The Central Bank of Nigeria (CBN) has released a new circular addressing suspected cases of excessive foreign currency speculation from Nigerian banks.
The new circular introduces a set of guidelines aimed at reducing the risks associated with these practices.
The circular, titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” highlights the CBN’s concerns over the growing trend of banks holding large foreign currency positions.
In simple English, the central bank believes some commercial banks hold long-term positions in forex with the hope of profiting from it especially when there are forex fluctuations.
This practice, known as speculation, involves buying or holding foreign currencies in the hope of profiting from fluctuations in exchange rates. However, this behavior can expose banks to significant risks, including exchange rate volatility and potential financial losses.
Optics: Commercial banks in Nigeria have profited massively from forex revaluation gains since 2023. As such, most analysts believe some of the banks may be deliberately buying forex and then holding them long enough to sell when it depreciates.
To address these issues, the CBN has issued prudential requirements that banks must follow. A key focus of these requirements is the management of the Net Open Position (NOP).
The circular also stipulates that banks should maintain adequate stocks of high-quality liquid foreign assets, such as cash and government securities, in each significant currency.
These assets are crucial for covering maturing foreign currency obligations. Banks are also advised to have foreign exchange contingency funding arrangements in place with other financial institutions.
On matching and hedging
Other requirements outlined in the circular include practicing natural hedging by borrowing and lending in the same currency to avoid currency mismatch risks.
Banks are also advised to ensure that the basis of the interest rate for borrowing matches that of lending, thereby mitigating basis risk associated with foreign borrowing interest rate risk.
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