The Central Bank of Nigeria (CBN) has issued a directive to all banks regarding the use of foreign currency-denominated collaterals for Naira loans, aiming to address prevailing concerns and enhance regulatory oversight in the banking sector.
In a letter addressed to all banks released on the April 8 2024, the CBN highlighted its observation of the practice where bank customers utilize Foreign Currency (FCY) as collateral for Naira loans. In response to this, the CBN has announced the prohibition of this practice, with exceptions outlined for specific types of foreign currency collaterals.
According to the directive, the use of foreign currency-denominated collaterals for Naira loans is only permitted in two scenarios:
1. Eurobonds issued by the Federal Government of Nigeria.
2. Guarantees of foreign banks, including Standby Letters of Credit.
The CBN emphasized that all loans currently secured with dollar-denominated collaterals, other than those mentioned above, must be wound down within a 90-day period. Failure to comply with this directive will result in such exposures being risk-weighted at 150% for Capital Adequacy Ratio computation, along with potential regulatory sanctions.
This directive underscores the CBN’s commitment to promoting stability, transparency, and sound risk management practices within the banking sector. By restricting the use of foreign currency collaterals for Naira loans, the CBN aims to mitigate currency risk exposure and enhance the resilience of financial institutions against external shocks.
Banks are urged to adhere to the directive and ensure compliance with regulatory requirements. The CBN’s letter serves as a reminder for banks to review their loan portfolios and take necessary actions to align with the new regulatory framework.
CBN’s prohibition on the use of foreign currency collaterals for Naira loans represents a significant regulatory measure aimed at safeguarding the stability and integrity of the banking sector, while also promoting prudent risk management practices.
