CBN restricts banks’ use of forex revaluation gains for dividends, expenses
…Aims to strengthen financial stability
By Sodiq Adelakun
Commercial banks in Nigeria have been instructed by the Central Bank of Nigeria (CBN) to refrain from using their foreign exchange revaluation gains for dividends and operational expenses.
The directive, which was issued on September 11, 2023, aims to be implemented immediately.
Foreign exchange revaluation gains refer to the increase in the value of a bank’s assets and liabilities denominated in foreign currency due to changes in the exchange rate.
The CBN stated that it had assessed the impact of recent foreign exchange rate changes on the banking system and recognised the potential impact on the Naira values of banks’ foreign currency assets and liabilities.
The CBN emphasised that these revaluation gains should be used to strengthen capital reserves and enhance the banking sector’s ability to withstand economic shocks and volatility.
According to the letter, “The Bank thus approved the following prudential guidance and directives for immediate implementation by banks:
“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 utilise 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.”
Despite the negative effects of foreign exchange reforms on some businesses in the first quarter of 2023, Nigerian banks have remained largely profitable.
