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The Central Bank of Nigeria (CBN) has issued a directive to deposit money banks (DMBs), instructing them to refrain from using gains generated from the revaluation of the naira to distribute dividends or fund their operational expenses.

This directive comes in the wake of a review of the recent change in the foreign exchange (FX) regime, revealing that banks have the potential to benefit significantly from the policy due to its capacity to substantially increase the naira’s value in relation to banks’ foreign currency (FCY) assets and liabilities.

The CBN conveyed this directive through a letter titled “Impact of Recent FX Policy Reforms: Prudential Guidance to the Banking Sector,” dated September 11, 2023, and signed by Haruna Mustafa, the CBN’s Director of the Banking Supervision Department….CONTINUE READING

The revaluation of a currency occurs when its value is augmented relative to another currency, particularly in a fixed exchange rate system.

On June 14, the CBN officially unified the multiple FX rate systems, consolidating all FX windows into the Investors’ and Exporters’ (I&E) window. This policy resulted in a approximately 63 percent depreciation of the local currency, leading to substantial FX market volatility.

In its letter, the financial regulator pointed out that the shift from multiple exchange rates to a single rate could lead to various levels of FX revaluation gains, although it also acknowledged the possibility of losses within the industry.

The CBN outlined guidelines for banks to manage the consequences of the FX reform, stating that they must exercise prudence by setting aside FCY revaluation gains as a counter-cyclical buffer to mitigate potential adverse movements in the FX rate. Consequently, these gains should not be utilized for dividend payments or covering operating expenses.

Moreover, the CBN indicated that banks that unintentionally breach the Single Obligor Limit (SOL) due to the FX policy will be granted forbearance upon application to the CBN, but solely for existing facilities as of the policy’s effective date. Likewise, banks that exceed the Net Open Position (NOP) prudential limits due to FX revaluation will receive forbearance upon application to the CBN. Existing prudential regulations concerning capital adequacy, dividend distribution, and FCY borrowing limits will continue to apply.