In response to the devaluation of the naira earlier this year, Nigeria’s central bank has issued a directive instructing the nation’s financial institutions to redirect the substantial gains from currency revaluation towards building safeguards against potential future losses. This move comes as part of the country’s broader currency reform efforts aimed at attracting foreign investment and revitalizing its struggling economy.

The Central Bank of Nigeria, based in Abuja, emphasized the need for prudence in handling these gains. In a circular addressed to all lending institutions, the central bank stated, “Banks are required to exercise utmost prudence and set aside the foreign currency revaluation gains as a counter-cyclical buffer to cushion any future movements in FX rates. Banks shall not utilize such FX revaluation gains to pay dividends or meet operating expenses.”

Nigerian banks have reported significant foreign exchange gains as a result of the naira’s 40% depreciation against the US dollar in June, a key component of the currency reform strategy. These gains have recently become evident as banks release their half-year financial results. Notably, Zenith Bank Plc, the largest lender in Nigeria, reported a staggering 355.6 billion naira (approximately $471.6 million) in foreign exchange gains. This windfall more than doubled the bank’s profits, enabling it to declare an interim dividend of 50 kobo, marking the largest such payout per share in at least a decade.

While the currency revaluation has proven advantageous for banks holding significant dollar reserves, it has had adverse effects on certain customers, particularly manufacturers with foreign-currency liabilities. These losses among manufacturers could, in turn, pose a risk to banks if they undermine the quality of their loan portfolios.

Zenith Bank responded to these potential challenges by increasing provisions nearly eightfold to 207.9 billion naira during the first half of the year. This adjustment reflects the evolving lending landscape affected by the currency devaluation.

The Central Bank of Nigeria has also issued a warning regarding the broader implications of the currency reforms, emphasizing the potential increase in asset quality risks and pressure on industry capital adequacy. Additionally, the central bank has expressed concerns about the possibility of banks breaching regulations related to lending to a single customer and exceeding dollar-holding limits.

As Nigeria continues to navigate its currency reforms and economic recovery, the prudent handling of windfall gains by financial institutions remains a critical aspect of safeguarding the nation’s financial stability and ensuring sustainable economic growth.

Photo Source: Google

12th September, 2023
By: Delino Gayweh
Serrari Financial Analyst