The Central Bank of Nigeria (CBN) has taken a decisive step to address concerns over excessive foreign currency speculation and hoarding by Nigerian banks.
In a recent circular titled: “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” the CBN introduced a set of guidelines to mitigate the risks associated with these practices.
The central bank expressed its worry about the increasing trend of banks holding substantial foreign currency positions, creating an incentive for excessive long positions that expose banks to foreign exchange and other risks.
The primary concern is that banks may be engaging in speculation, holding foreign currencies with the expectation of profiting from fluctuations in exchange rates.
To counteract these issues, the CBN issued prudential requirements, focusing on the management of Net Open Position (NOP), which measures the difference between a bank’s foreign currency assets and liabilities. The circular mandates that NOP must not exceed 20 per cent short or 0 per cent long of the bank’s shareholders’ funds. Banks with current NOPs exceeding these limits must adjust their positions to comply with the new regulations by February 1, 2024.
Additionally, the circular outlines the need for banks to maintain adequate stocks of high-quality liquid foreign assets to cover maturing foreign currency obligations. Banks are also advised to have foreign exchange contingency funding arrangements in place with other financial institutions.
To further address risks, the CBN recommended natural hedging by borrowing and lending in the same currency to avoid currency mismatch risks.
The circular emphasizes matching the basis of the interest rate for borrowing with that of lending to mitigate basis risk associated with foreign borrowing interest rate risk.
The CBN said there will be immediate sanctions and possible suspension from participating in the foreign exchange market for banks that do not adhere to these guidelines.
