In a recent development, the Central Bank of Nigeria (CBN) has implemented a new policy restricting the use of foreign currencies as collateral for Naira loans. The announcement was made through an official circular published on the bank’s website on Monday, April 8, 2024.

The CBN’s circular highlighted concerns over the increasing trend of customers using foreign currencies as collateral for Naira loans. As a result, the apex bank has imposed an immediate ban on this practice, with a few exceptions.

According to the updated guidelines, the use of foreign currency collaterals will only be allowed if they are in the form of Eurobonds issued by the Federal Government of Nigeria or guarantees from foreign banks, including Standby Letters of Credit.

CBN’s Stance on the New Directive

A spokesperson for the CBN stated, “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.”

Implications for the Banking Sector

Banks are required to wind down all existing loans secured with dollar-denominated collaterals, excluding the specified exceptions, within 90 days. Failure to comply with this directive will result in severe penalties, including a 150% risk weighting for the computation of the capital adequacy ratio.

This policy change underscores the CBN’s commitment to maintaining a balanced approach and recognizing the significance of specific international financial instruments and guarantees in the banking sector. It also reflects the regulator’s proactive stance in mitigating potential risks associated with the extensive use of foreign currency collaterals.

Conclusion

The CBN’s latest directive is expected to have far-reaching implications for the banking sector in Nigeria. Banks will need to adjust their lending practices, revisit loan security structures, and enhance risk assessment frameworks to comply with the new regulations. This move by the CBN aims to foster a more stable and sustainable banking environment, ultimately contributing to the overall financial stability of the Nigerian economy.

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Author: Deborah Oyinloye

With an interest in media, Deborah aims to impart the lives of people positively.

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