From now on, all deposit money banks (DMBs) must reveal their foreign exchange (FX) holdings and reduce them to a level that does not fall more than 20% short of the funds owned by their shareholders.
The Central Bank of Nigeria (CBN), in a memo sent to all banks yesterday, stated that the latest action was motivated by the need to limit the increase in banks’ foreign currency exposures through their net open position (NOP).
The latest instruction comes on the heels of mounting concern in the monetary authority about the destiny of the naira, which sank further to roughly N1520/$ at the parallel market as of press time.
This is the most recent move in the regulator’s arsenal of measures to halt the native currency’s precipitous decline during the last 12 months. In fact, Cardoso is up against the clock to stop the naira’s uncontrolled decline. The governor was summoned by the Senate to appear before it on Tuesday of next week by its Committee on Banking, Insurance, and Other Financial Institutions. The governor was asked to address the Senate on the state of the economy and the sharp depreciation of the naira, which was deemed to be the third worst performing currency last year.
The Committee, led by Senator Adetokunbo Abiru, convened yesterday when the currency plummeted to N1520/$ on the black market. As they left, they decided to call a meeting of the CBN governor.
In the memo titled “Harmonization of reporting requirements on foreign currency exposures of banks,” the central bank expressed worry about the increase in banks’ foreign currency exposures as shown by their net open position (NOP). (CBN, 2017). Due to this, banks now have an incentive to hold excessively large foreign exchange holdings, putting them at risk for foreign exchange and other issues.
The letter, which was jointly signed by Ijeoma Sike of the Banking Supervision Department and Dr. Hassan Mahmud, the Director of the CBN’s Trade and Exchange Department, highlighted how to make sure that risks are properly handled and prevent losses that might present serious systemic difficulties.
Using the gross aggregate technique, the maximum net operating profit (NOP) limit of all foreign currency assets and liabilities, including those off-balance sheet, shall not surpass 20% short or 0% long of shareholders’ funds that are not impaired by losses.
The top bank also stated that banks must continue to adhere to the prudential restriction if their current net operating profit (NOP) exceeds 20% of short and 0% of long-term shareholder funds that are unaffected by losses.
The CBN mandated that banks use the templates that are attached to calculate their foreign currency trading position (FCTP) and daily and monthly NOP.
Some said the timeframe required to reduce excess foreign exchange holdings leaves too much to be desired and underpins the pressure on the CBN to stabilize the market. Furthermore, banks must have an adequate stock of high-quality liquid foreign assets, such as cash and government securities in each significant currency to cover their maturing foreign currency obligations.
Additionally, banks must have a foreign exchange contingency funding arrangement with other financial institutions. Finally, banks must borrow and lend in the same currency (natural hedging) to avoid currency mismatch. Sources stated that the directive is being carefully studied to determine its effects on FX operations and the full consequences for customers’ funds.
“To mitigate basis risk associated with foreign borrowing interest rate risk, the basis of the interest rate for borrowing should be the same as that of lending, i.e., there should be no mismatch in floating and fixed interest rates,” the bankers’ bank continued. Even if a Eurobond doesn’t meet the requirements for tier-two capital, the issuer should be the one to initiate any early redemption provision, and the CBN must provide its consent in this respect.
“Adequate treasury and risk management systems must be adopted by all banks in order to oversee all foreign exchange exposures and guarantee timely and accurate reporting.”
The President has given the governor of the CBN all the assistance he needs to make sure the naira maintains its strength without impeding the significant financial reform that is now underway, the source added. The Banker’s Committee has opposed FX market opening. They want banks to be the sole players in the market. The banks seek to control all of the CBN’s foreign exchange supplies. Their desire is to get exclusive access to FX from the CBN.
This facilitates distortions greatly. They wait for the naira to weaken before selling after receiving their allotments from the CBN. They will get quite interested in this. This is the course of events. With the President’s support, nobody can be called in anymore.
