The CBN Implements a Ban on Foreign Currency Collaterals for Naira Loans
The Central Bank of Nigeria (CBN) has implemented a prohibition on using foreign cash as security for loans denominated in the Nigerian currency, the naira. Issued in a circular on April 8, 2024, and distributed to all banks, this order seeks to tackle current economic difficulties and transform the financial environment.
Adetona Adedeji, the current head of the Banking Supervision Department at CBN, has published a circular that specifies two exemptions to the recently implemented regulation.
These exemptions include Eurobonds issued by the Federal Government of Nigeria and foreign bank guarantees, which include Standby Letters of Credit.
The circular notes that the Central Bank of Nigeria has noticed the current practice of bank clients using foreign currency (FCY) as collateral for Naira loans.
Therefore, the use of foreign currency-denominated collateral for loans in Nigerian currency is banned, save in the specific instances listed above. In addition, the Central Bank of Nigeria emphasizes the necessity for banks to repay outstanding loans that are backed by collateral denominated in dollars within a period of 90 days.
Non-compliance with this order will result in certain exposures being risk-weighted at 150% when calculating the capital adequacy ratio, in addition to other regulatory penalties.At the same time, the Central Bank of Nigeria (CBN) declared the allocation of dollars to more than 1,500 Bureau de Change (BDC) operators to meet the retail market’s demand for qualified transactions.
Each Business Development Centre (BDC) will receive a sum of $10,000 at an exchange rate of N1,101 for $1. This action is in line with the Central Bank of Nigeria’s wider initiatives to maintain the recent increase in the value of the naira versus the dollar, which has seen an appreciation of more than 40% in the past few weeks.
The decision to cease accepting foreign currency as collateral for naira loans is a deliberate change in monetary policy with the objective of improving currency stability and reducing the potential risks arising from currency swings.
Nevertheless, the consequences of this directive go beyond just adhering to regulations; they affect the way borrowing is done, the dynamics of the financial industry, and the general stability of the economy.
Industry players, economists, and analysts are carefully observing the ongoing developments and evaluating the possible consequences on loan activities, business operations, and investor mood.
In the midst of these developments, the Central Bank of Nigeria (CBN) is implementing proactive steps to create a favorable economic environment that promotes sustainable growth and financial resilience.
By Nnaemeka Odenigbo
