The Central Bank of Nigeria (CBN) on Monday warned banks to stop spending foreign exchange (FX) revaluation gains in order not to undermine its current efforts aimed at stabilizing the Naira in the FX markets
The apex bank, in a circular dated September 11, and signed by its Director, Banking Supervision, Haruna Mustafa, hinged the purpose of the approved the following prudential guidance and directives for immediate implementation on the need to bolster the banking sector amid volatile FX rates.
Specifically, the circular partly stated: “Banks are required to exercise utmost prudence and set aside the FCY revaluation gains as a counter-cyclical buffer to cushion any future adverse movements in the FX rate. In this regard, banks shall not utilize such FX revaluation gains to pay dividend or meet operating expenses.
Banks that inadvertently breach the Single Obligor – Limit (SOL) due to the FX policy will be granted forbearance upon application to the CB. The forbearance shall apply only to existing facilities as at the effective date of this policy. Such banks shall be exempted from the regulatory deductions on the excess above the SOL limit in their CAR computation.
Banks that exceed the NOP prudential limits due to the FX revaluation shall be granted forbearance for the breach upon application to the CBN.
“Existing prudential regulations on capital adequacy, dividend payments and FCY borrowing limits shall continue to apply”, the apex bank added.
It also distributed a letter to all banks, detailing directives that must be immediately implemented, noting that the FX gains will serve as counter-cyclical buffers and cannot be utilized for dividend payouts or operating expenses.
Forex revaluation gains refer to the increase in the value of a bank’s assets and liabilities denominated in foreign currency, especially when there is a change in the exchange rate between the foreign currency and the local currency.
In recent weeks, most of the banks reported huge surges in their half-year profits, mainly due to the depreciation of the Naira following the unification of exchange rate windows.
In accounting, the depreciation notionally increased the balance sheets of the banks in Naira based on their FX holdings.
The CBN was concerned that banks could be tempted to spend the profits, thereby making them vulnerable if the exchange rate strengthens.
