CBN Bans Use Of Foreign Currency As Collateral To Collect Naira Loans From Banks

The Central Bank of Nigeria (CBN) has issued a directive prohibiting the use of foreign currency (FCY) as collateral for Naira loans.

This was contained in a circular issued on Monday by Dr. Acting Director of the Banking Supervision Department, Adetona S. Adedeji.

According to the directive, banks are no longer permitted to accept deposits denominated in foreign currencies such as USD, EUR, or GBP as security for Naira loans.

This prohibition extends to most financial instruments based on foreign currency, with exceptions explicitly outlined by the CBN.

Under the new regulation, Nigerian government-issued Eurobonds remain permissible as collateral for Naira loans, along with guarantees from reputable foreign banks, including Standby Letters of Credit.

The directive also providespd a timeframe for banks to address existing loans secured by non-compliant collateral.

The circular reads: “The Central Bank of Nigeria has observed the prevailing situation where bank Customers use Foreign Currency (FCY) as collateral 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”.

The CBN in the circular also warned of potential consequences for banks failing to comply with the directive.

“Failing which such exposures shall be risk-weighted 150 percent for Capital Adequacy Ratio computation, in addition to other regulatory sanctions,” the apex bank warned.

This adjustment effectively increases the capital reserves required by banks against these loans, impacting their profitability.

While the CBN did not specify the exact nature of additional sanctions, potential penalties could include fines or other punitive measures.