In an effort to counteract the steep decline of the Naira against the US dollar, the Central Bank of Nigeria (CBN) has taken decisive action against commercial banks, accusing them of hoarding foreign currency for profit amid the depreciation.
On Wednesday, the CBN issued new guidelines titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks.” This move aims to curb speculation and address concerns about banks holding excess foreign currency positions.
The Naira had experienced a rapid 42% decline against the US dollar over just two days, prompting the central bank to intervene with stringent measures to mitigate further depreciation.
The circular, signed by Directors of Trade and Banking Supervision, Hassan Mahmud and Rita Sike, expressed the CBN’s apprehension regarding the growing foreign currency exposures of banks through their Net Open Position (NOP).
“The Central Bank of Nigeria (CBN) has noted with concern the growth in foreign currency exposures of banks through their Net Open Position (NOP). This has incentivized banks to hold excess long foreign currency positions, which exposes banks to foreign exchange and other risks. Therefore, the CBN issues the following prudential requirements to ensure these risks are well managed and avoid losses that could pose material systemic challenges.”
“For example, a bank borrows or buys $ 1 million worth of forex but then holds half of it in its position instead of lending it or using it to finance purchases for its clients immediately.
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“What this means is that banks can profit from currency depreciation if they buy the forex low and sell high”, it stated.
Also, the CBN added that “banks with current NOPs exceeding these limits must 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 circular concluded.