28 October 2014, Abuja – Disturbed by increase in borrowings by banks through foreign lines of credit and issuance of foreign currency denominated bonds (Eurobonds), the Central Bank of Nigeria (CBN), has placed some restrictions on raising of such funds by banks.
Specifically, the central bank directed that the aggregate foreign currency borrowing of a bank excluding inter-group and inter-bank (Nigerian banks) borrowing should not exceed 75 per cent of its shareholders’ funds unimpaired by losses.
The CBN stated this in a letter posted on its website monrday, titled: “Prudential Regulation for the Management of Foreign Exchange Risks of Banks,” signed by its Director of Banking Supervision, Mrs. Tokunbo Martins.
The letter addressed to all banks, noted the measures were part of prudential and hedging requirements to mitigate risks in the banking system and also to avoid losses that could pose material systemic challenges.
In terms of the prudential measures, the central bank explained that the 75 per cent limit supersedes the 200 per cent specified in “Section 6 of our Guidelines for Foreign Borrowing for on-Lending by Nigerian Banks issued on November 26, 2001.”
Furthermore, the banking sector regulator stated that the Net Open Position(NOP), long or short of the overall foreign currency assets and liabilities taking into cognisance both those on and off-balance sheet should not exceed 20 per cent of shareholders’ funds unimpaired by losses using the Gross Aggregate Method.
Also, it directed banks whose current NOP exceed 20 per cent of their shareholders’ funds are required to bring them to prudential limit within six months.
“Banks are required to compute their monthly NOP using the attached template. The current NOP limit of one per cent of shareholders’ funds has been renamed as Foreign Currency Trading Position. This will continue to subsist in line with guidelines issued by the CBN.
“Banks are required to have adequate stock of high-quality liquid foreign assets i.e cash and government securities in each significant currency to cover their maturing foreign currency obligations.
“In addition, banks should have in place a foreign exchange contingency funding arrangement with other financial institutions,” it added.
In terms of hedging and other requirements, the central bank stipulated that banks should borrow and lend in the same currency (natural hedging) in order to avoid currency mismatch associated with foreign currency risk.
“The basis of the interest rate for borrowing should be the same as that of lending i.e. there should be no mismatch in floating and fixed interest rates, to mitigate basis risk associated with foreign borrowing interest rate risk.
“With respect to Eurobonds, any clause of early redemption should be at the instance of the issuer and approval obtained from the CBN in this regard, even if the bond does not qualify as tier-2 capital. Banks are required to adhere to the provisions of this circular with immediate effect,” it warned.
According to the central bank, although the low interest rate on foreign debt has created an incentive for banks to borrow abroad and has the advantage of providing fairly stable and long term funds to extend credit facilities in foreign currency and enhance their capital base, it also exposes banks to foreign exchange risks and other risks.
– This Day