By Ohuakanwa Chibuzo
Fitch, the international credit rating agency, has expressed concerns that the recent directive by the Central Bank of Nigeria (CBN) prohibiting commercial banks from holding net long foreign currency positions could further devalue the country’s currency, the Naira.
In its latest commentary on Nigerian banks released last Thursday, Fitch emphasized that allowing banks to maintain control over their net long foreign currency positions had historically helped mitigate Naira depreciation. The agency argued that the CBN’s decision to ban this practice would not alleviate the current forex challenges but might exacerbate them.
Net long positions indicate when an investor holds more long positions than short positions in a particular asset or market.
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The CBN mandated all commercial banks in Nigeria to cease the net long practice in forex dealings by February 1, as announced in a statement released in January. However, since the directive, the situation has worsened, with the Naira trading at N1,600 to $1 in the parallel market.
Fitch’s commentary highlighted key points regarding the CBN’s recent circulars and statements following the devaluation. It noted that the prohibition of net long foreign currency positions could expose banks’ capital positions to further Naira depreciation. Although most banks’ total capital adequacy ratios are expected to remain above regulatory minimums, the absence of net long FC positions could impact capital ratios.
Furthermore, Fitch expressed concerns about the proposed foreign currency gateway bank, suggesting it could adversely affect Nigerian banks’ liquidity. The agency also downgraded ENG’s Long-Term IDR due to breaches in regulatory minimum capital adequacy requirements, reflecting increased risks amid Naira pressures and significant foreign currency-denominated loans.
Fitch’s assessment underscores the challenges facing Nigerian banks amid evolving forex regulations and economic conditions, highlighting the need for strategic responses to safeguard financial stability and regulatory compliance.
