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In a bid to address unethical banking practices related to foreign currency manipulation, the Central Bank of Nigeria (CBN) has released fresh guidelines to commercial banks, specifically targeting currency speculation and hoarding.
The circular titled ‘Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks’ was issued on Wednesday, signed by Directors of Trade and Banking Supervision, Hassan Mahmud, and Rita Sike. This move follows the CBN’s earlier warning to deposit money banks regarding FX manipulations, as an ongoing investigation uncovered ‘double cheques’ practices, with severe punishments looming for infractions.
The CBN expressed concern over some commercial banks hoarding foreign currency to capitalize on Naira depreciation in the forex market. The newly issued guideline aims to curb this practice within the Nigerian banking sector, particularly focusing on the Net Open Position (NOP) of banks.
“The Central Bank of Nigeria (CBN) has noted with concern the growth in foreign currency exposures of banks through their Net Open Position (NOP). This has incentivized banks to hold excess long foreign currency positions, which exposes banks to foreign exchange and other risks.
“Therefore, the CBN issues the following prudential requirements to ensure these risks are well managed and avoid losses that could pose material systemic challenges.”
The guideline targets scenarios where a bank acquires or borrows $1 million worth of forex but holds half of it in its position instead of utilizing it immediately for lending or financing client purchases. This practice allows banks to profit from currency depreciation by buying low and selling high.
To enforce compliance, banks with current NOPs exceeding the specified limits must adjust their positions by February 1, 2024. The CBN further mandates banks to calculate their daily and monthly NOP, along with the Foreign Currency Trading Position (FCT), using templates provided by the central bank.
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