The Central Bank of Nigeria (CBN) has banned the use of foreign currency-denominated collaterals for obtaining naira loans, except under specific conditions.
This was conveyed through a circular distributed to all Nigerian banks by Dr Adetona S. Adedeji, the Acting Director of the Banking Supervision Department at the CBN.
The circular noted CBN’s observations of the prevalent use of foreign currency (FCY) as collateral by bank customers seeking naira loans. In the light of these observations, the CBN resolved to prohibit this practice, aiming to stabilise the financial market and ensure the prudent use of foreign currency within the economy.
However, the directive comes with notable exceptions. Foreign currency collateral will still be permissible if it is in the form of Eurobonds issued by the Federal Government of Nigeria or guarantees from foreign banks, including Standby Letters of Credit.
This move signifies the CBN’s effort to maintain a balanced approach, recognising the importance of specific international financial instruments and guarantees in the banking sector.
The circular reads:
The CBN’s directive mandates that all existing loans currently secured with dollar-denominated collaterals, other than those specified, be wound down within a 90-day window.
Banks failing to comply with this requirement will face stringent penalties. The circular specifies that such non-compliant exposures will be subject to a 150% risk weighting for the computation of the capital adequacy ratio, a key measure of a bank’s financial health. This is accompanied by a warning of additional regulatory sanctions, underscoring the seriousness with which the CBN views this policy change.
The circular stated: