The Central Bank of Nigeria (CBN) has issued a directive mandating Deposit Money Banks (DMBs) to divest their surplus dollar reserves by February 1, 2024, in a bid to mitigate the volatility of the country’s exchange rate.
In a new circular released on Wednesday, the apex bank also warned lenders against hoarding excess foreign currencies for profit.
The latest circular, titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” highlights the CBN’s determination to address the growing trend of banks holding substantial foreign currency positions.
The move comes barely 48 hours after the CBN released a circular, warning banks and FX dealers against reporting false exchange rates, among others.
Expressing concerns over the potential risks associated with excessive foreign exchange holdings, the CBN emphasized the need for banks to manage their Net Open Position (NOP) effectively.
The NOP, which measures the disparity between a bank’s foreign currency assets and liabilities, is subject to prudential requirements outlined in the circular.
Under the new regulations, banks are mandated to ensure that their NOP does not exceed 20 per cent short or 0 per cent long of their shareholders’ funds.
To facilitate compliance, the CBN specified the use of the Gross Aggregate Method for calculating the NOP, providing banks with a comprehensive overview of their foreign currency exposure.
In addition to managing their NOP, banks are required to monitor their daily and monthly NOP and Foreign Currency Trading Position (FCT) using designated templates provided by the CBN.
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 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,” the circular read.
Banks with current NOPs exceeding the prescribed limits are expected to adjust their positions promptly to align with the new regulatory framework by the February 1, 2024 deadline.
Ada Peter
