29 October 2014, Abuja – The Central Bank of Nigeria, CBN, has pegged foreign currency borrowings of banks to 75 percent of the shareholders’ funds.
In a circular to banks posted on its website, the CBN said that, “The aggregate foreign currency borrowing of a bank excluding inter-group and inter-bank (Nigerian banks) borrowing should not exceed 75 % of its shareholders’ funds unimpaired by losses”.
The circular titled “Prudential regulation for the management of foreign exchange risks of banks”, was signed by Mrs. Tokun Martins, Director, and Banking Supervision.
The CBN stated that the introduction of the limit was prompted by, “with concern the growth in foreign currency borrowings of banks through foreign lines of credit and issuance of foreign currency denominated bonds (Eurobonds).”
“The lower interest rate on foreign debt has created an incentive for banks to borrow abroad, and this has the advantage of providing fairly stable and long term funds to extend credit facilities in foreign currency and enhance their capital base.
“However, this also exposes banks to foreign exchange risks and their risks. Therefore to ensure that these risks are well managed and avoid losses that could pose material systemic challenges, the CBN issues the following prudential and hedging requirements:
“The aggregate foreign currency borrowing of a bank excluding inter-group and inter-bank (Nigerian banks) borrowing should not exceed 75 percent of its shareholders’ funds unimpaired by losses;
“The 75 percent limit supersedes the 200 percent specified in Section 6 of our Guidelines for Foreign Borrowing for on -Lending by Nigerian Banks issued on November 26, 2001;
“The Net Open Position (long or short) of the overall foreign currency assets and liabilities taking into cognizance both those on and off-balance sheet should not exceed 20 percent of shareholders’ funds unimpaired by losses using the Gross Aggregate Method;
“Banks whose current NOP exceed 20 percent of their shareholders’ funds are required to bring them to prudential limit within six (6) months; Banks are required to compute their monthly NOP using the attached template.
“Banks should borrow and lend in the same currency (natural hedging) to avoid currency mismatch associated with foreign currency risk”.