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CBN directs banks to release Dollar reserves, warns Forex dealers against inaccurate exchange rate reporting

US Dollar Bills and Nigerian Banknotes

*The Central Bank of Nigeria has directed Deposit Money Banks to maintain adequate reserves of high-quality liquid foreign assets and implement robust treasury and risk management systems to oversee Foreign Exchange exposures and ensure accurate reporting

Gbenga Kayode | ConsumerConnect

In a move to ensure stability in the Nigerian Foreign Exchange (Forex) market, the Central Bank of Nigeria (CBN) has directed the country’s Deposit Money Banks (DMBs) to offload their excess Dollar reserves by February 1, 2024.

The CBN, which issued the directive via a fresh circular titled, “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks”, released Wednesday, January 31, 2024, cautioned the commercial banks against stockpiling foreign currencies solely for profit.

The circular, signed by Hassan Mahmud, Director of Trade and Exchange at the CBN, and Rita Sike, representative of the Director of Banking Supervision, also highlighted concerns about banks’ growing foreign currency exposures, particularly through their Net Open Position (NOP).

The Bankers’ Bank said such an act might have had contributed to the fluctuations in exchange rates in the Nigerian economy.

CBN’s concerns about NOP operations

ConsumerConnect reports NOP assesses the gap between a bank’s foreign currency assets and liabilities.

Therefore, in an effort at addressing identified concerns, the CBN in the latest circular, outlined prudential requirements for banks to adhere to, with a primary focus on managing the Net Open Position (NOP).

The circular stipulates that the NOP should not exceed 20 percent short or 0 percent long of the bank’s shareholders’ funds.

The officials familiar with the matter reportedly said:  “We’ve observed that some banks are holding onto substantial foreign exchange reserves for extended periods to capitalise on exchange rate fluctuations.”

The newly issued circular introduces a series of guidelines aimed at mitigating the risks associated with such practices.

The circular highlights the mounting concerns surrounding banks’ accumulation of significant foreign currency reserves.

It is also that the latest directive was sequel to an earlier circular issued just 48 hours prior.

Regulator’s warning to Forex dealers on inaccurate exchange rates

The CBN has warned the DMBs and Forex dealers against reporting inaccurate exchange rates, among other alleged infractions in the Forex market.

The decision was said to have been made in respect of a recent adjustment in the methodology used to calculate Nigeria’s official exchange rate by the FMDQ Exchange, leading to a significant shift from approximately N900/Dollar to N1,480/Dollar.

The adjustment aims to align the official and parallel market rates, a move commended by stakeholders alike, according to report.

Meanwhile, for the banking sector regulator to fully address the Forex backlogs, stakeholders noted the CBN would be required to exceed $5 billion mark, and ensure adequate funding of Forex demands in the official market to prevent a resurgence of disparities between the official and parallel rates.

Therefore, to meet the Forex demands though the official window, the  latest circular also accused the banks of holding surplus Foreign Exchange positions, prompting a directive to divest these positions by Thursday, February 1.

Likewise, any Nigerian banks exceeding these limits are mandated to realign their positions to comply with the new regulations by Thursday.

Banks must compute their daily and monthly NOP and Foreign Currency Trading Position (FCT) using templates provided by the CBN, noted the circular.

Furthermore, banks are instructed to maintain adequate reserves of high-quality liquid foreign assets and implement robust treasury and risk management systems to oversee foreign exchange exposures and ensure accurate reporting.

Banks are urged to promptly bring all exposures within the set limits and ensure that all returns submitted to the CBN accurately reflect their balance sheets.

The banking sector regulator as well cautioned that failure to comply with the NOP limit would result in immediate sanctions and suspension of erring commercial banks from the Foreign Exchange market.

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