International credit rating agency, Fitch, has issued a stern warning to the Central Bank of Nigeria (CBN), cautioning that the ban on commercial banks from holding net long foreign currency positions could exacerbate the depreciation of the Naira.
In its latest commentary on Nigerian banks released last Thursday, Fitch highlighted the potential consequences of the CBN’s directive to prohibit banks from maintaining net long foreign currency positions.
The agency argued that this practice, which has historically helped mitigate Naira depreciation, should have been allowed to continue to address the current foreign exchange (Forex) challenges effectively.
The CBN had mandated all commercial banks in Nigeria to cease the practice of holding net long foreign currency positions by February 1, as stated in a statement released in January. However, Fitch’s analysis suggests that this measure has not yielded the desired outcome, with the Naira now trading at a concerning rate of N1,600 to $1 at the parallel market.
Fitch’s commentary emphasized the role of net long foreign currency positions in cushioning the impact of Naira devaluation on banks’ capital ratios, noting that the prohibition of this practice could leave banks more vulnerable to forex-related risks.
Additionally, the agency expressed concerns about the potential negative effects of the CBN’s proposed establishment of a foreign currency gateway bank on Nigerian banks’ liquidity.
The statement quoted part of Fitch’s analysis, which highlighted the downgrade of a bank’s Long-Term IDR (Issuer Default Rating) due to breaches in regulatory capital adequacy requirements.
Fitch underscored the challenges faced by Nigerian banks in generating internal capital amidst pressures on the Naira and increased asset-quality risks.
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Despite acknowledging that total capital adequacy ratios may remain above regulatory minimum requirements, Fitch warned that without net long foreign currency positions, banks’ capital positions could be significantly exposed to further Naira depreciation.
As Nigeria grapples with ongoing forex challenges and economic uncertainties, stakeholders await the CBN’s response to Fitch’s warning and anticipate potential measures to address the deepening concerns surrounding the stability of the Naira and the banking sector.
