CBN Restricts Banks’ FX Holdings Amid Naira Tumble

The Central Bank of Nigeria (CBN) has imposed limits on how much banks can hold in foreign currencies on Wednesday, expressing concern about the growth of forex exposures on their balance sheets following the naira’s tumble against the US dollar.

The naira fell to a record low on the official market on Tuesday, slipping below the unofficial parallel market rate after market regulator FMDQ Exchange changed its closing rate calculation methodology for the naira. Its dollar-denominated sovereign bonds also suffered sharp falls.

The CBN has introduced a limit on lenders’ net open positions of 20% of shareholders’ funds for short positions and a zero limit for long positions and ordered banks to harmonise reporting, according to a circular released on Wednesday.

Previously, lenders were not allowed to have open positions on the dollar, meaning they could not buy foreign exchange on their own account from the market or speculate on the value of the currency.

The regulator noted that excess net open dollar positions on banks’ balance sheets have incentivized lenders to hold foreign currency, thereby exposing them to currency and other risks.

Banks are now required to bring their exposures within the set limits immediately or face sanctions, including suspension from the currency market.

Before Nigeria’s currency woes, lenders could use their open net positions on foreign currency to finance short-term trade lines without resorting to the central bank for bidding. This effectively lets banks “make the market” for dollars and provide two-way quotes for buying and selling the currency, creating a fully functioning forex market.

The central bank stated that lenders will be required to have liquid foreign assets to cover maturing foreign currency obligations and asked banks to also have a foreign exchange contingency funding arrangement with other institutions.

Banks will require approval for the early repayment of their Eurobonds, where such redemption clauses are applicable.