CBN’s New Foreign Currency Gateway Bank Raises Concerns Over Nigerian Banks’ Liquidity: Fitch Ratings

The Central Bank of Nigeria (CBN)’s announcement of a new Foreign Currency Gateway Bank has stirred concerns over the liquidity of Nigerian banks, according to recent commentary from credit rating agency Fitch Ratings.

The proposed bank, designed to centralize correspondent banking activities, has prompted Fitch to issue cautionary remarks regarding its potential impact on the banking sector’s foreign currency (FC) liquidity.

Governor of the CBN, Dr. Olayemi Cardoso, unveiled plans for the Foreign Currency Gateway Bank to streamline and centralize correspondent banking functions, currently dominated by two major banks.

The initiative is part of the CBN’s efforts to address Nigeria’s persistent forex crisis.

Fitch Ratings expressed apprehension, highlighting the potential negative effects on the banking sector’s FC liquidity.

The agency noted that the centralization of correspondent banking activities, coupled with recent measures by the CBN, might exacerbate liquidity challenges for Nigerian banks.

Furthermore, Fitch cautioned that the recent devaluation of the naira, coupled with the CBN’s circular prohibiting banks from holding net long foreign currency positions, could further strain FC liquidity.

The prohibition on net long FC positions may leave banks more vulnerable to naira depreciation, potentially affecting their capital positions.

The CBN’s move to harmonize different segments of the foreign currency market last June led to significant naira devaluation, with the local currency closing at 899/$ at the official market by the end of last year.

As of February 13, the naira experienced a second devaluation, reaching 1,516/$, marking a 40% devaluation.

While the shift away from a managed exchange rate regime aims to attract capital inflows and mitigate forex shortages, it poses short-term risks such as heightened inflation and potential strains on loan quality and capital adequacy within the banking sector, as highlighted by Fitch Ratings.

As discussions continue, stakeholders closely monitor the implications of the proposed Foreign Currency Gateway Bank on Nigeria’s financial landscape.