“Banks should ensure that any reports they submit to the CBN accurately represent their balance sheets and that they promptly bring all of their exposures within the designated limits,” the statement stated.
The top bank warned that noncompliance with the NOP limit might result in immediate fines and/or expulsion from the foreign exchange market.
The Guardian was able to receive information indicating that President Bola Tinubu instructed CBN head Yemi Cardoso to take all necessary steps to maintain the value of the naira and reorient the economy for sustainable development.
In the end, it’s probable that the Banker’s Committee’s efforts to block a complete reform of the FX market were ineffective.
On the safety of domiciliary account holdings under the new policy, Chief Executive Officer of Dairy Hills Limited, Kelvin Emmanuel, claimed depositors’ money is safe, stating, “Dorm accounts are safe. This is to minimize the ability of banks to round trip on FX rate and gain from arbitrage, which is like hoarding of FX. This is a significant move since the key dealers in the FX markets, the banks, are a huge issue, he stated.
According to checks, Cardoso implemented a number of policies after taking office on September 22, 2023, including the Authorized Financial Markets Signatories, Dealing Mandates, and Approved Communication Channels for Transaction with the Financial Markets Department. These were released in the month of December.
Various opinions have been expressed on the efficacy of the present managed naira float. Prof. Kingsley Moghalu, the CEO of Sogato Strategies and a former deputy governor of the CBN, said that the naira’s issue is not that it has been “floated” or has been.
“In any event, we no longer have the oil revenues (for a variety of reasons) to support a managed float with strong foreign reserves,” stated Moghalu. The true failure of Nigeria’s economic policy lies in its inability to diversify its economy and move away from depending solely on natural resources to generate foreign exchange, instead building an export-driven economy through value-added manufacturing and services. This is the zone of industrial and trade policy.
The reason for this failure lies in Nigeria’s political culture that fosters a rent-seeking economy. Habits, especially bad ones, are hard to break. But Malaysia, Thailand and Chile, all originally resource-based economies, successfully achieved ‘economic complexity’ over time, manufacturing and exporting increasingly sophisticated products.
“You cannot offer what you do not have, thus for Nigeria to achieve this, it will take what its current generation of leaders seems to lack. A shift in direction necessitates an unprecedented degree of political determination and favors competent technocratic administration over crony empowerment motivated by vested self-interest. The Naira has minimal chance of recovery unless these underlying issues are resolved.
The political climate in Nigeria, which encourages a rent-seeking economy, is the cause of this failure. Bad habits in particular are difficult to break. However, the economies of Malaysia, Thailand, and Chile—all once resource-based—all managed to attain “economic complexity” over time by producing and exporting progressively complex goods.
“You cannot offer what you do not have, thus for Nigeria to achieve this, it will take what its current generation of leaders seems to lack. A shift in direction necessitates an unprecedented degree of political determination and favors competent technocratic administration over crony empowerment motivated by vested self-interest. The Naira has minimal chance of recovery unless these underlying issues are resolved. The days when we were flooded in oil money are long gone from the planet.
Today, a large number of non-OPEC nations generate enormous amounts of oil.
According to the professor, Nigeria’s economic policy has truly failed since it hasn’t diversified its economy to move away from relying solely on natural resources to supply foreign exchange and toward an export-oriented economy built on value-added manufacturing and services.
According to Lekan Oladele, a financial analyst, “at least going by the rollout plan announced by the then Acting Governor, Folashodun Adebisi Shonubi,” the plan has always been biased toward a managed float system. It is regrettable that CBN hasn’t been able to seize control of the FX market, most likely due to supply issues. Some things do not operate in isolation. You cannot float and not block loopholes and boost local production.”
Additionally, he pleaded with the governor of the CBN to forbid all intermediaries, financial institutions, and fintech companies from engaging in foreign currency trading, emphasizing that the only way to reduce exchange rate volatility is for all FX operations to be completed through banks.