CBN Orders Banks to Set Aside FX Revaluation Gains as Reserve

The Central Bank of Nigeria (CBN) has issued a new directive to commercial banks, instructing them not to use their foreign exchange (FX) revaluation gains for paying dividends or meeting operating expenses. The directive, which was contained in a letter dated September 11, 2023, and signed by the CBN Director, Banking Division Department, Haruna Mustafa, is aimed at enhancing the resilience of the banking sector amid volatile FX rates.

FX revaluation gains occur when there is an increase in the value of a bank’s assets and liabilities denominated in foreign currency when there is a change in the exchange rate between the foreign currency and the local currency. The CBN said it had assessed the consequences of the recent FX rate regime change on the banking system and identified its potential to substantially impact the naira values of banks’ foreign currency (FCY) assets and liabilities.

According to the CBN, banks are required to exercise utmost prudence and set aside the FCY revaluation gains as a counter-cyclical buffer to cushion any future adverse movements in the FX rate. The CBN emphasised that banks should use these revaluation gains to strengthen their capital reserves, thereby enhancing the banking sector’s capacity to withstand volatility and economic shocks.

The CBN also granted forbearance to banks that inadvertently breached the Single Obligor Limit (SOL) or the Net Open Position (NOP) limit due to the FX revaluation. The forbearance shall apply only to existing facilities as of the effective date of this policy. Such banks shall be exempt from the regulatory deductions on the excess above the SOL limit in their Capital Adequacy Ratio (CAR) computation. Banks that exceed the NOP prudential limits due to the FX revaluation shall also be granted forbearance for the breach upon application.

The CBN stated that existing prudential regulations on capital adequacy, dividend payments, and FCY borrowing limits would continue to apply. The apex bank said the new directive is expected to be implemented immediately by all banks.