• Saturday, March 02, 2024
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CBN crackdown: Banks must offload dollar reserves immediately

How reforms can boost productivity as money supply rises 77%

In a bid to bring stability to Nigeria’s volatile exchange rate, the Central Bank of Nigeria (CBN) has taken decisive action, directing Deposit Money Banks to offload their excess dollar reserves by February 1, 2024.

The announcement, revealed in a fresh circular released on Wednesday, also cautioned banks against stockpiling foreign currencies solely for profit, an act the CBN views as contributing to the fluctuations in exchange rates.

“We’ve observed that some banks are holding onto substantial foreign exchange reserves for extended periods to capitalize on exchange rate fluctuations,” shared officials familiar with the matter.

The newly issued circular introduces a series of guidelines aimed at mitigating the risks associated with such practices.

Titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” the circular highlights the mounting concerns surrounding banks’ accumulation of significant foreign currency reserves.

This latest directive follows closely on the heels of another circular issued just 48 hours prior, which cautioned banks and FX dealers against reporting inaccurate exchange rates, among other infractions.

Furthermore, the move comes amidst a recent adjustment in the methodology used to calculate Nigeria’s official exchange rate by the FMDQ Exchange, leading to a significant shift from approximately N900/dollar to N1,480/dollar.

Meanwhile, the parallel market saw the naira closing at 1,450/dollar on Tuesday.

The adjustment aims to align the official and parallel market rates, a move commended by stakeholders alike.

However, they have urged the CBN to address FX backlogs, estimated to exceed $5 billion, and ensure adequate funding of FX demands at the official market to prevent a resurgence of disparities between the official and parallel rates.

As part of efforts to meet FX demands at the official window, the CBN, in its latest circular, accused banks of holding surplus foreign exchange positions, prompting a directive to divest these positions by February 1, 2024 (today).

The circular, dated January 31, 2024, signed by Hassan Mahmud, Director of Trade and Exchange at the CBN, and Rita Sike, representative of the Director of Banking Supervision, highlighted concerns about banks’ growing foreign currency exposures, particularly through their Net Open Position (NOP).

To address these concerns, the CBN outlined prudential requirements for banks to adhere to, with a primary focus on managing the Net Open Position (NOP).

The NOP assesses the gap between a bank’s foreign currency assets and liabilities.

The circular stipulates that the NOP should not exceed 20 percent short or 0 percent long of the bank’s shareholders’ funds.

Moreover, banks exceeding these limits are mandated to realign their positions to comply with the new regulations by February 1, 2024.

Additionally, banks must compute their daily and monthly NOP and Foreign Currency Trading Position (FCT) using templates provided by the CBN.

Furthermore, banks are instructed to maintain adequate reserves of high-quality liquid foreign assets and implement robust treasury and risk management systems to oversee foreign exchange exposures and ensure accurate reporting.

Banks are urged to promptly bring all exposures within the set limits and ensure that all returns submitted to the CBN accurately reflect their balance sheets.

Finally, the apex bank cautioned that failure to comply with the NOP limit would result in immediate sanctions and suspension from the foreign exchange market.