The Central Bank of Nigeria (CBN) has ordered Deposit Money Banks (DMBs) to stop using foreign exchange revaluation gains for dividends and operational expenses.
The apex bank stated in a letter dated September 11, 2023, and signed by CBN Director, Banking Division Department, Haruna Mustafa, that the new instruction is anticipated to be implemented immediately.
Forex revaluation gains arise when the exchange rate between the foreign currency and the local currency changes, resulting in an increase in the value of a bank’s assets and liabilities denominated in foreign currency.
The CBN, according to the letter, has analyzed the effects of the recent FX rate regime change on the banking system and determined that it has the potential to significantly damage the naira values of banks’ foreign currency (FCY) assets and liabilities.
“The Bank thus approved the following prudential guidance and directives for immediate implementation by banks,” the letter read.
“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 dividends or meet operating expenses.
“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 CBN. The forbearance shall apply only to existing facilities as of 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.
“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.
“Existing prudential regulations on capital adequacy, dividend payments, and FCY borrowing limits shall continue to apply. shall be exempted from the regulatory deductions on the excess above the SOL limit in their CAR computation.
“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.
“Existing prudential regulations on capital adequacy, dividend payments, and FCY borrowing limits shall continue to apply.”
