The Central Bank of Nigeria (CBN) has issued a directive to all banks in Nigeria to cease the use of foreign currencies as collateral for naira loans.
This instruction was communicated through a circular titled “The use of foreign-currency-denominated collaterals for naira loans” with reference number BSD/DIR/PUB/LAB/017/004, signed by the apex bank’s acting Director of Banking Supervision Department, Adetona Adedeji, and published on the CBN’s website on Monday.
The CBN observed the prevalent practice of bank customers using foreign currency (FCY) as collateral for naira loans and has thus prohibited it with immediate effect.
The circular directs banks to wind down all existing loans secured with foreign currency collaterals within 90 days or face a 150 per cent capital adequacy ratio computation as part of the bank’s risk assessment.
Exceptions to this directive include Eurobonds issued by the Federal Government of Nigeria or guarantees of foreign banks, including standby letters of credit.
Related News: EFCC Probes $2.4 Billion Forex Irregularities Uncovered by CBN Audit
All other loans currently secured with dollar-denominated collaterals should be wound down within the specified period.
The CBN emphasized its commitment to ensuring adequate foreign exchange liquidity in the market while strengthening the naira.
Eurobonds, as described by the Hong Kong and Shanghai Banking Corporation (HSBC), are offshore bonds issued by governments or corporates denominated in a currency other than that of the issuer’s country, often in US dollars.
Standby letters of credit are contractual commitments by a foreign buyer’s bank to pay once the exporter ships the goods and presents required documentation.
The CBN reiterated that the legal tender in Nigeria is the Naira and warned against contravening the provisions of the CBN Act of 2007, which stipulates that currency notes issued by the bank shall be legal tender in Nigeria for the payment of any amount.
Contravention of this provision is considered an offense punishable by prescribed fines or imprisonment.
This directive aims to regulate the use of foreign currencies in the domestic economy and ensure compliance with legal tender regulations in Nigeria.
You can also read: CBN Implements Higher Capital Requirement of N500 Billion for Mega Banks