Central Bank of Nigeria Reiterates Guidelines on Banks’ FX Revaluation Gains

The Central Bank of Nigeria (CBN) has reaffirmed its directives regarding the utilization of FX revaluation gains by banks, referencing a previous circular issued on September 11, 2023.

According to the CBN, banks are mandated to utilize FX revaluation gains as a buffer to mitigate significant fluctuations in the foreign exchange (FX) rate. These gains should not be allocated towards dividend payments or operational expenses.

The reiteration comes in response to concerns raised after Nigerian banks reported substantial profits in their semi-annual financial results following the revaluation of the naira in June. The depreciation of the naira led to an apparent increase in the banks’ balance sheets in naira terms, primarily due to their foreign exchange holdings.

The CBN is wary that utilizing these profits for expenditures could expose banks to risks if the exchange rate were to appreciate unexpectedly.

Under the policy guidelines, banks are advised to reserve additional earnings from FCY revaluation to cover potential deficits in the event of a decline in the exchange rate. This approach, known as a counter-cyclical buffer, aims to enhance financial resilience and stability.

Furthermore, banks that have exceeded the permissible lending threshold to a single borrower due to the FCY policy may seek approval from the CBN to maintain the excess loan. This provision, termed forbearance, exempts banks from penalties for surpassing the lending limit, provided the loans were established before the implementation of the policy.

The CBN’s reiteration underscores its commitment to maintaining prudent financial practices and ensuring the stability of Nigeria’s banking sector amidst evolving economic conditions.