The Central Bank of Nigeria (CBN), has issued a circular prohibiting the use of foreign currency (FCY), as collateral for loans denominated in Naira.
The directive, communicated by Dr. Adetona S. Adedeji, Acting Director of the Banking Supervision Department, marks a departure from previous practices.
Under the new regulation, banks are no longer permitted to accept deposits in foreign currencies such as USD, EUR, or GBP as security for Naira loans, with a few exceptions outlined by the CBN.
Exceptions to the ban include Nigerian government-issued Eurobonds, which can still be utilised as collateral for Naira loans, along with guarantees from reputable foreign banks, including Standby Letters of Credit.
Existing loans secured by non-compliant collateral must be addressed within a stipulated timeframe, as stated in the circular: “All loans currently secured with dollar-denominated collateral other than as mentioned above should be wound down within 90 days.”
The CBN also warned of consequences for non-compliance, stating that failing to adhere to the directive would result in risk-weighted adjustments of 150 percent for Capital Adequacy Ratio computation, in addition to potential regulatory sanctions.
These additional measures are aimed at ensuring banks hold sufficient capital reserves against such loans, although the specifics of these sanctions were not detailed in the circular.
The move by the CBN represents a strategic measure to regulate the use of foreign currency in the Nigerian financial system, potentially impacting the profitability and risk management practices of banks operating within the country.
