In a bid to mitigate risks to the financial system and enhance liquidity in Nigeria’s currency market, the Central Bank of Nigeria (CBN) has issued a directive instructing banks to limit their foreign exchange exposure.
According to the directive, the net open position limit of foreign currency assets and liabilities for banks “should not exceed 20% short or 0% long of shareholders’ funds unimpeded by losses.” The regulator has set a deadline of February 1 for banks to comply with these limits.
The move by the CBN comes amidst a significant drop in the official rate of the naira against the dollar this week, bringing it closer to the parallel market rate.
The 31% decline was triggered by a change in the method for setting the naira’s rate and is part of the government’s broader efforts since June to stop managing the exchange rate and unify the two markets.
The directive aims to address concerns about the potential vulnerability of banks to foreign exchange rates and other risks due to the growth in foreign currency exposures.
By setting limits on the net open position, the CBN aims to curtail speculative bets against the naira, fostering more stability in the currency.
Ronak Gadhia, the Director of Sub-Saharan Banks Research at EFG Hermes, noted that a sharp decline in the value of the foreign exchange position held by a bank could impact its capital adequacy and solvency.
The regulation not only aims to limit banks’ ability to speculate on the naira but also seeks to stabilize the currency, presenting a dual objective.
Banks with excess dollars are required to sell them before the February 1 deadline to comply with the set limits.
The CBN has also directed banks with an early redemption clause on their Eurobonds to seek approval before exercising this option.
Additionally, banks are instructed to maintain an adequate stock of liquid assets to cover maturing foreign currency obligations and establish a contingency funding arrangement with other financial institutions.
Experts say as the financial landscape evolves, banks and financial institutions will need to adjust their strategies to align with the new regulatory measures set by the CBN, ensuring compliance with the specified limits and fostering stability in Nigeria’s currency market.