The Central Bank is at it again!! They have now released a new prudential regulation that seeks to tighten the amount of foreign currency banks can borrow from the European or world market as a whole. Banks in the past two years have rushed towards Eurobonds based on their relatively cheap interest rates in a bid to shore up Tier 2 capital.
However, these sort of borrowings does come with significant risk as they have to pay back the loans in foreign currency. A sudden crash in the value of the naira against the dollar for example is likely to keep banks under significant risk. Based on this, the CBN has now issued fresh new guidelines that seem to place a cap on how much banks can borrow. Here are the key guidelines;
- The aggregate foreign currency borrowing of a bank excluding inter- group and inter-bank (Nigerian banks) borrowing should not exceed 75% of its shareholders’ funds unimpaired by losses. The 75% limit supersedes the 200% specified in Section 6 of our Guidelines for Foreign Borrowing for on-Lending by Nigerian Banks issued on November 26, 2001.
- The Net Open Position (long or short) of the overall foreign currency assets and liabilities taking into cognizance both those on and off- balance sheet should not exceed 20% of shareholders’ funds unimpaired by losses using the Gross Aggregate Method. Banks whose current NOP exceed 20% of their shareholders’ funds are required to bring them to prudential limit within six (6) months. Banks are required to compute their monthly NOP using the attached template.
- The current NOP limit of 1% of shareholders’ funds has been renamed as Foreign Currency Trading Position. This will continue to subsist in line with guidelines issued by the CBN.
- Banks are required to have adequate stock of high-quality liquid foreign assets i.e cash and government securities in each significant currency to cover their maturing foreign currency obligations. In addition, banks should have in place a foreign exchange contingency funding arrangement with other financial institutions.
According to Reuters, Nigerian banks have raised over $1.1 billion this year from issuing Eurobonds and other types of debt instruments as lenders rush to take advantage of loose monetary policies by global central banks to shore up their capital bases. Zenith Bank sold $500 million in Eurobonds, Access Bank raised $400 million and Diamond Bank secured $200 million, according to Citi, which acted as lead arranger.
Get the full regulations here
