The Central Bank of Nigeria (CBN) has commenced investigation of two banks for foreign exchange malpractices. The two Ter 2 banks are being investigated for unbridled sale of foreign exchange to BDCs related to the banks.
One of the banks with headquarters on Victoria Island recently appointed a new Chief Executive Officer, while the other with headquarters on Lagos Island, recently celebrated its 30th anniversary. Investigation revealed that in some instances the banks foreign exchange in millions to each BDC per time. The apex bank however got wind of these unbridles foreign exchange sales and sent its examiners to investigate the banks as well as imposed stiff penalties on the banks. Investigations also revealed that though the apex bank has not barred the banks from selling foreign exchange to BDCs; they have however stopped doing so.
It would be recalled that last week the apex bank banned banks from selling its intervention foreign exchange in the interbank market, or to BDCs. In a circular with reference number TED/FEM/FPRB/GEN/01/020, dated October 28, 2014, the CBN also directed that funds purchased through its interventions at the interbank market should be utilised within two working days of delivery, at a rate not more than 10 kobo above the purchase rate. The CBN circular also directed that unutilised funds within two days of delivery should be returned to the Bank at the original purchase rates.

Naira loses 90k in interbank
Meanwhile the naira continued its depreciation against the dollar in the interbank market last week losing 90 kobo. Data from the Financial Market Dealers Quote (FMDQ) show that the interbank foreign exchange rate rose to N165.65 per dollar at the close of business on Friday from N164.75 per dollar. This it was gathered due to persistent demand pressure, aggravated by absence of intervention from the apex bank. Furthermore, the CBN reduced by 10 percent foreign exchange sales at the RDAS sessions held last week. From $999.88 million, foreign exchange sold dropped to $898.85 million. The official exchange rate remained unchanged at N 155.76 per dollar.
The 90 kobo depreciation of the naira at the interbank market last compounded the woes of the currency against the dollar for the month. Analysis revealed that though the naira was stable at the official segment, it depreciated by 185 kobo in the interbank in the month of October, with the interbank rate rising from N163.8 to N165.65 per dollar. The depreciation could have been worse but for the regular intervention of the CBN with special foreign exchange sales to stabilise the naira in the interbank market. Foreign exchange sales at RDAS for the month of October dropped slightly to $3 billion from $3.1 billion in the previous month.

External Reserve declines by $757m in October
The External reserve last week continued its downward trend reflecting the impact of the CBN’s foreign exchange intervention sales to stabilise the naira. Last week, the reserve fell below the $38 billion mark to $38.763 billion. This translated to decline of $238.99 billion in one week. Cumulatively, the external reserve fell by $757 million in October, representing the biggest decline since it start rising in June. By extension, the external reserve has declined by $5.17 billion or 11.8 percent in 2013.

