reinforcing their capital reserves to enhance their capacity to endure volatility and economic shocks.
The CBN’s move has garnered attention within the financial sector, and analysts are closely monitoring its potential impact on the banking industry as well as the broader Nigerian economy.