Nigeria: CBN Takes Measures to Halt Forex Speculation and Hoarding by Banks

In an effort to curb foreign exchange (forex) speculation and enhance risk mitigation, the Central Bank of Nigeria (CBN) has issued a new circular outlining reporting requirements on foreign currency exposure for all banks.

Expressing concerns about the rising trend of banks holding substantial foreign currency positions, the CBN’s circular, titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” emphasizes the need for prudential measures to manage associated risks effectively.

The circular specifies that the Net Open Position (NOP) limit for overall foreign currency assets and liabilities, considering both on and off-balance sheet items, should not exceed 20 percent short or 0 percent long of shareholders’ funds unimpaired by losses, calculated using the gross aggregate method.

Banks whose current NOP exceeds the stipulated limits (20 percent short and 0 percent long) in relation to their shareholders’ funds unimpaired by losses are required to bring their positions within the prudential limit by February 1, 2024.

To ensure transparency and accuracy, banks are mandated to compute their daily and monthly NOP and Foreign Currency Trading Position (FCTP) using templates provided by the CBN. Non-compliance with these limits will result in immediate sanctions and/or suspension from participating in the foreign exchange market, as warned by the apex bank.

Furthermore, banks are directed to maintain a sufficient stock of high-quality liquid foreign assets, including cash and government securities in significant currencies, to cover maturing foreign currency obligations. They are also required to establish a foreign exchange contingency funding arrangement with other financial institutions.

To mitigate currency mismatch risks associated with foreign currency exposure, banks are advised to borrow and lend in the same currency, adopting a strategy known as natural hedging. Additionally, the circular emphasizes the importance of aligning interest rates for borrowing and lending and seeks CBN approval for any early redemption clause in Eurobonds.

The CBN underscores the adoption of adequate treasury and risk management systems by all banks to ensure compliance with the outlined measures.