The Central Bank of Nigeria (CBN) has sent a circular banning commercial banks from spending gains made from forex trading. This means that Banks should no longer use the extra money they make from forex revaluation to pay dividends or expenses. Instead, it should be saved for future purposes, should the Naira exchange rate goes down more. ‘This is called a counter-cyclical buffer.’
CBN made this policy upon discovery of how commercial banks recklessly spend gains they made from forex trading. The gains are usually recorded high when the Naira value falls in the forex market.
The policy also restricts commercial banks from loaning out more than the stipulated amount to it’s customers. Violating it henceforth, would attract penalty from the apex bank.
The policy reads:
The Bank thus approved the following prudential guidance and directives for immediate implementation by banks:
1. Treatment of FX Revaluation Gains: Banks are required to exercise utmost prudence and set aside the FCY revaluation gains as a counter-cyclical buffer to cushion any future adverse movements in the FX rate. In this regard, banks shall not utilize such FX revaluation gains to pay dividend or meet operating expenses.
2. Single Obligor Limit (SOL):Banks that inadvertently breach the Single Obligor
– Limit (SOL) due to the FX policy will be granted forbearance upon application to the CB. The forbearance shall apply only to existing facilities as at the effective date of this policy. Such banks shall be exempted from the regulatory deductions on the excess above the SOL limit in their CAR computation.
3. Net Open Position (NOP) Limit:Banks that exceed the NOP prudential limits due to the FX revaluation shall be granted forbearance for the breach upon application to the CBN.
4. Existing prudential regulations on capital adequacy, dividend payments and FCY borrowing limits shall continue to apply.