Published On: Fri, Apr 14th, 2017

Dollar demand slumps over looming dollar crash

Naira Exchange

  • As CBN raises limits of foreign borrowings by banks

There were strong indications on Thursday that the demand for forex  by authorized dealers has slumped.

This is because the dealers were only able to pick $45 million out of the $100 million offered by the CBN on wholesale spot.

This is as the Central Bank of Nigeria (CBN) has upped the limit on banks’ foreign currency borrowings to 125 percent of shareholders’ fund following the violation of its regulatory limit due to naira depreciation.

Industry experts have attributed the slump in demand to the rate of forex liquidity being pumped into the system by the CBN, noting that it is only a matter of time before the dollar begins another round of crash.

The experts also attributed the new trend to the general cash crunch in the financial system.

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The new regulation replaces a 2014 rule capping foreign borrowings, including Eurobonds, at 75 percent of shareholders’ funds.

A circular entitled:Review of the Limit on Foreign borrowing by Banks by the Director of Banking Supervision Department of the apex bank, Ahmad Abdullahi lamented that the recent depreciation in the value of the currency has led to an increase in the Naira equivalent of foreign currency denominated borrowings by banks.

“A major consequence of this development was the inadvertent breach of the regulatory limit for foreign currency borrowings by some banks,” CBN said in  the circular.

“To address this development … the aggregate foreign currency borrowing of a bank borrowing should not exceed 125 percent of shareholders’ funds.”

The new rules also prescribes that all foreign borrowing should be hedged through the financial markets and debt should have a minimum of five- year maturity except for trade lines.

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It directed the banks  to report on their utilisation of foreign currency borrowings on a monthly basis.

The circular read in part: “The recent depreciation in the value of the currency has led to an increase in the Naira equivalent of foreign currency denominated borrowings by banks. A major consequence of this development was the inadvertent breach of the regulatory limit for foreign currency borrowings (75 per cent of shareholdersí funds unimpaired by losses) by some banks.

 

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