The Central Bank of Nigeria (CBN) on Monday issued a directive to all banks prohibiting the use of foreign currency as collateral for Naira loans.

This move comes amid efforts to strengthen the country’s financial sector and ensure regulatory compliance.

In a letter addressed to all banks, the CBN outlined new guidelines prohibiting the practice, with exceptions for specific types of foreign currency collateral.

According to the letter signed by Adetona Adedeji, director of banking supervision department, the use of foreign currency-denominated collaterals for Naira loans is now prohibited, except in cases where the collateral is in the form of Eurobonds issued by the Federal Government of Nigeria or guarantees provided by foreign banks, including Standby Letters of Credit.

The Central Bank of Nigeria has observed the prevailing situation where bank customers use Foreign Currency (FCY) as collaterals for Naira loans,” the bank said.

“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 effect, the apex bank notes that all loans currently secured with dollar-denominated collaterals other than as allowed by the new directive should be wound down within 90 days.

Should any of the lenders fail to meet the requirements, the CBN said such exposures should be risk-weighted 150 per cent for Capital Adequacy Ratio computation, in addition to other regulatory sanctions.

The new move is part of a coordinated effort by the apex bank to strengthen the banking sector and stabilise the Nigerian economy.

The CBN had on 29 March announced an upward review of the minimum capital requirement for banks, specifying that commercial banks with international licenses must maintain a capital base of N500 billion.

Similarly, the apex bank directed that national and regional banks are required to have capital bases of N200 billion and N50 billion, respectively.

Culled from Premium Times Nigeria