CBN bars use of foreign currency as collateral for naira loans

THE Central Bank of Nigeria (CBN) on Monday banned the use of foreign currency-denominated collaterals for naira loans, threatening to sanction erring banks.

In a letter to all banks, and signed by Adetona Adedeji, acting director of the banking supervision department, the apex bank outlined the new regulations aimed at addressing prevailing practices in the banking sector.

The directive highlights the observation by the CBN of the widespread practice where bank customers utilise foreign currency as collateral for naira loans. Effective immediately, the CBN has prohibited the use of foreign currency-denominated collaterals for Naira loans, except under specific circumstances.

The only exceptions permitted for the use of foreign currency collaterals are Eurobonds issued by the Federal Government of Nigeria or guarantees of foreign banks, including Standby Letters of Credit.

The directive further mandates that all loans currently secured with dollardenominated collaterals, other than those mentioned above, must be wound down within 90 days. Failure to comply with this directive will result in such exposures being risk-weighted at 150 percent for Capital Adequacy Ratio computation, in addition to other regulatory sanctions.

The policy shift underscores the CBN’S commitment to ensuring the stability and integrity of the Nigerian banking system while promoting prudent lending practices and safeguarding against currencyrelated risks.

Banks and financial institutions are urged to adhere strictly to these new guidelines to avoid regulatory penalties.

The CBN emphasised that this directive was in the best interest of maintaining a sound and resilient banking sector in Nigeria.

For further clarification or guidance, the CBN advised the lenders to contact the banking supervision department of the apex bank.