Again, CBN Warns Banks against Utilising FX Revaluation Gains to Pay Dividends

James Emejo in Abuja

The Central Bank of Nigeria (CBN) has reminded financial institution not to utilise their foreign exchange (FX) revaluation gains to pay dividends or meet operating expenses.
It also reiterated its earlier policy stance that banks should set aside their FX revaluation gains as counter-cyclical buffer to cushion any adverse movements in the FX rate.

The central bank emphasised this in a circular dated March 14, 2024, which was signed by acting CBN Director, Banking Supervision Department, Adetona Adedeji, and addressed to all banks.

The apex bank had on September 11, 2023, issued guidelines on how banks can manage the impact of FX reforms and warned against the use of foreign currency revaluation gains for their operations.
A revaluation of a currency occurs when the value of a legal tender is increased relative to another currency in a fixed exchange rate regime.
The CBN stressed that banks were required to exercise utmost prudence and set aside FCY revaluation gains as a counter-cyclical buffer to cushion any adverse movements in the FX rate.

However, the September circular had directed all banks to build capital buffers to increase resilience against potential volatility and economic shocks.
The CBN had approved additional prudential guidance and directives for immediate implementation to improve financial soundness as it relates to treatment of FX revaluation gains, Single Obligor Limit (SOL),  Net Open Position (NOP) and Capital Adequacy.

The central bank further reviewed the impact of the recent foreign exchange rate regime change on the banking system and observed its potential to significantly increase Naira values of banks’ foreign currency (FCY) assets and liabilities,  resulting in varying levels of FX revaluation gains or losses across the industry.

According to the CBN, additional implications of FX policy reforms may include breach of single obligor and open position limits,  possible increase in asset quality risks,  as well as pressure on industry capital adequacy.
Consequently, the apex bank directed banks to exercise utmost prudence and set aside FCY revaluation gains as a counter-cyclical buffer to cushion any future adverse movements in the FX rate.

In this regard, banks shall not utilise such FX revaluation gains to pay dividend or meet operating expenses, it warned – and granted forbearance to banks that inadvertently breach the SOL due to the FX policy upon application to the CBN.

It added that the forbearance shall apply only to existing facilities as at the effective date of the policy.

Such banks shall be exempted from the regulatory deductions on the excess above the SOL on their Capital Adequacy Ratio computation.