The Central Bank of Nigeria (CBN) has issued a directive to all banks, instructing them to cease the use of foreign currency-denominated collaterals for naira loans.
Adetona Adedeji, the acting director of the banking supervision department at the CBN, made this announcement in a statement released on Monday.
In the circular, the regulator outlined measures to be taken by banks, including the trimming of all existing loans with foreign currency collaterals to a 90-day timeframe. Failure to comply would result in a 150 percent capital adequacy ratio computation as part of the bank’s risk assessment.
The circular states: “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.”
The move by the CBN aims to ensure that there is sufficient foreign exchange liquidity in the market while concurrently strengthening the naira.
