The Central Bank of Nigeria (CBN) recently issued a significant directive to all banks operating within the country, targeting the use of foreign currency as collateral for Naira-denominated loans. This directive aims to address a prevalent practice where customers leverage foreign currency assets to secure loans denominated in Naira.
Under the new directive, the CBN has imposed strict limitations on the utilization of foreign currency collaterals for Naira loans, with only specific circumstances deemed acceptable. Notably, the exceptions include Eurobonds issued by the Federal Government of Nigeria and guarantees provided by foreign banks, such as Standby Letters of Credit.
Furthermore, the directive mandates that all existing loans secured with dollar-denominated collaterals be phased out within a stipulated timeframe of 90 days. Failure to comply with this directive will result in regulatory consequences, including the risk-weighting of such exposures at 150% for Capital Adequacy Ratio computation, along with other potential sanctions.
This directive, as outlined in a letter signed by the AG Director of the Banking Supervision Department, Dr. Adetona Adedeji, underscores the CBN’s commitment to ensuring regulatory compliance and stability within the banking sector. It serves as a proactive measure to safeguard the interests of customers and maintain overall financial stability within the Nigerian banking industry.
In light of this directive, banks are strongly encouraged to promptly initiate actions to ensure full compliance. Additionally, they are advised to seek clarification or assistance from regulatory authorities as needed to ensure seamless implementation of the new regulations.
