CBN Moves Against Forex Speculation, Hoarding, Issues Fresh Guidelines

The Central Bank of Nigeria (CBN) has issued a new circular on reporting foreign currency exposure to all banks to curb forex speculation and risk mitigation.
In several guidelines, the central bank sought to address suspected cases of excessive foreign currency speculation, while highlighting its concerns over the growing trend of banks holding large foreign currency positions.

Among other requirements, the new directive on forex exposures of banks mandates them to lend in the same currency it borrowed.
This is just as the value of the naira continues to diminish against the dollar, leaving many companies to foreign exchange exposures in the country.
In a circular to all banks, jointly signed by the director, Trade and Exchange department, Dr Hassan Mahmud and Rita Ijeoma Sike for director, Banking Supervision, the CBN said it had noted with concern the growth in foreign currency exposures of banks through their Net Open Position (NOP).
According to the apex bank, this has created an incentive for banks to hold excess long foreign currency positions, which exposes banks to foreign exchange and other risks. Thus, it issued the prudential requirements to ensure that these risks are well managed to avoid losses that could pose material systemic challenges.
The CBN requires that 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 per cent short or zero per cent long of shareholders’ funds unimpaired by losses using the Gross Aggregate Method.
Thus, banks whose current NOP exceeds 20 per cent short and zero per cent long of their shareholders’ funds unimpaired by losses are required to bring them to prudential limit by February 1, 2024.

Banks are also required to borrow and lend in the same currency to avoid currency mismatch associated with foreign currency risk.
The guideline stated that 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 sheet,” it stressed.
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 are to have in place a foreign exchange contingency funding arrangement with other financial institutions.