CBN bans foreign currency collateral for naira loans.

The Central Bank of Nigeria has instructed banks to cease accepting foreign currencies as collateral for naira loans, as outlined in a circular titled “The use of foreign-currency-denominated collaterals for naira loans” with ref number: BSD/DIR/PUB/LAB/017/004. Signed by Adetona Adedeji, the acting Director of the Banking Supervision Department, the circular was released on Monday and uploaded to the CBN’s website.

The apex bank expressed concern over customers’ use of foreign currency as collateral for naira loans and promptly prohibited it. Banks were directed to wind down all existing loans with foreign currency collaterals within 90 days or face a 150 percent capital adequacy ratio computation as part of their risk management.

Exceptions were made for Eurobonds issued by the Federal Government of Nigeria or guarantees from foreign banks, including standby letters of credit. Loans secured with dollar-denominated collaterals other than those mentioned would be phased out within 90 days or face additional regulatory sanctions.

The CBN emphasized its commitment to ensuring adequate foreign exchange in the market while strengthening the naira. It clarified that Eurobonds are bonds issued offshore by governments or corporations in currencies other than their country of origin, typically in US dollars. Additionally, it explained that Letters of Credit, a trade finance tool, protect both exporters and importers in international transactions.

In a prior circular, the CBN highlighted concerns about the increasing use of foreign currencies in the domestic economy, emphasizing the legal tender status of the Nigerian naira. Violation of this provision is considered an offense under the CBN Act of 2007, punishable by a prescribed fine or imprisonment.