The Central Bank of Nigeria (CBN) has issued an order to Deposit Money Banks, instructing them to sell their excess dollar holdings by February 1, 2024. The directive aims to stabilize the nation’s volatile exchange rate and prevent banks from hoarding foreign currencies for profit.
In a circular titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” the CBN expressed concerns about the increasing trend of banks holding substantial foreign currency positions. The circular introduces guidelines to mitigate the risks associated with such practices.
The CBN emphasized that some banks maintain long-term foreign exchange positions to capitalize on the volatile movements in exchange rates. The new guidelines set prudential requirements for banks, focusing on managing the Net Open Position (NOP), which measures the difference between a bank’s foreign currency assets and liabilities.
Banks are required to ensure that their NOP does not exceed 20% short or 0% long of their shareholders’ funds. The calculation must use the Gross Aggregate Method to provide a comprehensive view of the bank’s foreign currency exposure. Banks with current NOPs exceeding these limits must adjust their positions to comply with the new regulations by February 1, 2024.
Additionally, banks must calculate their daily and monthly NOP and Foreign Currency Trading Position (FCT) using specific templates provided by the CBN. The circular also mandates banks to maintain sufficient stocks of high-quality liquid foreign assets and adopt adequate treasury and risk management systems for oversight of foreign exchange exposures.
Failure to comply with the NOP limit may result in immediate sanctions and suspension from the foreign exchange market, according to the CBN. This move is part of broader efforts to unify official and parallel market exchange rates.
Meanwhile, stakeholders have urged the CBN to clear foreign exchange backlogs, estimated at over $5 billion, to prevent a significant gap between official and parallel market rates. The directive from CBN Governor Olayemi Cardoso follows recent adjustments to the calculation methodology for the nation’s official exchange rate, contributing to increased stability.
In response to the naira’s fall and economic concerns, the Senate Committee on Banking, Insurance, and Other Financial Institutions has summoned CBN Governor Olayemi Cardoso to appear before the committee on Tuesday next week for a briefing on the state of the economy. The naira has experienced its worst week on the official market, prompting increased scrutiny and regulatory measures.
