March 14, (THEWILL)- The Central Bank of Nigeria (CBN) has issued a directive to all banks on the need to strictly comply with foreign exchange (forex) policy reforms especially as it relates to prudent management of the recent forex gains windfall.
In a letter signed by the Acting Director, Banking Supervision, Dr Adetone Adedeji, on Thursday, addressed to banking institutions, the CBN stressed the need for prudent financial management and risk mitigation.
In the letter, the CBN reminded Nigerian lenders of the need to be prudent with forex revaluation gains harvested by the industry players last year..
The forex revaluation gains refer to the increase in the value of foreign currency-denominated assets or liabilities due to changes in the exchange rate between the foreign currency and the local currency.
These gains are typically recognized on the balance sheet of a company or financial institution and can arise from various sources, including investments in foreign securities, foreign currency loans, or trade receivables/payables denominated in foreign currencies.
The CBN letter emphasised that banks are prohibited from utilizing forex revaluation gains to pay dividends or cover operational expenses. Instead, these gains are to be reserved to cushion any adverse movements in the forex rate, thereby promoting financial stability within the banking sector.
The letter serves as a reminder to banks of their obligations under the recent forex policy reforms. It urges banks to adhere to the prudential guidance provided and underscores the Central Bank’s commitment to maintaining a resilient banking sector in Nigeria.
Analysts believe that as banks adjust their strategies in response to these guidelines, stakeholders will be closely monitoring their compliance with the Central Bank’s directives and the overall impact on the banking landscape.
Referencing a previous communication dated September 11, 2023, the Central Bank reiterated its directive that banks must set aside foreign currency (FCY) revaluation gains as a counter-cyclical buffer. This precautionary measure aims to mitigate the potential adverse effects of fluctuations in the FX rate.
The Central Bank’s proactive approach underscores its determination to safeguard the stability of the country’s financial system amid ongoing challenges.
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.
