CBN Directs Banks to Stop Spending FX Revaluation Gains
The Central Bank of Nigeria, CBN, has issued a fresh directive instructing commercial banks on Monday to stop spending their foreign exchange (FX) revaluation gains for dividends and operational expenditures.
The new directive was conveyed in a letter dated September 11, 2023, signed by the Director of, Banking Division Department, Haruna Mustafa, and it is expected to be implemented immediately. A growing number of local deposit money banks with strong net FX positions saw large revaluation gains after the CBN switched to float managed regime in June after years of hard currency peg.
For commercial banks who prepare reports using international financial reporting standards (IFRS), FX revaluation gain represents an increase in the value of a bank’s assets and liabilities denominated in foreign currency when there is a change in the exchange rate between the foreign currency and the local currency.
In reaction to the trend in the banking sector, the CBN said it had assessed the consequences of the recent FX rate regime change on the banking system and identified its potential to substantially impact the Naira values of banks’ foreign currency (FCY) assets and liabilities.
The FX reforms negatively affected some businesses in the first quarter of 2023, but Nigerian banks were largely profitable. According to the lender, FX revaluation gains must serve as a counter-cyclical buffer to safeguard against potential adverse FX rate fluctuations.
The CBN emphasized that banks should utilize these revaluation gains to reinforce their capital reserves, thus enhancing the banking sector’s capacity to endure volatility and economic shocks.
The letter reads in part, “The Bank thus approved the following prudential guidance and directives for immediate implementation by banks:
“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.” #CBN Directs Banks to Stop Spending FX Revaluation Gains
