The Central Bank of Nigeria (CBN) has made an important decision to stop accepting foreign currencies as collateral for loans denominated in naira.
In a circular disseminated today, April 8, the apex bank instructed all Nigerian financial institutions to discontinue the longstanding practice of utilizing foreign currencies as security for loans denominated in the local currency.
The CBN clarified that foreign currencies may only serve as collateral for naira-denominated loans under specific circumstances: namely, when the collateral comprises Eurobonds issued by the Federal Government of Nigeria or guarantees provided by foreign banks, which include Standby Letters of Credit.
Furthermore, the CBN mandated that all outstanding loans currently backed by dollar-denominated collateral, apart from those meeting the aforementioned exceptions, must be phased out within a period of 90 days. Failure to adhere to this directive will result in sanctions being imposed.
This decision underscores a significant shift in the CBN’s approach to loan collateralization in naira, potentially aimed at mitigating exchange rate risks and standardizing banking practices within the Nigerian financial sector.
Read below
‘’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 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, failing which such exposures shall be risk-weighted 150% for Capital Adequacy Ratio computation, in addition to other regulatory sanctions.
Please be guided accordingly.
See the circular
