The Central Bank of Nigeria, CBN, has expressed concern over the growing incidence of abuse of prudential regulations by banks through the issuance of foreign currency denominated bonds (Eurobonds).
The bank’s director of banking supervision, Tokunbo Martins, said financial sector regulator was also worried that the banks were not adhering to the regulation regarding foreign currency borrowings in foreign lines of credit.
According to Mrs. Martins, the lower interest rate on foreign debt was created as an incentive for banks to borrow abroad, apart from the added advantage of providing fairly stable and long term funds to extend credit facilities in foreign currency and enhance their capital base.
Noting that the policy was capable of also exposing banks to foreign exchange and other risks, Mrs. Martins said the banks must adhere strictly to the prudential and hedging requirements to ensure that these risks were well managed and losses capable of posing material and systemic challenges were avoided.
The prudential guidelines include that the aggregate foreign exchange borrowing of a bank, excluding inter-group and inter-bank borrowing should not exceed 75 per cent of its shareholders’ funds unimpaired by losses.
The 75 per cent limit, she said, supersedes the 200 per cent specified in the guidelines for foreign borrowing for on-lending by Nigerian banks issued on November 26, 2001.
The guidelines also states that the net open position (long or short) of the overall foreign currency assets and liabilities taking into account that on and off balance sheet should not exceed 20 per cent of shareholders’ funds unimpaired by loses using the gross aggregate method.
The banks whose current NOP exceed 20 per cent of their shareholders’ fund, she said, would be required to bring them to prudential limit within six months, while banks are required to compute their monthly NOP based on approved template.
The current NOP limit of one per cent of shareholders’ funds has been renamed Foreign Currency Trading Position to subsist the CBN guidelines.
The director said banks were required to have adequate stock of high-quality liquid foreign assets, including cash and government securities in each significant currency to cover their maturing foreign currency obligations.
She said banks were expected to have in place a foreign exchange contingency funding arrangement with other financial institutions.
On hedging and other requirements, Mrs. Martins said the banks should borrow and lend in the same currency to avoid currency mismatch associated with foreign currency risk.
Similarly, the basis of the interest rate for borrowing should be the same as that of borrowing without any mismatch in floating and fixed interest rates to mitigate the basis risk associated with foreign borrowing interest rate risk.
On Eurobonds, the CBN said any clause of early redemption should be at the instance of the issuer and approval obtained from the CBN, even if the bond did not qualify as tier two capital.
“Banks are required to adhere to the provisions of this circular with immediate effect,” she warned.
Support PREMIUM TIMES' journalism of integrity and credibility
Good journalism costs a lot of money. Yet only good journalism can ensure the possibility of a good society, an accountable democracy, and a transparent government.
For continued free access to the best investigative journalism in the country we ask you to consider making a modest support to this noble endeavour.
By contributing to PREMIUM TIMES, you are helping to sustain a journalism of relevance and ensuring it remains free and available to all.
TEXT AD: To advertise here . Call Willie +2347088095401...