The Central Bank of Nigeria (CBN) on Wednesday issued a directive mandating Deposit Money Banks (DMBs) to maintain a Net Open Position (NOP) limit within 20 per cent short or zero per cent long of shareholders’ funds unimpaired by losses.
This directive encompasses both on-and-off-balance sheet foreign currency assets and liabilities, employing the gross aggregate method. In a strategic move to correct market dynamics and bolster foreign exchange (FX) supply, the regulatory bank also announced the elimination of the allowable limit on exchange rates quoted by International Money Transfer Operators (IMTOs).
In a separate circular signed by the Director of the Trade and Exchange Department, Hassan Mahmud, the CBN said its measures are aimed at curbing foreign currency speculation in the FX market.
The CBN’s decision was prompted by growing concerns over the increasing foreign currency exposures of banks through their NOP. The new prudential requirements, jointly signed by Hassan Mahmud and Rita Ijeoma Sike, CBN Directors of Trade and Exchange and Banking Supervision, respectively, seek to mitigate risks associated with excess long foreign currency positions held by banks, safeguarding them against foreign exchange and other potential risks.
Financial analysts express optimism regarding the potential positive impact of these policy changes on the FX market and the overall economy. Projections suggest that the reforms could attract between $4 billion and $6 billion in inflows, addressing existing liquidity challenges.
The updated regulation mandates banks to bring their NOP within approved limits by February 1, 2024, and comply with daily and monthly computations using approved templates.
Banks are also required to maintain an adequate stock of high-quality liquid foreign assets to cover maturing foreign currency obligations, adopt natural hedging strategies, and ensure uniformity in interest rates for borrowing and lending to mitigate foreign borrowing interest rate risk.
The CBN warns of immediate sanctions and/or suspension from participating in the foreign exchange market for non-compliance with NOP limits. Additionally, the circular on IMTOs’ allowable exchange rate limit signals the central bank’s commitment to liberalising the Nigerian foreign exchange market.
Analysts believe that these regulatory interventions will prompt banks to align with CBN’s prudential guidelines, potentially alleviating pressure on the black market, enhancing transparency, and restoring confidence in the FX market.
Despite the naira reaching an all-time low on the parallel market, the official window saw increased daily turnover, indicating potential positive outcomes from the recent policy adjustments.
official window saw increased daily turnover, indicating potential positive outcomes from the recent policy adjustments.
