In a significant move aimed at regulating Nigeria’s financial sector, the Central Bank of Nigeria (CBN) has issued a circular instructing all banks to cease the practice of accepting foreign currencies as collateral for naira loans.
The circular, titled “The use of foreign-currency-denominated collaterals for naira loans” with reference number BSD/DIR/PUB/LAB/017/004, was signed by the CBN’s acting Director of the Banking Supervision Department, Adetona Adedeji, and uploaded to the bank’s website on Monday.
The apex bank expressed concern over the increasing use of foreign currency (FCY) by bank customers as collateral for naira loans, citing potential risks to financial stability. As a result, it has prohibited this practice with immediate effect, except in cases where the foreign currency collateral consists of Eurobonds issued by the Federal Government of Nigeria or guarantees of foreign banks, including standby letters of credit.
The circular mandates banks to wind down all existing loans secured with dollar-denominated collaterals within 90 days. Failure to comply will result in such exposures being risk-weighted at 150% for Capital Adequacy Ratio computation, along with other regulatory sanctions.
Emphasizing its commitment to maintaining adequate foreign exchange reserves and strengthening the naira, the CBN reiterated its mission to ensure stability in the foreign exchange market.
Eurobonds, as explained by the Hong Kong and Shanghai Banking Corporation (HSBC), are offshore bonds denominated in a currency other than that of the issuer’s country. They are typically long-term debt instruments and are frequently denominated in US dollars.
Letters of Credit, on the other hand, serve as contractual commitments by the foreign buyer’s bank to pay upon the exporter’s shipment of goods and presentation of required documentation to the exporter’s bank.
This directive follows the CBN’s earlier circular addressing the increasing use of foreign currencies in Nigeria’s domestic economy for payment of goods and services. The apex bank reaffirmed the legal status of the Naira as the sole legal tender in Nigeria, warning against any contravention of this provision under the CBN Act of 2007, which carries penalties including fines and imprisonment.
The CBN’s latest regulatory measures aim to strengthen the domestic currency’s position and ensure compliance with existing financial regulations.