By Adedapo Adesanya
The Central Bank of Nigeria (CBN), in its latest move to strengthen the local currency and sanitise the foreign exchange (FX) market, has banned the use of foreign currency collaterals for Naira loans.
The CBN, however, exempted Eurobonds issued by the Federal Government of Nigeria or Guarantees of foreign banks, including Standby Letters of Credit from the ban.
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.
This was announced in a circular titled, The Use of Foreign-Currency Denominated Collaterals for Naira Loans signed by the Director, Banking Supervision Department, CBN, Mr Adetona Adedeji, on Monday.
“The Central Bank of Nigeria has observed the prevailing situation where bank customers use Foreign Currency (FCY) as collaterals for Naira loans.
“Consequently, the current practice of using foreign currency-denominated collateral for Naira loans is hereby prohibited, except, where the foreign currency collateral is: Eurobonds issued by the Federal Government of Nigeria; or Guarantees of foreign banks, including Standby Letters of Credit.”
The apex bank warned that banks that fail to comply with this requirement will face stringent penalties.
“In this regard, all loans currently secured with dollar-denominated collaterals other than as mentioned above should be wound down within 90 days, failing which such exposures shall be risk-weighted 150 per cent for Capital Adequacy Ratio computation, in addition to other regulatory sanctions.”
With this new move, banks and other financial institutions will have to go to the drawing table as it could affect loan structuring, and risk management practices, and extend to the financial stability of the economy.
Recall that the CBN last week announced recapitalisation plans for banks across several cadres. The banks have until March 2026 to raise additional funding to meet the recapitalisation targets.