CBN Issues New Guidelines on FX Revaluation Gains Usage by Banks

The Central Bank of Nigeria (CBN) has released updated guidelines regarding how banks can utilize their Foreign Exchange (FX) revaluation gains, emphasizing the need for prudent financial management.

In a recent circular referencing a previous directive dated September 11, 2023, the CBN reiterated that FX revaluation gains should primarily function as a financial buffer to mitigate significant fluctuations in the FX rate and should not be utilized for dividend payouts or routine operational expenses.

Following the naira’s revaluation earlier in the year, Nigerian banks reported substantial profits in their interim financial reports, largely attributed to the depreciation of the naira.

This depreciation resulted in a notional increase in the banks’ balance sheets when denominated in naira due to their foreign currency holdings.

Expressing concern over the potential pitfalls of increased profitability, the CBN is cautious of banks making expenditure decisions that could expose them to risks if there is an appreciation in the exchange rate.

Banks are now advised to refrain from allocating the additional earnings derived from Foreign Currency (FCY) revaluation towards paying dividends or covering day-to-day operational costs.

Instead, these funds are expected to be reserved as a preventive measure to address potential future deficits in the event of a decline in the exchange rate, aligning with a counter-cyclical buffer strategy.

In cases where banks have exceeded the permissible lending limits to a single borrower as a result of the FCY policy, they are encouraged to seek approval from the CBN to maintain the excess credit exposure.

This approval, known as forbearance, implies that the CBN will not penalize banks for surpassing the lending thresholds, provided that the loans were extended before the policy implementation.