The Central Bank of Nigeria (CBN) has issued a circular prohibiting the use of foreign currency (FCY) as collateral for Naira-denominated loans, News About Nigeria reports.
This directive was outlined in a circular by Dr. Acting Director of the Banking Supervision Department, Adetona S. Adedeji.
According to the new regulation, banks are no longer permitted to accept deposits denominated in foreign currencies such as USD, EUR, or GBP as security for loans issued in Naira.
This ban encompasses most foreign currency-based financial instruments, with exceptions outlined by the CBN.
Specifically, Nigerian government-issued Eurobonds and guarantees provided by reputable foreign banks, including Standby Letters of Credit, are exempt from this prohibition and can still be used as collateral for Naira loans.
The circular provides a timeframe for banks to address existing loans secured by non-compliant collateral, stating that loans currently secured with dollar-denominated collaterals other than Eurobonds or foreign bank guarantees should be wound down within 90 days.
Failure to comply with this new directive carries consequences for banks, as outlined by the CBN.
“Consequently, the current practice of using foreign currency-denominated collaterals 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.
“In this regard, all loans currently secured with dollar-denominated collaterals other than as mentioned above should be wound down within 90 days,” the directive read in part.
Such exposures will be risk-weighted at 150 percent for Capital Adequacy Ratio computation, in addition to other regulatory sanctions.
This effectively increases the capital reserves that banks must hold against these loans, thereby impacting their profitability.
While the circular did not specify the exact nature of these additional sanctions, they could potentially include fines or other penalties imposed by the CBN.
