In a bid to stabilize the nation’s exchange rate, the Central Bank of Nigeria (CBN) has directed Deposit Money Banks (DMBs) to divest their surplus dollar holdings by February 1, 2024.
The move comes as part of the CBN’s efforts to curb the hoarding of foreign currencies by commercial banks for speculative gains.
A circular released by the CBN on Wednesday outlined the new guidelines aimed at mitigating the risks associated with banks holding large foreign currency positions. The central bank expressed concerns over the growing trend of banks maintaining significant foreign exchange exposures, which it believes could potentially destabilize the financial system.
Under the new directive titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” the CBN introduced prudential requirements to regulate banks’ Net Open Position (NOP). The NOP measures the disparity between a bank’s foreign currency assets and liabilities and serves as a key indicator of its exposure to foreign exchange risks.
According to the circular, banks are mandated to ensure that their NOP does not exceed 20 percent short or 0 percent long of their shareholders’ funds. Banks with current NOPs exceeding these limits are required to adjust their positions to comply with the new regulations by February 1, 2024.
Furthermore, banks are instructed to maintain adequate stocks of high-quality liquid foreign assets and adopt robust treasury and risk management systems to oversee their foreign exchange exposures accurately.
Non-compliance with the NOP limit will result in immediate sanctions and suspension from the foreign exchange market, warned the CBN.
The directive comes amid the adjustment of the nation’s official exchange rate methodology, which aims to unify the official and parallel market rates. Economists and stakeholders have lauded the move but urged the CBN to address FX backlogs estimated at over $5 billion to prevent a further misalignment between official and parallel market rates.
In response to the circular, banking executives anticipate that the divestment of excess dollar liquidity will inject liquidity into the market and help stabilize the exchange rate, thereby attracting foreign investors.
Overall, the CBN’s directive underscores its commitment to maintaining stability in the foreign exchange market and ensuring the prudent management of foreign currency exposures by banks.
