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In a significant move, the Central Bank of Nigeria (CBN) has issued a directive to commercial banks, instructing them to refrain from utilizing their foreign exchange (FX) revaluation gains for dividends and operational expenditures.
The directive, conveyed in a letter dated September 11, 2023, signed by Haruna Mustafa, Director of the Banking Division Department, is set to take immediate effect.
FX revaluation gains represent the increase in the value of a bank’s assets and liabilities denominated in foreign currency following fluctuations in the exchange rate between foreign currency and the local currency.
The CBN stated that it has assessed the impact of recent FX rate regime changes on the banking system, recognizing the potential to significantly affect the Naira values of banks’ foreign currency assets and liabilities.
While the FX reforms had a negative impact on some businesses in the first quarter of 2023, Nigerian banks largely remained profitable.
According to the CBN, FX revaluation gains must now serve as a counter-cyclical buffer, safeguarding against potential adverse FX rate fluctuations.
The CBN emphasized that banks are to utilize these revaluation gains to strengthen their capital reserves, thereby enhancing the banking sector’s capacity to withstand volatility and economic shocks.
The key points of the directive include:
1. Treatment of FX Revaluation Gains: Banks are mandated to exercise prudence by setting aside FCY revaluation gains as a counter-cyclical buffer, which cannot be used for dividend payments or operational expenses.
2. Single Obligor Limit (SOL): Banks that unintentionally breach the Single Obligor Limit (SOL) due to FX policy will be granted forbearance upon application to the CBN. This forbearance applies only to existing facilities as of the effective date of this policy, and such banks will 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 exceeding the NOP prudential limits due to FX revaluation will receive forbearance for the breach upon application.
The directive clarifies that existing prudential regulations concerning capital adequacy, dividend payments, and FCY borrowing limits will continue to apply.
This directive represents a proactive measure by the CBN to ensure financial stability and strengthen the Nigerian banking sector against potential FX-related risks.
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