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 was contained in a circular to all banks by Acting Director of the Banking Supervision Department, Adetona S. Adedeji and this represents a significant shift in the CBN’s approach to loan collateralization.

The circular titled: The use of foreign currency denominated collaterals for naira loans dated 8 April 2024 read: 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.

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

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

However, the CBN has outlined two specific exceptions to this new regulation which affects most foreign currency-based financial instruments- Nigerian government-issued Eurobonds can still be used as collateral for naira loans.

Also, 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.

CBN as well 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.

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