CBN insists banks can’t pay dividends from FX revaluation gains

The Central Bank of Nigeria has reiterated that banks operating in the country cannot use their foreign exchange revaluation gains to pay dividends or meet their operational expenses.

In a circular from the apex bank on Thursday signed by the acting Director, of 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.”

The CBN had in September directed Deposit Money Banks to stop utilising gains from their foreign exchange revaluation for dividends and operational expenditures.

In a letter dated September 11, 2023, and signed by then CBN Director, Banking Division Department, Haruna Mustafa, the apex bank said the new directive was expected to be implemented immediately.

Forex revaluation gains occur when there is an increase in the value of a bank’s assets and liabilities denominated in foreign currency due to a change in the exchange rate between the foreign currency and the local currency.

Several Nigerian banks reported high revaluation gains in their third-quarter reports, setting them up to report better figures for the full year.

Some of the lenders that have released their full-year results have posted impressive performance.

In the September circular, the CBN assessed the consequences of the recent FX rate regime change on the banking system and identified its potential to substantially impact the naira values of banks’ foreign currency assets and liabilities.

“The bank thus approved the following prudential guidance and directives for immediate implementation by banks. Treatment of FX Revaluation Gains: Banks are required to exercise utmost prudence and set aside the FCY revaluation gains as a counter-cyclical buffer to cushion any future adverse movements in the FX rate. In this regard, banks shall not utilise such FX revaluation gains to pay dividends or meet operating expenses.

“Single Obligor Limit (SOL): Banks that inadvertently breach the Single Obligor Limit (SOL) due to the FX policy will be granted forbearance upon application to the CBN. The forbearance shall apply only to existing facilities as of the effective date of this policy. Such banks shall be exempted from the regulatory deductions on the excess above the SOL limit in their CAR computation.

“Net Open Position Limit: Banks that exceed the NOP prudential limits due to the FX revaluation shall be granted forbearance for the breach upon application,” the circular partly read.