CBN declares FX gains off limits for Banks’ dividends, operations

The Central Bank of Nigeria (CBN) has reiterated its position on how banks utilize their FX revaluation gains referencing a previous circular dated September 11, 2023.

The bank stated that FX revaluation gains should serve as a buffer to cushion significant movement in the FX rate and should not be used to pay dividends or operating expenses.

In a circular from the apex bank on Thursday signed by the acting Director, the Banking Supervision Department, Adetona Adedeji, banks were warned against such a move.

“Further to our letter dated September 1, 2023, referenced BSD/DIR/CON/LAB/16/020 on the above subject, the Central Bank of Nigeria wishes to reiterate that banks are 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.

“In this regard, banks shall not utilise such FX revaluation gains to pay dividends or meet operating expenses.”

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This move prioritizes financial stability within the banking sector. The CBN is urging banks to treat FX revaluation gains as a buffer against potential fluctuations in the exchange rate. These gains occur when the value of the Nigerian Naira strengthens against foreign currencies held by banks.

Traditionally, such gains could be seen as a source of additional profit, potentially leading to higher dividend payouts. However, the CBN argues that these gains are not sustainable and shouldn’t be distributed as dividends. Instead, the bank wants them held in reserve to provide a safety net if the Naira weakens in the future.

This new policy could impact both banks and investors. Banks will have less flexibility in how they utilize their profits. Investors hoping for larger dividend payouts may be disappointed.

The CBN’s decision reflects its commitment to safeguarding the Nigerian financial system. By requiring banks to hold onto these gains, the central bank aims to ensure that the banking sector remains resilient in the face of potential currency volatility.

After the naira was revalued in June, Nigerian banks recorded significant profits in their semi-annual financial results, largely due to the naira’s depreciation. This leads the CBN to issue the referenced directive in September.

This depreciation led to a notional increase in the banks’ balance sheets in naira terms, given their foreign exchange holdings.

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The central bank is concerned that this increase in profits may lead to spending that could expose the banks to risk if the exchange rate were to appreciate.