The Central Bank of Nigeria (CBN) issued a new circular on 31st January 2024,
expressing concern about excessive foreign currency risk in Nigerian banks.
The circular introduced a set of guidelines to reduce these
risks associated with banks holding large amounts of foreign currency.
The circular states, “The CBN has noted with concern the
growth in foreign currency exposures of banks through their Net Open Position
(NOP).
This has created an incentive for banks to hold excess long
foreign currency positions, which exposes banks to foreign exchange and other
risks. Therefore, to ensure that these risks are well managed and avoid losses
that could pose material systemic challenges, the CBN issues the following
prudential requirements:
·
The
Net Open Position (NOP) limit of the overall foreign currency assets and
liabilities taking into cognizance both those on and off-balance Sheet should
not exceed 20% short or 0% long of shareholders’ funds unimpaired by losses
using the Gross Aggregate Method.
·
Banks
whose current NOP exceed 20% short and 0% long of their shareholders’ funds
unimpaired by losses are required to bring them to prudential limit by February
1, 2024.
·
Banks
are required to compute their daily and monthly NOP and Foreign currency
trading position (FCTP) using the attached templates.
·
Banks
are also required to have adequate stock of high-quality liquid foreign assets,
i.e. cash and government securities in each significant currency to cover their
maturing foreign currency obligations. In addition, banks should have in place
a foreign exchange contingency funding arrangement with other financial
institutions.”
The CBN's new prudential requirements on foreign currency
exposure may have a mixed impact on the Nigerian market.
These measures aim to enhance financial stability and reduce
foreign exchange volatility by limiting speculative trading by banks.
This could serve to achieve a more stable exchange rate.
However, it may also trigger sell-offs in banking stocks, potentially impacting
broader market sentiment.
