Nigeria’s Central Bank directs banks to cap foreign exchange exposure at 20% short or 0% long of shareholders’ funds by February 1.Thank you for reading this post, don't forget to subscribe!
The goal is to stabilize the naira by restricting speculative bets following a 31% depreciation. Banks holding excess dollars must sell before the deadline or face sanctions, enhancing currency stability and financial system risk management.
The move is part of broader currency market reforms to address risks, improve liquidity, and align with the government’s effort to unify exchange rates.
Compliance involves maintaining prudent forex exposure limits and ensuring adequate liquidity for maturing foreign currency obligations.
Impact on Banks and Naira Stability
Ronak Gadhia, director of sub-Saharan banks research at EFG Hermes, highlighted that sudden movements in exchange rates could significantly impact banks’ capital adequacy and solvency.
By reducing net open position limits, banks’ ability to speculate against the naira is also curtailed, contributing towards greater currency stability – an additional aim of this regulation.
Past large depreciations have incentivized Nigerian banks to increase dollar holdings as protection against further naira losses. The central bank’s concern over growing foreign currency exposures reflects potential vulnerabilities faced by banks due to forex rate risks.
Compliance Measures and Liquidity Requirements
In addition to limiting forex exposures, lenders with excess dollars are required either sell them before the deadline or face sanctions.
Furthermore, those with early redemption clauses on their eurobonds must seek approval before exercising these options. Banks are also mandated to maintain adequate liquid assets covering maturing foreign currency obligations while establishing contingency funding arrangements with other financial institutions.