CBN directs commercial banks to stop spending Forex revaluation gains

NIGERIA, Sept. 12 – The Central Bank of Nigeria (CBN) issued a directive instructing commercial banks on Monday to refrain from utilizing their foreign exchange revaluation gains for dividends and operational expenditures.

The new directive was conveyed in a letter dated September 11, 2023, signed by the Director, Banking Division Department, Haruna Mustafa, and it is expected to be implemented immediately.

Forex revaluation gains refer to the increase in the value of a bank’s assets and liabilities denominated in foreign currency when there is a change in the exchange rate between the foreign currency and the local currency.

The CBN said it had assessed the consequences of the recent Forex rate regime change on the banking system and identified its potential to substantially impact the Naira values of banks’ foreign currency (FCY) assets and liabilities.

The Forex reforms negatively affected some businesses in the first quarter of 2023, but Nigerian banks were largely profitable.

According to the lender, Forex revaluation gains must serve as a counter-cyclical buffer to safeguard against potential adverse Forex rate fluctuations.

The CBN emphasized that banks should utilize these revaluation gains to reinforce their capital reserves, thus enhancing the banking sector’s capacity to endure volatility and economic shocks.

The letter reads in part, “The Bank thus approved the following prudential guidance and directives for immediate implementation by banks:

“Treatment of Forex 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 Forex rate. In this regard, banks shall not utilize such Forex 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 Forex 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 Forex 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 Forex 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.”