Abuja, Nigeria – The Central Bank of Nigeria (CBN) has sounded the alarm regarding the increasing foreign currency exposures of banks through their Net Open Position (NOP), prompting the issuance of stricter prudential requirements to mitigate potential risks and safeguard the stability of the financial system.
In response to the escalating concerns, Directors of Trade and Banking Supervision at the CBN, Hassan Mahmud, and Rita Sike, unveiled a set of fresh guidelines titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks” on Wednesday, January 31, 2024.
The move comes as a proactive measure to address speculation and hoarding practices that contributed to a rapid 42% decline of the Naira against the dollar within a span of just two days.
Expressing concerns over the surge in foreign currency exposures, the CBN issued a circular stating, “This has incentivized banks to hold excess long foreign currency positions, which exposes banks to foreign exchange and other risks.”
Key Guidelines and Objectives:
Preventing Speculation and Hoarding: The guidelines aim to curb practices that allow banks to hold substantial portions of purchased forex without immediate utilization for lending or client financing, preventing currency speculation and hoarding.
Effective Risk Management: The guidelines stress prudential requirements to ensure banks engage in effective risk management practices, mitigating potential losses that could pose significant systemic challenges to the financial sector.
Deadline for Compliance: Banks with Net Open Positions (NOPs) exceeding specified limits are instructed to adjust their positions in adherence to the new regulations by February 1, 2024.
Monitoring Foreign Currency Trading Positions: Banks are mandated to calculate their daily and monthly NOP and Foreign Currency Trading Position (FCT) using templates provided by the CBN, enhancing transparency and regulatory oversight.
The CBN’s proactive measures underscore its commitment to maintaining a stable and resilient financial system, addressing challenges posed by the volatility in foreign currency exposures. The guidelines are expected to foster responsible banking practices and contribute to the overall economic stability of Nigeria.
