The Central Bank of Nigeria (CBN) has once again emphasized its stance that banks operating within the country are prohibited from utilizing their foreign exchange (FX) revaluation gains for dividend payouts or operational expenditures.
In a recent circular issued by the apex bank on Thursday, signed by Adetona Adedeji, the acting Director of the Banking Supervision Department, banks were sternly warned against this practice.
The circular, referencing a prior directive dated September 1, 2023, reiterated the imperative for banks to exercise caution and reserve foreign currency (FCY) revaluation gains as a counter-cyclical buffer to mitigate any adverse movements in the FX rate. It explicitly stated that such gains should not be diverted towards dividends or operational expenses.
This reiteration comes in the wake of a previous directive issued by the CBN in September 2023, which mandated Deposit Money Banks to desist from using gains derived from FX revaluation for dividends and day-to-day operational costs. This directive was intended for immediate implementation.
Forex revaluation gains materialize when there’s an upsurge in the value of a bank’s assets and liabilities denominated in foreign currency due to fluctuations in the exchange rate between the foreign currency and the local currency.
The September circular from the CBN assessed the ramifications of recent FX rate regime changes on the banking sector and recognized the potential substantial impact on the naira values of banks’ foreign currency assets and liabilities.
As per the circular, banks are instructed to prudently allocate FCY revaluation gains as a safeguard against future adverse FX rate movements. Moreover, they are explicitly barred from utilizing these gains for dividend payments or operational expenditures.
Additionally, the circular outlined other prudential guidance and directives for immediate implementation by banks, including provisions for forbearance for banks inadvertently breaching Single Obligor Limit (SOL) and Net Open Position Limit (NOP) due to FX policy changes.
Despite several Nigerian banks reporting significant revaluation gains in their third-quarter reports, with expectations of improved full-year figures, the CBN remains resolute in its stance to ensure the prudential management of FX revaluation gains.
The reinforcement of this directive underscores the CBN’s commitment to maintaining stability and resilience within the Nigerian banking sector amidst evolving economic conditions and FX rate dynamics.
