CBN bars banks from utilizing Fx gains to cover operational expenses, pay dividends
By Sodiq Adelakun
The Central Bank of Nigeria issued a letter to all banks on Thursday regarding the impact of the recent foreign exchange (FX) policy reform.
The letter reminded Nigerian lenders to be cautious when dealing with foreign exchange (FX) revaluation gains, as instructed by the banking and finance sector regulator.
FX revaluation gains pertain to the rise in the worth of foreign currency-denominated assets or liabilities resulting from fluctuations in the exchange rate.
In the communication, the Central Bank emphasised the importance of prudence in handling such gains for financial institutions across the country.
In other words, when the exchange rate of a foreign currency appreciates relative to the local currency, the value of assets or liabilities denominated in that foreign currency increases when expressed in terms of the local currency.
These gains are typically recognised on the balance sheet of a company or financial institution and can arise from various sources, including investments in foreign securities, foreign currency loans, or trade receivables/payables denominated in foreign currencies.
Banks and financial institutions often need to manage and account for these FX revaluation gains or losses as part of their risk management and financial reporting processes.
The letter, dated March 14, 2024, underscores the necessity for banks to exercise utmost prudence and outlines specific measures to be taken in light of these reforms.
Referencing a previous communication dated September 11, 2023, the Central Bank reiterated its directive that banks must set aside foreign currency (FCY) revaluation gains as a counter-cyclical buffer. This precautionary measure aims to mitigate the potential adverse effects of fluctuations in the FX rate.
Importantly, the letter emphasises that banks are prohibited from utilising FX revaluation gains to pay dividends or cover operational expenses. Instead, these gains are to be reserved to cushion any adverse movements in the FX rate, thereby promoting financial stability within the banking sector.
The acting director of the banking supervision department, Adetona S. Adedeji, issued the letter reminding banks of their obligations under the recent FX policy reforms. The letter emphasises the importance of adhering to prudential guidance and highlights the Central Bank’s commitment to maintaining a strong banking sector in Nigeria.
This directive is particularly significant as Nigeria faces evolving economic dynamics and aims to strengthen its financial regulatory framework. The Central Bank’s proactive approach demonstrates its determination to protect the stability of the country’s financial system amidst ongoing challenges
