January 31, (THEWILL) – The Central Bank of Nigeria (CBN) has issued a new directive to banks in the management of their foreign currency exposures which the apex bank said had created operational challenges in the system.
In a letter to all banks dated January 31, 2024, and co-signed by the director, trade and exchange, Dr Hassan Mahmud, and Mrs Rita Ijeoma Sike for director, banking supervision, the CBN said it had noted with concern the growth in foreign exposures of banks through their Net Open Position (NOP).
A net open position in one currency is the net outstanding balance of all assets, liabilities and off balance sheet items in that currency.
The CBN said this anomaly has created an incentive for banks to hold excess long foreign currency positions which exposes banks to foreign exchange and other risks.
To ensure that these risks are well managed and avoid losses that could pose material systemic challenges, the CBN has issued a list of prudential requirements for banks’ compliance with immediate effect.
Among these is that the NOP of the overall currency assets and liabilities taking into cognizance both those on and both those on and off balance sheet positions off balance sheet should not exceed 20% short of 0% long of shareholders’ funds unimpaired by losses using the Gross Aggregate Method.
The CBN directs all banks 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.
“Please, note that non-compliance with the NOP limit will result in immediate sanction and/or suspension from participation in the foreign exchange market,” the apex bank warned.
Banks are also required to have an adequate stock of high-quality liquid foreign assets, i.e. cash and government securities in each significant currency to cover their maturing foreign currency obligations.
In addition, banks should have in place a foreign exchange contingency funding arrangement with other financial institutions.
“Banks should borrow and lend in the same currency (natural hedging) to avoid currency mismatch associated with foreign currency risk.
“The basis of the interest rate for borrowing should be the same as that of lending i.e. there should be no mismatch in floating and fixed interest rates, to mitigate basis risk associated with foreign borrowing interest rate risk.
“With respect to Eurobonds, any clause of early redemption should be at the instance of the issuer and approval obtained from the CBN in this regard, even if the bond does not qualify as tier 2 capital. All banks are required to adopt adequate treasury and risk management systems,” the circular read in part.
The action may not be unconnected with recent developments in the forex market regarding the CBN’s efforts to clear the backlog of funds owed the foreign airlines and other industry stakeholders.
While the CBN said it had cleared all arrears of forex obligations, the foreign airlines countered by notifying the apex bank that about $700 million was still outstanding with the banks.
About the Author
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.
