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CBN directs banks to limit exposure to foreign currency

The directives are aimed at stopping the naira —now exchanging at N1520 to a dollar — from further plunging into record lows.

• January 31, 2024
Central Bank of Nigeria(CBN)
Central Bank of Nigeria(CBN) (Credit: Ahmed Oluwasanjo)

The Central Bank of Nigeria, CBN, has issued a new set of directives that would discourage banks from tampering with the naira’s value through hoarding and speculation of the foreign currency, a circular seen by Peoples Gazette showed. 

The directives are aimed at stopping the naira —now exchanging at N1520 to a dollar — from further plunging into record lows.

In order to guarantee that foreign currency is available to citizens who require it, the CBN intends for all banks to hold only a maximum of 20 per cent of foreign exchange in short-term investments and 0 per cent in long-term investments.

“The Net Open Position (NOP) limit of the overall foreign currency assets and liabilities taking into cognizance both those on and off-balance sheets should not exceed 20% short or 0 % long-forgotten shareholders funds unimpaired by losses using the Gross Aggregate method,” reads the circular signed by Hassan Mahmud, CBN trade and exchange director.

In the circular released on January 31 and co-signed by Rita Ijeoma Sike, director for banking supervision, the apex bank expressed concern over “the growth in foreign currency exposures of banks through their Net Open Position (NOP).”

“This has created an incentive for banks to hold excess long foreign currency positions, which exposes banks to foreign exchange and other risks,” the circular noted.

The directive suggests that some commercial and investment banks are guilty of hoarding forex obtained at low rates from CBN from their customers in hopes of selling it at a higher price when the market prices fluctuate.

With the directive, banks can only keep 20 per cent of CBN-sourced forex in short-term investment and have also been mandated to use the comprehensive gross aggregate method to calculate the NOP, which would reveal their foreign currency exposure.

Banks with NOPs that exceed 20 per cent have been directed to adjust them to the prudential limit by Thursday, February 1, at the latest.

The apex bank specifically provided all banks in Nigeria with a specific template to calculate and input daily and monthly returns on Net Open Assets and Net Open Positions for majorly U.S. dollars, Great Britain Pounds, Euro and a box for other currencies.

“Banks are expected to bring all their exposures within the set limits immediately and ensure that all returns submitted to the CBN provide an accurate reflection of their balance sheets.”

The CBN further directed the banks “to borrow and lend in the same currency (natural hedging) to avoid currency mismatch associated with foreign risk.”

The apex bank said it would not hesitate to immediately sanction erring banks as they would be suspended from participating in the foreign exchange market.

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