CBN moves to curb FX circulation, naira hoarding

Alex Omenye
Alex Omenye

The Central Bank of Nigeria has issued a circular aimed at addressing suspected cases of excessive foreign currency speculation and hoarding by Nigerian banks.

The circular, titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” emphasizes the CBN’s concerns over the growing trend of banks holding large foreign currency positions.

To tackle these concerns, the CBN has introduced prudential requirements focusing on the management of the Net Open Position.

“The NOP measures the difference between a bank’s foreign currency assets and its foreign currency liabilities. The circular mandates that the NOP must not exceed 20% short or 0% long of the bank’s shareholders’ funds. Banks exceeding these limits must adjust their positions by February 1, 2024.”

Furthermore, the CBN requires banks to calculate their daily and monthly NOP and Foreign Currency Trading Position using specific templates provided.

The circular also outlines that banks should maintain sufficient stocks of high-quality liquid foreign assets in each significant currency.

“Banks are required to have adequate stock of high-quality liquid foreign assets in each significant currency to cover their maturing foreign currency obligations. Additionally, banks should have a foreign exchange contingency funding arrangement with other financial institutions.”

In addition to these requirements, the circular encourages practicing natural hedging by borrowing and lending in the same currency to avoid currency mismatch risks.

“Banks should borrow and lend in the same currency (natural hedging) to avoid currency mismatch associated with foreign currency risk. The basis of the interest rate for borrowing should be the same as that of lending to mitigate basis risk associated with foreign borrowing interest rate risk.” the circular said.

Regarding Eurobonds, the circular states, “Any clause of early redemption should be at the instance of the issuer, and approval obtained from the CBN, even if the bond does not qualify as tier 2 capital, reporting on a timely basis.”

The CBN emphasizes the importance of compliance, warning that non-adherence will result in immediate sanctions and possible suspension from the foreign exchange market.

This move by the CBN signifies a strong stance against speculative activities in the banking sector, aiming to safeguard the financial system and promote economic stability. If successful, banks are expected to liquidate their net long positions, effectively selling forex into the market, potentially providing immediate relief and triggering currency appreciation.

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