CBN Advises Banks Against Paying Dividends with FX Gains in 2024.
The Central Bank of Nigeria (CBN) has reiterated its stance on the utilization of FX revaluation gains by banks, emphasizing that such gains should not be used for dividend payments or operational expenses. This directive, referencing a circular issued on September 11, 2023, aims to ensure prudence in managing FX-related profits.
According to the CBN, FX revaluation gains should be reserved as a buffer to mitigate significant fluctuations in the FX rate. Banks are urged to exercise caution and refrain from allocating these gains towards dividends or operating costs.
The backstory to this directive stems from the revaluation of the naira in June, which resulted in Nigerian banks reporting substantial profits in their semi-annual financial results.
The depreciation of the naira led to an increase in the banks’ balance sheets in naira terms, primarily driven by their foreign exchange holdings.
The CBN expressed concern that excessive spending of these profits could expose banks to risks in the event of an appreciation in the exchange rate. Therefore, the policy aims to ensure that banks maintain a prudent approach to managing their FX-related earnings.
Under the policy, banks are advised to retain the additional earnings from FCY revaluation to cover potential future deficits in the event of a decline in the exchange rate. This strategy, known as a counter-cyclical buffer, aims to enhance banks’ resilience to FX rate fluctuations.
Furthermore, banks that have exceeded the permissible lending threshold to a single borrower due to the FCY policy may seek approval from the CBN to retain the excess loan amount.
This exemption, termed forbearance, exempts banks from penalties for surpassing the lending limit, provided the loans were established before the implementation of the policy.
The CBN’s directive underscores its commitment to maintaining stability in the financial sector and ensuring prudent management of FX-related profits by banks.
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