CBN Prohibits Use Of Foreign Currencies As Collateral For Naira Loans

The Central Bank of Nigeria (CBN) has prohibited the use of foreign currency (FCY) as collateral for naira loans.

This directive contained in a circular by the Acting Director of the Banking Supervision Department, Adetona Adedeji, represents a significant shift in the CBN’s approach to loan collateralization.

According to the new regulation, banks can no longer accept deposits denominated in foreign currencies like USD, EUR, or GBP as security for loans issued in naira.

This ban extends to most foreign currency-based financial instruments, excluding those specifically permitted by the CBN.

The CBN has outlined two specific exceptions to this new regulation: Nigerian government-issued Eurobonds can still be used as collateral for naira loans.

Guarantees provided by reputable foreign banks, including Standby Letters of Credit, will remain acceptable forms of collateral.

The directive provided a timeframe for banks to address existing loans secured by non-compliant collateral-foreign currency deposits other than Eurobonds or foreign bank guarantees.

The circular reads: “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.

“In this regard, all loans currently secured with dollar-denominated collaterals other than as mentioned above should be wound down within 90 days”.

The CBN in the circular also outlined potential consequences for banks that fail to comply with this new directive.

“Failing which such exposures shall be risk-weighted 150 percent for Capital Adequacy Ratio computation, in addition to other regulatory sanctions,” the apex bank warned.

This effectively increases the capital reserves that banks must hold against these loans, making them less profitable.

The CBN did not specify the nature of these additional sanctions but they could potentially include fines or other penalties.