Why CBN Banned Use Of Foreign Currency As Collateral To Collect Naira Loans |Golden News

The Central Bank of Nigeria (CBN) has taken a significant step by issuing a directive that prohibits the use of foreign currency (FCY) as collateral for Naira loans.

This directive, announced in a circular by Dr. Acting Director of the Banking Supervision Department, Adetona S. Adedeji, marks a notable shift in the CBN’s approach to loan collateralization.

Directive Details

Under this new directive, banks across Nigeria are no longer authorized to accept deposits denominated in foreign currencies like USD, EUR, or GBP as security for Naira loans.

This prohibition extends to most financial instruments based on foreign currency, with only specific exceptions outlined by the CBN.

Permissible Collateral

Despite the broad restriction, the directive allows Nigerian government-issued Eurobonds to continue serving as collateral for Naira loans.

Additionally, guarantees from reputable foreign banks, including Standby Letters of Credit, are deemed acceptable forms of collateral.

Transition Period for Compliance

To facilitate a smooth transition, the directive provides a timeframe for banks to address existing loans secured by non-compliant collateral.

Loans currently secured with dollar-denominated collaterals other than Eurobonds or foreign bank guarantees should be wound down within 90 days from the issuance of the directive.

Consequences of Non-Compliance

The circular issued by the CBN warned of potential consequences for banks failing to comply with the directive.

Exposures related to non-compliant collateral may be risk-weighted at 150 percent for Capital Adequacy Ratio computation, in addition to other regulatory sanctions.

This adjustment effectively increases the capital reserves required by banks against these loans, impacting their profitability.

Conclusion

While the CBN did not specify the exact nature of additional sanctions, potential penalties could include fines or other punitive measures.

This directive reflects the CBN’s efforts to strengthen the regulatory framework surrounding loan collateralization and ensure the stability of the Nigerian financial system.