CBN directs banks to sell surplus dollars in 24 hours

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The Central Bank of Nigeria (CBN) has mandated Deposit Money Banks (DMBs) to divest their surplus dollar holdings by February 1, 2024, as a measure to stabilize the nation’s fluctuating exchange rate.

In a recently issued circular on Wednesday, the central bank also cautioned financial institutions against stockpiling surplus foreign currencies for profit.

Titled, “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks”, the apex bank raised concerns over the growing trend of banks holding large foreign currency positions. The move comes barely 48 hours after the CBN released a circular, warning banks and FX dealers against reporting false exchange rates, among others.

In its most recent circular, the central bank alleged that banks were maintaining surplus foreign exchange positions. It stipulated that lenders must dispose of excess dollar positions by February 1, 2024 (today).

The circular, dated January 31, 2024, was signed by Dr. Hassan Mahmud, the Director of Trade and Exchange at the CBN, and Mrs. Rita Sike, the representative of the Director of Banking Supervision at the CBN.

“The Central Bank of Nigeria has noted with concern the growth in foreign currency exposures of banks through their Net Open Position (NOP). This has created an incentive for banks to hold excess long foreign currency positions, which exposes banks to foreign exchange and other risks,” the circular read.

The CBN has also introduced prudential requirements for banks to adhere to, with a primary focus on managing the Net Open Position (NOP).

The NOP measures the disparity between a bank’s foreign currency assets (what it owns in foreign currencies) and its foreign currency liabilities (what it owes in foreign currencies).

The circular stipulates that the NOP should not exceed 20 percent short or 0 percent long of the bank’s shareholders’ funds. The calculation, according to the apex bank, must utilize the Gross Aggregate Method, offering a comprehensive perspective on the bank’s foreign currency exposure.

Banks with current NOPs surpassing these limits are obligated to adjust their positions to comply with the new regulations by February 1, 2024. Moreover, banks are instructed to compute their daily and monthly NOP and Foreign Currency Trading Position (FCT) using specific templates provided by the CBN.