The Central Bank of Nigeria (CBN) has directed Deposit Money Banks (DMBs) to liquidate their surplus dollar reserves by February 1, 2024, in an effort to stabilize the country’s volatile exchange rate. In a recent circular issued on Wednesday, the apex bank cautioned against the accumulation of excess foreign currencies by banks for speculative gains.

Entitled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” the CBN expressed apprehension regarding the increasing trend of banks amassing significant foreign currency reserves. This directive follows closely on the heels of a circular released by the CBN just 48 hours earlier, which warned banks and foreign exchange (FX) dealers against the dissemination of false exchange rates, among other infractions.

In its latest communication, dated January 31, 2024, and signed by Dr. Hassan Mahmud, Director of Trade and Exchange at the CBN, along with Mrs. Rita Sike, representing the Director of Banking Supervision at the CBN, the apex bank highlighted concerns about banks holding excessive foreign exchange positions. Banks were given until February 1, 2024 (the current date) to divest themselves of surplus dollars from their reserves.

The circular underscored the CBN’s observation of the burgeoning foreign currency exposures of banks through their Net Open Position (NOP), which incentivizes banks to maintain surplus long foreign currency positions, thereby exposing them to foreign exchange and associated risks.

Moreover, the CBN introduced prudential guidelines that banks must adhere to, particularly focusing on the management of the Net Open Position (NOP), which assesses the disparity between a bank’s foreign currency assets and liabilities. According to the directive, the NOP should not surpass 20 per cent short or 0 per cent long of the bank’s shareholders’ funds. This calculation must employ the Gross Aggregate Method to offer a comprehensive overview of the bank’s foreign currency exposure.

Furthermore, banks exceeding these thresholds are obligated to rebalance their positions to comply with the new regulations by February 1, 2024. Additionally, banks must compute their daily and monthly NOP and Foreign Currency Trading Position (FCT) using specific templates provided by the CBN.