April 8, 2024

By Kelechukwu MGBOJI InvestAdvocate

Lagos (INVESTADVOCATE)-The Central Bank of Nigeria (CBN) has directed all deposit money banks (DMBs) to stop the use of hard currencies as collateral for naira-denominated loans. CBN’s circular on Monday titled “The use of foreign-currency-denominated collaterals for naira loans” stated ‘it had observed the use of FCY by bank customers as collateral for naira loans and, therefore, prohibits it with immediate effect.”number: The circular signed by the acting Director, Banking Supervision Department, Adetona Adedeji, with a reference number BSD/DIR/PUB/LAB/017/004, directed banks to trim all existing loans with foreign currency collaterals to 90 days or attract a 150 per cent capital adequacy ratio computation as part of the bank’s risk.

The circular uploaded on the apex bank’s website read in part: “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 circular read.
The CBN maintained that it is on a mission to ensure that there is adequate foreign exchange in the market despite naira misfortune.

The apex bank’s previous circular to all the banks signed by erstwhile Director of Corporate Communications Department, Ibrahim Mu’azu, had lamented increasing use of foreign currencies in the domestic economy as a medium of payment for goods and services by individuals and corporates.

It noted that some institutions price their goods and services in foreign currencies and demand payments in foreign currencies rather than the domestic currency (the Naira), which is the legal tender in Nigeria.
CBN had then warned defaulters against six months jail liability if convicted.