The Central Bank of Nigeria (CBN) has instructed deposit money banks (DMBs) to cease using gains derived from the revaluation of the naira for dividend payments or operational financing,TheCable reports.

The CBN’s decision follows a review of the recent changes in the foreign exchange (FX) regime, which revealed that banks could benefit significantly from this policy due to its potential to substantially increase the naira value of banks’ foreign currency (FCY) assets and liabilities.

This directive from the apex bank was conveyed in a letter titled “Impact of Recent FX Policy Reforms: Prudential Guidance to the Banking Sector,” dated September 11, 2023. The letter was signed by Haruna Mustafa, the director of the banking supervision department at the CBN.

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Currency revaluation occurs when the value of a currency is raised relative to another currency in a fixed exchange rate system.

On June 14, the CBN officially consolidated the multiple FX rate systems, merging all FX windows into the investors’ and exporters’ (I&E) window. This policy resulted in a depreciation of the local currency by approximately 63 percent, leading to significant volatility in the FX market.

In the letter, the financial regulator explained that the shift from the multiple exchange rate system to a single rate could result in varying levels of FX revaluation gains. Nevertheless, the policy could also result in losses across the banking industry.

The CBN’s statement read, “Additional implications of the FX policy reforms may include breaches of single obligor and net open position limits, possible increase in asset quality risks, and pressure on industry capital adequacy.”

The CBN also provided guidelines on how banks can manage the impact of FX reform.

Regarding the treatment of FX revaluation gains, the CBN 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 dividends or meet operating expenses.”

In cases where banks inadvertently breach the Single Obligor Limit (SOL) due to the FX policy, the CBN will provide forbearance upon application. This forbearance will apply only to existing facilities as of the effective date of the policy, exempting banks from regulatory deductions on the excess above the SOL limit in their Capital Adequacy Ratio (CAR) computation.

Similarly, banks that exceed the Net Open Position (NOP) prudential limits due to FX revaluation will receive forbearance for the breach upon application to the CBN.

The CBN emphasized that existing prudential regulations on capital adequacy, dividend payments, and FCY borrowing limits will continue to be applicable.

The CBN also directed banks to implement these measures immediately.


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