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April 8, 2024
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CBN bans foreign currency as collateral for Naira loans

The Central Bank of Nigeria (CBN) has issued a directive to all banks operating within the country, instructing them to cease accepting foreign currencies as collateral for naira-denominated loans. This directive was communicated via a circular titled “The use of foreign-currency-denominated collaterals for naira loans,” bearing reference number BSD/DIR/PUB/LAB/017/004. Signed by Adetona Adedeji, the acting Director of the Banking Supervision Department at the apex bank, the circular was disseminated on Monday and subsequently uploaded to the CBN’s website.

The central bank noted a prevalent trend among bank customers of offering foreign currency (FCY) assets as collateral for naira loans. Consequently, the CBN has implemented an immediate prohibition on this practice.

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Banks are now required to adjust all existing loans secured with foreign currency collaterals within a 90-day timeframe. Failure to comply will result in the affected exposures being subjected to a 150% risk weighting for Capital Adequacy Ratio computation, alongside other regulatory penalties.

The circular clarified that the prohibition does not apply to specific exceptions, such as Eurobonds issued by the Federal Government of Nigeria or guarantees from foreign banks, including standby letters of credit. Eurobonds, as defined by the Hong Kong and Shanghai Banking Corporation (HSBC), are long-term debt instruments issued offshore by governments or corporations and denominated in currencies other than that of the issuer’s country, typically in US dollars.

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Standby letters of credit, according to the International Trade Administration, serve as contractual commitments by a foreign buyer’s bank to make payment upon the exporter meeting specified conditions.

CBN reiterated its commitment to maintaining adequate foreign exchange liquidity in the market while simultaneously strengthening the naira. This move aligns with the central bank’s broader objectives for monetary policy and financial stability.

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Prior to this directive, the CBN had previously addressed concerns regarding the growing reliance on foreign currencies within the domestic economy for both individual and corporate transactions. It emphasized the legal tender status of the Nigerian Naira, as stipulated in the CBN Act of 2007. Any contravention of this provision constitutes an offense punishable by law, with prescribed fines or imprisonment upon conviction.

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The Central Bank of Nigeria has issued a directive instructing