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Central Bank of Nigeria Bans Use of Foreign Currency Collaterals for Naira Loans

Central Bank of Nigeria Bans Use of Foreign Currency Collaterals for Naira Loans
Central Bank of Nigeria Bans Use of Foreign Currency Collaterals for Naira Loans

The Central Bank of Nigeria (CBN) has issued a directive to all banks in the country, urging them to discontinue the practice of using foreign currencies as collateral for naira 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.

The circular, signed by Adetona Adedeji, the acting Director of the Banking Supervision Department at CBN, was made public on the bank’s website on Monday.

It highlights the observation of CBN regarding the utilization of foreign currency by bank customers as collateral for naira loans, prompting the prohibition of such practices with immediate effect.

According to the directive, the use of foreign currency-denominated collaterals for naira loans is now prohibited, except in cases where the collateral is in the form of Eurobonds issued by the Federal Government of Nigeria or guarantees from foreign banks, including standby letters of credit.

Additionally, the circular mandates banks to phase out all existing loans secured with foreign currency collaterals within 90 days. Failure to comply will result in a risk-weighting of 150% for Capital Adequacy Ratio computation, along with other regulatory sanctions.

The CBN emphasized its commitment to maintaining adequate foreign exchange reserves in the market while concurrently strengthening the value of the naira.

Explaining further, Eurobonds, as described by the Hong Kong and Shanghai Banking Corporation (HSBC), are offshore bonds issued by governments or corporations, typically denominated in currencies other than that of the issuer’s country, often in US dollars.

Moreover, Letters of Credit, recognized as a trade finance tool, serve as contractual commitments by the foreign buyer’s bank to pay upon the shipment of goods, provided the exporter presents the required documentation to the importer’s bank.

This directive follows previous concerns raised by the CBN regarding the growing use of foreign currencies in Nigeria’s domestic economy, both for transactions and pricing of goods and services.

The CBN reiterated the legal tender status of the Naira, as stipulated in the CBN Act of 2007, warning against contravention of this provision, which may lead to prescribed fines or imprisonment upon conviction.

This Article is Fact-Checked. See Policy.

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