No alternative to further tightening-Experts
Meanwhile analysts have said that the recent decline in crude oil prices with its concomitant effect on foreign exchange earnings, external reserve and the exchange rate of the naira, has made it imperative for the CBN to further tighten its monetary policy. In difference economic commentary, the analysts were of the view that the CBN has no alternative to further tightening of money supply.
“It is clear that a tightening cycle is developing, with a strong possibility of further direct tightening,” said analysts at Ecobank in a briefing titled, “Nigeria: Yields are heading up.”
“The recent, sharp fall in Brent oil prices and uncertainty over the normalization of US monetary policy following the end of QE in several days support a tightening bias. Without a large cushion of foreign exchange reserves the CBN is under pressure from the fall in oil prices so we expect the CBN to tighten policy as a means of underpinning the NGN. The MPR will remain above 12 percent for the weeks ahead, with the possibility of indirect tightening in the November meeting of the MPC. However, if the naira weakens in the interbank market to naira 170 or more, and oil prices drop below $80 per barrel an emergency MPC meeting could raise the MPR 50-100bp and increase the CRR”, they said.
Analysts at Financial Derivative Company (FDC) also stated, “We expect the CBN to continue to pursue a contractionary monetary policy, which will help in mitigating the risks to inflation and the exchange rate”.
In the company’s Economic and Business Update Bulletin issued last week, they explored the possible policy responses to the economic impact of the decline in crude oil prices. They noted, “The CBN‘s monetary policy will be a very useful tool in managing the risks to the exchange rate and inflation. The current restrictive policy stance has been effective so far in achieving the Central Bank‘s objectives. Although there is a strong desire for an expansionary interest rate policy to boost growth, it may not be prudent to adopt such a policy at this critical time.
“Fiscal policy, on the other hand, would have limited impact in curbing economic risks. However, the government can intensify efforts to prevent oil leakages and pipeline vandalism. This will help increase the country‘s oil production and in turn, minimize the impact of falling oil prices on revenues and external reserves. The government should also intensify efforts at strengthening the non-oil sector. Pending developments in the agriculture and power sectors should be carefully analysed to determine the way for- ward. Furthermore, there should be better collaboration of nation- al and regional governments in tackling the Boko Haram menace, since crimes are perpetrated through interstate and country borders.
“Nigeria‘s economic indicators have remained positive and relatively stable so far in 2014. However, the threats of increased risks from excess market liquidity, decreasing oil prices, changes in global monetary policies and security unrest may affect the stability of some economic variables. We expect the CBN to continue to pursue a contractionary monetary policy, which will help in mitigating the risks to inflation and the exchange rate. The Government should also intensify efforts at preventing leakages in oil production as well as strengthening the non-oil sector in order to boost revenues. The security crisis can also be better managed through greater collaboration of national and regional governments.”
AMCON redeems N866bn bond
Meanwhile the Asset Management Corporation of Nigeria (AMCON) redeemed its N866.73 billion Bond which matured on Friday. As reported by Vanguard last week, the bonds were redeemed with a combination of cash and treasury bills. This, according to a money market source, might not have significant or lasting impact on market liquidity, as the CBN is expected to mop up the liquidity fallout with increase sales of treasury bills this week.

CBN pegs banks’ foreign loans to 75% of shareholders funds
Last week, in bid to protect banks from possible currency depreciation, the Central Bank of Nigeria (CBN) pegged foreign currency borrowings of banks to 75 percent of the shareholders’ funds.
In a circular to banks posted on its website, the CBN said that, “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 circular titled “Prudential regulation for the management of foreign exchange risks of banks”, was signed by Mrs. Tokun Martins, Director, and Banking Supervision.
The CBN stated that the introduction of the limit was prompted by, “with concern the growth in foreign currency borrowings of banks through foreign lines of credit and issuance of foreign currency denominated bonds (Eurobonds).”
“The lower interest rate on foreign debt has created an incentive for banks to borrow abroad, and this has the advantage of providing fairly stable and long term funds to extend credit facilities in foreign currency and enhance their capital base.
“However, this also exposes banks to foreign exchange risks and their 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 and hedging requirements:
“The aggregate foreign currency borrowing of a bank excluding inter-group and inter-bank (Nigerian banks) borrowing should not exceed 75 percent of its shareholders’ funds unimpaired by losses;
“The 75 percent limit supersedes the 200 percent 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 percent of shareholders’ funds unimpaired by losses using the Gross Aggregate Method;
“Banks whose current NOP exceed 20 percent 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.
“Banks should borrow and lend in the same currency (natural hedging) to avoid currency mismatch associated with foreign currency risk.
“.The basis of the interest rate for borrowing should be the same as that of lending i.e. there should be no mismatch in floating and fixed
Interest rates, to mitigate basis risk associated with foreign borrowing interest rate risk.
“With respect to Eurobonds, any clause of early redemption should be at the instance of the issuer and approval obtained from the CBN in this regard, even if the bond does not qualify as tier 2 capital”.