In a bid to stabilize the nation’s volatile exchange rate, the Central Bank of Nigeria (CBN) has directed Deposit Money Banks (DMBs) to sell their excess dollar stock latest February 1, 2024. This move is part of the CBN’s efforts to address concerns over the growing trend of banks holding large foreign currency positions.
The new circular, titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” was released on Wednesday, and it warned lenders against hoarding excess foreign currencies for profit. The apex bank expressed concerns over the incentive for banks to hold excess long foreign currency positions, exposing them to foreign exchange and other risks.
The circular, dated January 31, 2024, was signed by the Director, Trade and Exchange, CBN, Dr. Hassan Mahmud, and a representative of the Director, Banking Supervision, CBN, Mrs. Rita Sike. It accused banks of holding excess foreign exchange positions and gave them until February 1, 2024, to sell off their excess dollar positions.
The CBN also issued prudential requirements that banks must adhere to, with a key focus on the management of the Net Open Position (NOP), which measures the difference between a bank’s foreign currency assets and its foreign currency liabilities. The circular mandates that the NOP must not exceed 20 per cent short or 0 per cent long of the bank’s shareholders’ funds.
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.
This directive comes shortly after the CBN released a circular warning banks and FX dealers against reporting false exchange rates. The move reflects the CBN’s commitment to maintaining stability in the foreign exchange market and ensuring that banks operate within prudential limits to mitigate risks associated with foreign currency exposures.
The CBN’s latest directive is aimed at curbing excessive foreign currency speculation and hoarding while promoting a more stable and transparent foreign exchange market in Nigeria. It remains to be seen how banks will respond to this directive and its impact on the nation’s foreign exchange market in the coming days.
