CBN Directs Banks to Sell Excess Dollars

The Central Bank of Nigeria (CBN) has issued a directive mandating Deposit Money Banks (DMBs) to divest themselves of excess dollar holdings by the latest deadline of February 1, 2024.

The CBN, in a circular released on Wednesday titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” expressed concern over the growing trend of banks amassing large foreign currency positions for profit. The move follows closely on the heels of a prior circular, issued just 48 hours earlier, cautioning banks and foreign exchange (FX) dealers against disseminating false exchange rates.

The circular, dated January 31, 2024, and signed by Dr. Hassan Mahmud, the Director of Trade and Exchange at the CBN, along with Mrs. Rita Sike, the representative of the Director of Banking Supervision, accused banks of holding excessive foreign exchange positions.

The apex bank set a deadline of February 1, 2024 (today) for banks to liquidate their surplus dollar reserves.

Highlighting the risks associated with banks maintaining large Net Open Positions (NOP), the circular emphasised the incentive for banks to hold excessive long foreign currency positions, exposing them to potential foreign exchange risks.

To address this, the CBN introduced prudential requirements, focusing on managing the NOP.

Under the new regulations, the NOP must not exceed 20% short or 0% long of the bank’s shareholders’ funds. The calculation is to be performed using the Gross Aggregate Method, offering a comprehensive overview of the bank’s foreign currency exposure. Banks exceeding these limits in their current NOPs are instructed to adjust their positions to comply with the regulations by February 1, 2024.

Moreover, the circular mandates that banks use specific templates provided by the CBN to calculate their daily and monthly NOP, along with their Foreign Currency Trading Position (FCT).

The CBN’s latest measures aim to curb the growing trend of banks holding excessive foreign currency reserves and contribute to the overall stability of Nigeria’s exchange rate.