Exploration: Should the Central Bank of Nigeria Oversee Banks’ Foreign Exchange Profit Oversight?

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The recent directive issued by the Central Bank of Nigeria (CBN) regarding the treatment of banks’ foreign exchange (FX) revaluation gains has triggered a significant response from the Nigerian public.

As the regulator of banking and financial institutions, the CBN has instructed lenders not to utilize FX revaluation gains for purposes such as paying dividends or covering operational expenses.

To understand this directive better, it’s essential to grasp the concepts of devaluation and revaluation.

According to the CBN, when the domestic currency’s value falls (or rises) concerning other foreign currencies in a fixed exchange rate system, it’s termed revaluation (devaluation) following the direct convention.

The CBN plays a pivotal role in formulating exchange rate policies.

The decision regarding exchange rate policies ultimately rests with the Central Bank of Nigeria’s Board, which considers proposals from the MPIC (Monetary Policy Implementation Committee).

The Trade and Exchange Department (TED) of the CBN mainly manages Nigeria’s exchange rate policy, with all stakeholders sharing the responsibility for implementing these policies.

The CBN’s circular explicitly states that banks must exercise caution and set aside foreign currency (FCY) revaluation gains as a counter-cyclical buffer to safeguard against potential adverse movements in the FX rate.

Consequently, these gains should not be used for dividend payments or operational expenses.

In the words of Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise, the CBN’s goal is to prevent excessive liquidity from entering the system.

He explains that the revaluation of liabilities can burden companies, as it increases their financial obligations. In contrast, revaluing foreign currency assets can inflate profits.

The CBN aims to prevent an influx of money resulting solely from revaluation, characterizing it as a liquidity management measure.

Muda emphasizes that, even though these gains technically belong to the banks, there’s an element of moral suasion involved in the CBN’s directive.

The central bank advises banks in the interest of the economy, and if persuasion doesn’t work, the CBN has the authority to take other measures, including debiting banks.

Uche Uwaleke, a professor of Capital Market at Nasarawa State University Keffi, believes that the directive is intended to shield banks from the volatility of the FX market.

Instead of distributing these gains as dividends to shareholders, banks are expected to use them as safeguards against adverse exchange rate movements.

Furthermore, exchange rate fluctuations can impact obligor limits for banks, which are capped at 20 percent of shareholders’ funds according to the Banks and Other Financial Institutions Act (BOFIA).

This means a bank cannot lend more than 20 percent of its shareholders’ funds to a single individual or entity. Asset revaluation due to FX market volatility could potentially breach this Single Obligor Limit (SOL).

Professor Uwaleke commends the CBN for its willingness to grant forbearance rather than imposing sanctions on banks facing such issues.

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