The Central Bank of Nigeria has warned that the rising reliance of banks in the country on foreign currency borrowings exposes the banks to foreign exchange risks, among others.
The CBN issued “prudential and hedging requirements to ensure that these risks are well managed, avoiding losses that could pose material systemic challenges” as released from their website recently.
The lower interest rate on foreign debt had created an incentive for banks to borrow abroad, which it noted, had the advantage of giving fairly stable and long-term funds to extend credit facilities in foreign currency and boost their capital base, CBN said.
On the prudential requirements, excluding inter-group and inter-bank (Nigerian banks) central bank said the collective foreign currency borrowing should not exceed 75 per cent of its shareholders’ funds unimpaired by losses.
“The 75 per cent limit supersedes the 200 per cent specified in Section 6 of our Guidelines for Foreign Borrowing for on-Lending by Nigerian Banks issued on November 26, 2001.”
The CBN said banks whose current NOP surpass 20 per cent of their shareholders’ funds are required to bring them to prudential limit within six months.
It further said that the current NOP limit of one per cent of shareholders’ funds had been renamed as Foreign Currency Trading Position, adding that it would continue to subsist in line with guidelines issued by the CBN.
The hedging and other requirements included that banks should borrow and lend in the same currency (natural hedging) to avoid currency disparity associated with foreign currency peril.