In a significant move to stabilize Nigeria’s volatile exchange rate, the Central Bank of Nigeria (CBN) has issued a directive mandating Deposit Money Banks (DMBs) to promptly sell their surplus dollar reserves. The apex bank’s circular, released on Wednesday, warns against hoarding excess foreign currencies for profit.
The directive, titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” expresses the CBN’s concern over the increasing trend of banks holding substantial foreign currency positions. This action follows closely on the heels of another circular released just 48 hours earlier, where the CBN cautioned banks and foreign exchange (FX) dealers against reporting false exchange rates.
The circular, dated January 31, 2024, and signed by Dr. Hassan Mahmud, Director of Trade and Exchange at CBN, and Mrs. Rita Sike, a representative of the Director of Banking Supervision, highlighted the growing foreign currency exposures of banks through their Net Open Position (NOP). The NOP measures the difference between a bank’s foreign currency assets and liabilities, exposing banks to foreign exchange and other risks.
To address this concern, the CBN has imposed prudential requirements with a specific focus on managing the NOP. The circular mandates that the NOP must not exceed 20% short or 0% long concerning the bank’s shareholders’ funds. Calculation of the NOP must be done using the Gross Aggregate Method, providing a comprehensive view of the bank’s foreign currency exposure.
Banks with current NOPs exceeding these limits are required to adjust their positions to comply with the new regulations by February 1, 2024. Additionally, banks must calculate their daily and monthly NOP and Foreign Currency Trading Position (FCT) using specific templates provided by the CBN.
The consecutive actions taken by the CBN underscore a concerted effort to ensure transparency and stability in the foreign exchange market. As Nigeria faces economic challenges, these proactive measures aim to instill confidence in the financial system and maintain a balanced foreign exchange landscape.
Source: Channels TV
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