CBN Issues New Guidelines To Stop Foreign Currency Speculation, Hoarding By Commercial Banks

The Central Bank of Nigeria (CBN) on Wednesday issued new guidelines to all commercial banks operating in the country against hoarding and speculation of foreign currency.

This was stated in a circular issued by the apex bank jointly signed by the Directors of Trade and Exchange, Hassan Mahmud and Director of Banking Supervision, Rita Sike, revealing that the CBN had discovered foreign currency exposures of banks through their Net Open Position (NOP) which allowed the bank to hoard the currency for a very long time unnecessarily.

The NOP measures the difference between a bank’s foreign currency assets (what it owns in foreign currencies) and its foreign currency liabilities (what it owes in foreign currencies).

The CBN circular introduces a set of guidelines aimed at reducing the risks associated with the practice of hoarding and speculation of these foreign currencies by Nigerian banks.

The apex bank noted that some commercial banks hold long-term positions in forex with the hope of profiting from it, especially when there are forex fluctuations.

To address these challenges, the CBN has imposed prudential rules for banks to follow:

“The Net Open Position (NOP) limit of the overall foreign currency assets and liabilities taking into cognizance both those on and off-balance sheet should not exceed 20% short or 0% long of shareholders’ funds unimpaired by losses using the Gross Aggregate Method.

 

“Banks whose current NOP exceed 20% short and 0% long of their shareholders’ funds unimpaired by losses are required to bring them to prudential limit by February 1, 2024.

“Banks are required to compute their daily and monthly NOP and Foreign currency trading position (FCTP) using the attached templates.

“Banks are also required to have adequate stock of high-quality liquid foreign assets, i.e. cash and government securities in each significant currency to cover their maturing foreign currency obligations. In addition, banks should have in place a foreign exchange contingency funding arrangement with other financial institutions.”

The circular further reads, “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 i.e. there should be no mismatch in floating and fixed interest rates, to mitigate basis risk associated with foreign borrowing interest rate risk.

“With respect to Eurobonds, any clause of early redemption should be at the instance of the issuer and approval obtained from the CBN in this regard, even if the bond does not qualify as tier 2 capital.

“All banks are required to adopt adequate treasury and risk management systems. to provide oversight of all foreign exchange exposures and ensure accurate reporting on a timely basis.

“Banks are expected to bring all their exposures within the set limits immediately and ensure that all returns submitted to the CBN provide an accurate reflection of their balance sheets.”

 

 

“Please, note that non-compliance with the NOP limit will result in immediate sanction and/or the suspension from participation in the foreign exchange market,” the circular adds.