CBN orders banks to sell more foreign exchange to customers

 

Yemi Cardoso, CBN governor

The Central Bank of Nigeria (CBN) has ordered the commercial banks in the country to bring their exposures within a set limits immediately, meaning that banks would have to sell down excess foreign exchange in their custody or face sanctions including suspension from the currency market.

The central bank introduced a limit on lenders' net open positions of 20 per cent of shareholders' funds for short positions and a zero limit for long positions and ordered banks to harmonise reporting, the monetary authority said in a circular on Wednesday.

Nigeria's central bank announced this limits on how much banks can hold in foreign currencies and expressed concern about the growth of forex exposures on their balance sheets after the local currency tumbled against the U.S. dollar.

In the past, lenders were not allowed to have open positions on the dollar, meaning they could not buy foreign exchange on their own account from the market or speculate on the value of the currency.

The regulator said excess net open dollar positions on banks' balance sheets have created an incentive for lenders to hold foreign currency, thereby exposing them to currency and other risks.

Nigeria's currency fell to a record low on the official market on Tuesday, slipping below the unofficial parallel market rate, after market regulator FMDQ Exchange changed its closing rate calculation methodology for the naira.

Its dollar-denominated sovereign bonds also suffered sharp falls.

Before Nigeria's currency woes, lenders could use their open net positions on foreign currency to finance short-term trade lines without resorting to the central bank for bidding.

That effectively let banks "make the market" for dollars and provide two-way quotes for buying and selling the currency, creating a fully functioning forex market.

The central bank said lenders will be required to have liquid foreign assets to cover maturing foreign currency obligations and asked banks to also have a foreign exchange contingency funding arrangement with other institutions.

It added that banks will require approval in case of an early repayment of their Eurobonds, where such redemption clause is applicable.