Home Nigeria CBN frantically tightens noose on banks’ FX operations, speculators

CBN frantically tightens noose on banks’ FX operations, speculators



Going forward, all deposit money banks (DMB) are to disclose their positions on foreign exchange (FX) holdings and draw it down to not more than 20 per cent short of their shareholders’ funds.

In a memo addressed to all banks yesterday, the Central Bank of Nigeria (CBN) said the latest move was informed by the need to curb the growth in foreign currency exposures of banks through their net open position (NOP).

The new directive comes on the heels of rising panic in the monetary authority over the fate of the naira, which dipped further to about N1520/$ at the parallel market as at press time.

It is the latest of the series of policy options the regulator has taken in the past year to stop the free fall of the domestic currency. Indeed, Cardoso is racing against time to rein in the free fall of naira. Yesterday, the Senate, through its Committee on Banking, Insurance and other Financial Institutions, summoned the governor to appear before it on Tuesday next week to answer questions on the state of the economy and the sharp depreciation of naira, a currency adjudged the third worst performing last year.

The Committee, chaired by Senator Adetokunbo Abiru, met yesterday as the currency tumbled to N1520/$ at the parallel market and resolved to summon the CBN governor on the way out.

The apex bank, in the memo, ‘Harmonisation of reporting requirements on foreign currency exposures of banks,’ said: “The CBN 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 memo, which was jointly signed by the Director of Trade and Exchange Department of CBN, Dr Hassan Mahmud, and Ijeoma Sike of the Banking Supervision Department, explained that to ensure that the risks are well managed and avoid losses that could pose material systemic challenges, the NOP limit of the overall foreign currency assets and liabilities taking into cognizance both those on and off-balance sheet should not exceed 20 per cent short or zero per cent long of shareholders’ funds unimpaired by losses using the gross aggregate method.

The apex bank also said that banks, whose current NOP exceed 20 per cent short and zero per cent long of their shareholders’ funds unimpaired by losses have till today to comply with the prudential limit.

The CBN directed that banks are now required to compute their daily and monthly NOP and foreign currency trading position (FCTP) using the attached templates.

The directive, according to sources, is carefully being studied to ascertain its impacts on FX operations and the full consequences for customers’ funds. Some said the timeframe required to cut down excess FX holdings leaves too much to be desired and underpins the pressure on the CBN to stabilize the market .

In addition, banks are also required to have adequate stock of high-quality liquid foreign assets, that is cash and government securities in each significant currency to cover their maturing foreign currency obligations. In addition, banks should have in place a foreign exchange contingency funding arrangement with other financial institutions.

There are other requirements such as banks should borrow and lend in the same currency (natural hedging) to avoid currency mismatch associated with foreign currency risk.

The bankers’ bank added: “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, to mitigate basis risk associated with foreign borrowing interest rate risk. Concerning Eurobonds, any clause of early redemption should be at the instance of the issuer and approval obtained from the CBN in this regard, even if the bond does not qualify as tier-two capital.

“All banks are required to adopt adequate treasury and risk management systems to provide oversight of all foreign exchange exposures and ensure accurate reporting on a timely basis. Banks are expected to bring all their exposures within the set limits immediately and ensure that all returns submitted to the CBN provide an accurate reflection of their balance sheets,” it stated.

The apex bank warned that non-compliance with the NOP limit would result in immediate sanction and/or suspension from participation in the foreign exchange market.

The Guardian learnt the policy stems from a directive by President Bola Tinubu to the CBN boss, Yemi Cardoso, to move ahead with all policies required to shore up the value of the naira and reposition the economy for stable growth.

To this end, the Banker’s Committee may have lost out in their efforts to stop the full unification of reform of the FX market.


The source said: “The President has given the CBN governor all the support he needs to ensure the naira stays strong without hampering major reform currently going in the financial space. The Banker’s Committee has been against opening the FX space. They want only banks to dominate the space. The banks want to monopolise the FX supply from the CBN. They want to be the only ones who will be able to access FX from the CBN.

“This makes distortions very easy. When they get their allocations from the CBN, they wait for naira to depreciate and then sell. This will result in huge interest for them. This is what has been happening. Now, with the President’s backing, there is no one to call in the Aso Rock.”

On the safety of domiciliary account holdings following the new policy, Chief Executive Officer of Dairy Hills Limited, Kelvin Emmanuel, said depositors’ money is safe, saying, “Dorm accounts are safe. This is to reduce the ability of banks to round trip on FX rate and earn from arbitrage, which is like hoarding of FX. This is a major step because the banks who are primary dealers are a big problem in the FX markets,” he said.

Checks showed that since September 22, 2023, when Cardoso assumed office, he has introduced several policies, which include the Authorised Financial Markets Signatories and the Dealing Mandates and Approved Communication Channels for Transaction with the Financial Markets Department. These were issued in December.

Divergent views have trailed the effectiveness or otherwise of the current managed float of the naira.  A former deputy governor of the CBN and who is also the Chief Executive Officer, Sogato Strategies, Prof. Kingsley Moghalu, submitted that the problem with the naira is not that it was or has been ‘floated’.

Moghalu said: “In any case, we no longer have the oil revenues (for various reasons) to underpin a managed float with robust foreign reserves. The real failure of Nigerian economic policy is that of having failed to diversify its economy away from reliance on natural resources for forex supply towards an export economy based on 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.

“For Nigeria to achieve this will require what its present generation of politicians appears to lack, for you cannot give what you do not have. The level of political will required to change course is extraordinary and requires a focus on merit and competent technocratic management rather than crony- empowerment based on vested self-interest. Until these fundamentals are fixed, there is little hope for the Naira. The world has changed from the days of our being awash with oil money. Many other countries that are not in OPEC now produce massive amounts of oil.”

The scholar insisted that the real failure of Nigerian economic policy is that of having failed to diversify its economy away from reliance on natural resources for FX supply towards an export economy based on value-added manufacturing and services.

A financial analyst, Lekan Oladele, argued that the plan has always been tilted towards a managed float system, saying, “at least going by the rollout plan announced by the then Acting Governor, Folashodun Adebisi Shonubi. What is unfortunate is that probably owing to supply constraints, CBN has not been able to take control of the FX market. Some things do not work in isolation. You cannot float and not block loopholes and boost local production.”

He also urged the CBN governor to stop all the middlemen, financial houses and fintech firms from trading in FX, stressing that all FX trades should be done through banks, saying that this is the solution to the exchange rate volatility.

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