CBN reminds banks of being prudent with FX revaluation gains

The Central Bank of Nigeria on Thursday issued a letter addressed to all banks regarding the impact of recent foreign exchange (FX) policy reform.

In the letter, the banking and finance sector regulator reminded Nigerian lenders of the need to be prudent with foreign exchange (FX) revaluation gains.

FX 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.

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In other words, when the exchange rate of a foreign currency appreciates relative to the local currency, the value of assets or liabilities denominated in that foreign currency increases when expressed in terms of 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.

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Banks and financial institutions often need to manage and account for these FX revaluation gains or losses as part of their risk management and financial reporting processes.

The letter, dated March 14, 2024, underscores the necessity for banks to exercise utmost prudence and outlines specific measures to be taken in light of these reforms.

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.

Importantly, the letter emphasizes that banks are prohibited from utilizing FX revaluation gains to pay dividends or cover operational expenses. Instead, these gains are to be reserved to cushion any adverse movements in the FX rate, thereby promoting financial stability within the banking sector.

Signed by Adetona S. Adedeji, acting director of the banking supervision department, the letter serves as a reminder to banks of their obligations under the recent FX 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.

This directive comes at a critical juncture as Nigeria continues to navigate evolving economic dynamics and seeks to bolster its financial regulatory framework. The Central Bank’s proactive approach underscores its determination to safeguard the stability of the country’s financial system amid ongoing challenges.

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.