The Central Bank of Nigeria, on Wednesday, announced limits on how much banks can hold in foreign currencies and expressed concern about the growing forex exposures on their balance sheets after the local currency tumbled against the U.S. dollar.
Nigeria’s currency fell to a record low on the official market on Tuesday, slipping below the unofficial parallel market rate.
This is coming after the market regulator, FMDQ Exchange, changed its closing rate calculation methodology for the naira.
Its dollar-denominated sovereign bonds also suffered sharp falls.
The central bank has 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.
In the past, CBN did not allow lenders to have open positions on the dollar. That means they could not buy foreign exchange on their account from the market. Neither could they 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.
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It asked them to bring their exposures within the set limits immediately. This means that banks would have to sell down or face sanctions including suspension from the currency market.
Before Nigeria’s currency woes, lenders could use their open net positions on foreign currency to finance short-term trade lines. This is without resorting to the central bank for bidding.
That effectively lets 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 an early repayment of their Eurobonds, where such redemption clause applies. (Reuters)
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