CBN bans use of foreign currency as collateral for naira loans

The Central Bank of Nigeria (CBN) has banned the use of foreign currencies as collaterals for naira loans.

The CBN gave the directive in a circular dated April 8, 2024, signed by its Acting Director of Banking Supervision, Adetona Adedeji, and addressed to all banks in the country.

However, the apex bank listed two exceptions to the rule as foreign currency collateral which are Eurobonds issued by the Federal Government or guarantees of foreign banks, including Standby Letters of Credit.

The circular read: “The Central Bank of Nigeria has observed the prevailing situation where customers use Foreign Currency (FCY) as collaterals 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, failing which such exposures shall be risk-weighted 150% for Capital Adequacy Ratio (CAR) computation, in addition to other regulatory sanctions.”

Capital adequacy ratio is calculated by dividing a bank’s capital by its risk-weighted assets.