The Central Bank of Nigeria (CBN) has instructed Deposit Money Banks (DMBs) to refrain from using profits gained from the revaluation of foreign exchange for dividends and operational expenses. This directive, outlined in a letter dated September 11, 2023, and signed by the CBN’s Director of Banking Division Department, Haruna Mustafa, is to be promptly implemented.
Forex revaluation gains arise when there is an increase in the worth of a bank’s assets and liabilities denominated in foreign currency due to a shift in the exchange rate between the foreign currency and the local currency.
As stated in the letter, the CBN has evaluated the implications of the recent change in FX rate regulations on the banking sector and recognizes its potential to significantly affect the naira values of banks’ foreign currency (FCY) assets and liabilities. “The Bank has therefore sanctioned the following prudential guidelines and instructions for immediate adoption by banks,” the letter stated.
“Handling of FX Revaluation Gains: Banks are mandated to exercise the utmost caution and set aside the FCY revaluation gains as a safeguard against any future adverse fluctuations in the FX rate. In light of this, banks are prohibited from using such FX revaluation gains for dividend payouts or covering operational costs.
“Single Obligor Limit (SOL): Banks that inadvertently breach the Single Obligor Limit (SOL) due to the FX policy will be granted leniency upon application to the CBN. This leniency will only apply to existing facilities as of the effective date of this policy. Such banks will be exempt from the regulatory deductions on the excess amount above the SOL limit in their Capital Adequacy Ratio (CAR) computation.
“Net Open Position (NOP) Limit: Banks that surpass the prudential limits for NOP due to FX revaluation will be granted leniency for the breach upon application.”