The Central Bank of Nigeria (CBN) has issued new restrictions on the amount of foreign currencies that banks can hold on their balance sheets, citing concerns about the growing forex exposure.
This action comes as the naira reached a historic low against the US dollar in the official market.
Data from the FMDQ Exchange revealed that the naira dropped to a record low of 1,531 against the dollar during Tuesday’s trading, slipping below rates observed in the unofficial parallel market. However, the currency closed at 1,482.57 naira against the dollar by the end of the trading session on the official market.
In related-developments, the currency’s future value on the forwards market showed a decline, with traders quoting the $dollar as low as 1,650 in a year’s time.
To address these concerns, the #CBN has issued a circular introducing limitations on the net open positions of banks. Short positions are now limited to 20% of shareholders’ funds, while long positions have a zero limit. Additionally, banks have been instructed to standardize reporting procedures.
Previously, banks were not permitted to hold open positions on the dollar, which meant they could not independently purchase foreign exchange from the market or speculate on currency values.
The CBN pointed out that excessive net open positions in foreign currency on banks’ balance sheets have incentivized banks to hold foreign currencies, thereby exposing them to currency and other risks.
Banks are now required to bring their exposures within the prescribed limits immediately or face sanctions, including suspension from the currency market.
Prior to these restrictions, banks could use their net open positions on foreign currency to finance short-term trade lines without relying on the central bank’s bidding system. This flexibility allowed banks to actively participate in the forex market, providing quotes for buying and selling the currency and fostering a fully functioning forex market.
The central bank further stipulated that banks must maintain sufficient liquid foreign assets to cover maturing foreign currency obligations. It also recommended that banks establish foreign exchange contingency funding arrangements with other institutions.
