CBN Restricts Banks from Profiting from Foreign Exchange Revaluation

The Central Bank of Nigeria (CBN) has recently reiterated its directive to banks, barring them from paying dividends to shareholders or using foreign currency revaluation gains for operating expenses.

The apex bank emphasized that these gains should be set aside as a counter-cyclical buffer to mitigate any adverse movements in the foreign exchange rate.

Foreign exchange revaluation gains occur when the value of a bank’s assets or liabilities denominated in foreign currencies increases due to fluctuations in exchange rates.

In the context of Nigerian banks, these gains typically arise from the revaluation of foreign currency-denominated assets, such as loans, investments, or deposits.

In 2024, the value of the naira has depreciated by 76.5 per cent against the dollar, causing some banks to breach their lending limits and open positions on foreign exchange trading.

The CBN’s recent letter to banks, referencing a circular issued last year, reinforced its stance on the matter.

Last September, the CBN had recognized that changes in the currency regime have impacted banks to varying degrees and stressed the importance of setting aside foreign currency revaluation gains as a counter-cyclical buffer.

The CBN’s recent move aims to maintain stability in the banking sector and ensure that banks are well-positioned to handle potential adverse movements in the foreign exchange rate.

By restricting the use of these gains for dividends or operating expenses, the CBN hopes to prevent any potential negative consequences on the broader economy.

As Nigeria’s financial landscape continues to evolve, the CBN’s efforts to provide prudential guidance to the banking sector will play a crucial role in maintaining stability and fostering growth in the nation’s economy.