CBN DIRECTS DEPOSIT MONEY BANKS TO STOP SPENDING FOREX REVALUATION GAINS

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The Deposit Money Banks (DMBs) have been ordered by the Central Bank of Nigeria (CBN) to stop using the proceeds of their foreign exchange revaluation for dividends and operating costs.

The apex bank stated that the new instruction is anticipated to be put into effect right away in a letter dated September 11, 2023, and signed by the CBN Director, Banking Division Department, Haruna Mustafa.

When the exchange rate between the foreign currency and the local currency changes, the value of a bank’s assets and liabilities denominated in foreign currency increases. This is known as a forex revaluation gain.

The letter claims that the CBN has evaluated the effects of the recent change in the FX rate regime on the banking sector and determined that it may have a significant impact on the naira values of the foreign currency (FCY) assets and liabilities of banks.

“The Bank thus approved the following prudential guidance and directives for immediate implementation by banks,” the letter read.

“Treatment of FX Revaluation Gains: 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 dividends or meet operating expenses.

“Single Obligor Limit (SOL): Banks that inadvertently breach the Single Obligor Limit (SOL) due to the FX policy will be granted forbearance upon application to the CBN. The forbearance shall apply only to existing facilities as of 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.

“Net Open Position (NOP) Limit: Banks that exceed the NOP prudential limits due to the FX revaluation shall be granted forbearance for the breach upon application.

“Existing prudential regulations on capital adequacy, dividend payments, and FCY borrowing limits shall continue to apply. shall be exempted from the regulatory deductions on the excess above the SOL limit in their CAR computation.

“Net Open Position (NOP) Limit: Banks that exceed the NOP prudential limits due to the FX revaluation shall be granted forbearance for the breach upon application.

“Existing prudential regulations on capital adequacy, dividend payments, and FCY borrowing limits shall continue to apply.”