The Central Bank of Nigeria (CBN) has released a new circular addressing suspected cases of excessive foreign currency speculation and hoarding from Nigerian banks.

The new circular introduces a set of guidelines aimed at reducing the risks associated with these practices.

The circular, titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” highlights the CBN’s concerns over the growing trend of banks holding large foreign currency positions.

• “The Central Bank of Nigeria (CBN) has noted with concern the growth in foreign currency exposures of banks through their Net Open Position (NOP). This has created an incentive for banks to hold excess long foreign currency positions, which exposes banks to foreign exchange and other risks. Therefore, to ensure that these risks are well managed and avoid losses that could pose material systemic challenges, the CBN issues the following prudential requirements”

In simple English, the central bank believes some commercial banks hold long-term positions in forex with the hope of profiting from it especially when there are forex fluctuations.

• For example, a bank borrows or buys $ 1 million worth of forex but then holds half of it in its position instead of lending it or using it to finance purchases for its clients immediately.
• What this means is that banks can profit from currency depreciation if they buy the forex low and sell high.

This practice, known as speculation, involves buying or holding foreign currencies in the hope of profiting from fluctuations in exchange rates. However, this behavior can expose banks to significant risks, including exchange rate volatility and potential financial losses.

Optics: Commercial banks in Nigeria have profited massively from forex revaluation gains since 2023.

• As such, most analysts believe some of the banks may be deliberately buying forex and then holding it long enough to sell when it depreciates.
• In some cases, some banks can buy forex from the CBN with plans to sell to customers but they do not sell and instead hold the forex. Once the currency depreciates, they make money.

（source：https://nairametrics.com/2024/01/31/new-cbn-circular-aims-to-curb-banks-forex-speculation-issues-guidelines-to-stop-it/）