Forex: CBN Restates Position on Bank Usage of Revaluation Gains

Forex-Market, Forex

Forex: CBN Restates Position on Bank Usage of Revaluation Gains

The Central Bank of Nigeria (CBN) has recently restated its position on how banks are allowed to utilize their forex (FX) revaluation gains referencing a previous circular dated September 11, 2023.

The bank stated that FX revaluation gains should serve as a buffer to cushion significant movement in the FX rate and should not be used to pay dividends or operating expenses.

It stated, “Further to our letter dated September 11, 2023, referenced BSD/DIR/CON/LAB/16/020 on the above subject, the Central Bank of Nigeria (CBN) wishes to reiterate that banks are required to exercise utmost prudence and set aside FCY revaluation gains as a counter-cyclical buffer to cushion any adverse movement in the FX rate.

“In this regard, banks shall not utilize any such revaluation gains to pay dividends or meet operating expenses.

After the naira was revalued in June, Nigerian banks recorded significant profits in their semi-annual financial results, largely due to the naira’s depreciation. This leads the CBN to issue the referenced directive in September.

This depreciation led to a notional increase in the banks’ balance sheets in naira terms, given their foreign exchange holdings.

The central bank is concerned that this increase in profits may lead to spending that could expose the banks to risk if the exchange rate were to appreciate.

Banks are advised not to allocate the additional earnings from foreign currency (FCY) revaluation towards dividends or operational costs.

They should reserve these funds to cover potential future deficits if the exchange rate declines, a strategy known as a counter-cyclical buffer.

Banks that have exceeded the permissible lending threshold to a single borrower due to the FCY policy may seek approval from the central bank to maintain the excess loan.

This exemption, also known as forbearance, means the central bank will not impose any penalties for surpassing the lending limit, provided the loans were established before the implementation of the policy.