In a significant move aimed at fortifying Nigeria’s financial system, the Central Bank of Nigeria (CBN) has prohibited the utilization of foreign currency as collateral for obtaining loans in naira, except under specific conditions. This directive, communicated through a circular from Adetona S. Adedeji, the Acting Director of the Banking Supervision Department at the CBN, underscores the regulator’s commitment to maintaining stability and promoting responsible currency management within the economy.
The circular, distributed to all Nigerian banks, highlighted the prevailing practice of leveraging foreign currency (FCY) as collateral for naira loans. In response, the CBN has intervened to curtail this practice, citing the need to stabilize the financial market and ensure judicious use of foreign currency resources.
Exceptions to the ban include Eurobonds issued by the Federal Government of Nigeria and guarantees from foreign banks, including Standby Letters of Credit. These exceptions, carefully delineated by the CBN, acknowledge the significance of specific international financial instruments and guarantees in bolstering the resilience of the banking sector.
The directive mandates a 90-day timeline for the winding down of existing loans secured with dollar-denominated collateral, excluding those specified. Failure to comply will result in severe penalties, including a 150% risk weighting for Capital Adequacy Ratio computation and additional regulatory sanctions.
This regulatory intervention heralds a new chapter in Nigeria’s banking landscape, prompting banks to reevaluate their lending practices and enhance risk management frameworks to align with the CBN’s directives. As banks navigate the transition, industry observers anticipate significant adjustments in loan structuring and risk assessment practices to ensure compliance within the stipulated timeframe.
The implementation of this policy underscores the CBN’s proactive stance in mitigating risks associated with extensive reliance on foreign currency collateral, ultimately contributing to a more stable and sustainable banking environment in Nigeria. With banks now mandated to adhere to the new regulations, stakeholders are closely monitoring the sector’s response and the broader implications for financial stability and economic growth.
Credit: Nairametrics (Text Excluding Headline)
