The Central Bank of Nigeria (CBN) has introduced revised guidelines to allow Deposit Money Banks (DMBs) to deposit excess foreign currency notes at its branches in Lagos and Abuja in order to credit their offshore accounts with correspondent banks.
According to the apex bank, this move will deepen the foreign exchange market, boost liquidity, and align exchange rates between the parallel and official markets.
The decision comes in response to increasing demands from DMBs to streamline their forex cash management.
The document containing the guidelines and signed by Solaja, Mohammed J. Olayemi, the Acting Director, Currency Operations Department at the CBN read in part: “In order to deepen the foreign exchange market, boost liquidity and attain convergence in the exchange rates of the parallel and official markets, the Central Bank of Nigeria (CBN) has approved that DMBS may deposit their excess foreign currency notes with Lagos and Abuja branches of the Bank. The approval is a response to the increasing demand by DMBS to deposit their forex cash with CBN for onward credit to their off-shore accounts with the correspondent banks.”
Offshore accounts with correspondent banks refer to bank accounts held in foreign countries, typically used to facilitate international transactions. Correspondent banks are financial institutions that provide services on behalf of another bank, such as processing foreign currency exchanges or payments.
This arrangement allows local banks to access foreign markets and manage foreign exchange more efficiently without establishing a physical presence abroad.
Earlier, the CBN released a circular addressing suspected cases of excessive foreign currency speculation and hoarding from Nigerian banks. It, therefore, mandated DMBs to sell their excess dollar stock latest February 1, 2024, as part of moves to stabilize the nation’s volatile exchange rate. It did this by stating that the Net Open Position (NOP) must not exceed 20% short (owning more than owning) or 0% long (owning no more than the bank’s shareholder funds not reduced by losses) of the bank’s shareholders’ funds. The NOP measures the difference between a bank’s foreign currency assets (what it owns in foreign currencies) and its foreign currency liabilities (what it owes in foreign currencies).
The House of Representatives recently claimed that four banks are holding approximately $5 billion in surplus foreign exchange, signaling concerns about the volatility in Nigeria’s foreign exchange market.
Responding to this, the House directed the joint Committees on Banking Regulations and Banking Institutions to undertake an investigative hearing into the failure of banks and financial institutions to adhere to CBN directives regarding NOP Limits. The result of this probe remains unknown.
