The Central Bank of Nigeria (CBN) has issued a directive to banks, instructing them to cease the uti
The Central Bank of Nigeria (CBN) has instructed Deposit Money Banks (DMBs) to refrain from using foreign exchange revaluation gains for dividend payouts and operational costs.
This new directive is communicated in a letter dated Monday and signed by Haruna Mustafa, the Director of Banking Division Department at the CBN.
Foreign exchange revaluation gains denote the increase in the worth of a bank's assets and liabilities denominated in foreign currency following fluctuations in the exchange rate between the foreign currency and the local currency.
The CBN explained that it has evaluated the implications of the recent change in the FX rate regime on the banking sector and recognized its potential to significantly impact the Naira values of banks' foreign currency assets and liabilities.
To mitigate this risk, the CBN has mandated DMBs to reserve their foreign currency revaluation gains as a counter-cyclical buffer. This implies that these gains cannot be used by the banks for dividend distributions or covering operating expenses.
"The Central Bank of Nigeria (CBN) has issued guidelines regarding the treatment of FX Revaluation Gains. Banks are mandated to exercise the utmost caution and allocate foreign currency (FCY) revaluation gains as a counter-cyclical buffer to safeguard against potential adverse movements in the FX rate. Consequently, these gains cannot be utilized for dividend payouts or covering operational expenses," stated the CBN.
Furthermore, the CBN has indicated that it will provide leniency to Deposit Money Banks (DMBs) that inadvertently breach the Single Obligor Limit (SOL) or Net Open Position (NOP) limits due to FX revaluation.
The Single Obligor Limit (SOL) represents the maximum amount of credit that a bank can extend to a single borrower, while the Net Open Position (NOP) signifies the maximum foreign currency exposure a bank can have.
Regarding SOL breaches, the CBN clarified, "Banks that unintentionally exceed the Single Obligor Limit (SOL) due to FX policy changes will be granted forbearance upon application to the CBN. This forbearance will only apply to existing facilities as of the effective date of this policy. Such banks will be exempt from regulatory deductions related to excess amounts beyond the SOL limit in their Capital Adequacy Ratio (CAR) computation."
In the case of exceeding NOP prudential limits due to FX revaluation, the CBN specified, "Banks will receive forbearance for the breach upon application."
Additionally, the CBN emphasized that the existing prudential regulations governing capital adequacy, dividend payments, and FCY borrowing limits will remain in effect. These regulations will also exempt banks from regulatory deductions on the excess amounts beyond the SOL limit in their CAR computation.
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