16 February 2018

Nigerian Banks to Report Foreign Currency Exposures Using NiFEX Rate - Fitch

Fitch rating agency has disclosed that Nigerian banks plan to report the foreign currency items in their 2017 financial statements based on the Nigerian Foreign Exchange Fixing (NiFEX) rate instead of the official exchange rate.

In a statement yesterday, the rating agency said that banks' move to a more market-based presentation of foreign-currency assets, liabilities and profit-and-loss items will give a pragmatic representation of their foreign currency positions.

It stated: "Our discussions with banks that we rate suggest that most will publish their 2017 financial statements based on the Nigerian Foreign Exchange Fixing (NiFEX) rate (about N330/USD) instead of the official exchange rate of N305/USD, which they previously used. "Financial statements with foreign currency items translated more in line with market exchange rates will give a more realistic representation of banks' foreign currency positions and capital at risk from potential further depreciation of the naira. Exchange-rate risk warrants scrutiny for Nigerian banks because about 40 percent of assets and liabilities in Nigeria's banking sector are denominated in US dollars and not all banks operate with matched foreign currency positions."

However, the credit rating agency opined that NiFEX in itself is not the true market exchange rate. It recommended that the Nigerian Autonomous Foreign Exchange Rate (NAFEX) is the closest to the real market rate.

According to Fitch, "adopting the NiFEX rate is, however, only a partial step towards using market exchange rates. IFRS guidelines say that companies operating in countries with multiple exchange rates should translate their FC assets and liabilities into local currency based on the exchange rates at which they expect to settle them. But the guidelines leave scope for considerable judgement and flexibility, and Nigeria operates with multiple exchange rates, which adds to the confusion

"In our view, the exchange rate used under the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) mechanism is the closest to a true market rate. NAFEX was introduced last year and rates are set by market participants, giving investors and exporters a more transparent way to sell foreign currency. NAFEX attracts greater volumes than other exchange mechanisms."


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