The Central Bank of Nigeria has released a new circular mandating Deposit Money Banks to stop the use of foreign currencies as collateral for naira loans within 90 days.
The development happened as the naira rose against the greenback at both the official and parallel markets on Monday.
The CBN has continued to deepen its battle to free dollar liquidity stocked up in the financial system by deploying various measures aimed at shoring up the naira against the United States dollar.
On Monday, the Olayemi Cardoso-led CBN issued a new circular, expressing concerns over the use of foreign currencies as collateral for naira loans.
The circular made available on its website and titled “The use of foreign-currency-denominated collaterals for naira loans”, was referenced BSD/DIR/PUB/LAB/017/004.
The apex bank said it observed the use of foreign currency by bank customers as collateral for naira loans.
As such, the regulator directed banks to trim all existing loans with foreign currency collaterals to 90 days or attract a 150 per cent capital adequacy ratio computation as part of the bank’s risk.
The new directive means a borrower may no longer use dollar deposits in their domiciliary bank accounts as collateral to obtain naira loans.
According to stakeholders, the practice is partly due to the need to hedge against foreign currency spikes which can be costlier than interest rates.
“The Central Bank of Nigeria has observed the prevailing situation where bank customers use foreign currency 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 computation, in addition to other regulatory sanctions,” the circular read.
