The Central Bank of Nigeria (CBN) has ordered all banks in Nigeria to end the use of foreign currencies as collateral for naira loans.
It disclosed this in a circular titled “The use of foreign-currency-denominated collaterals for naira loans” with ref number: BSD/DIR/PUB/LAB/017/004.
Adetona Adedeji, the acting director of the apex bank’s Banking Supervision Department, signed the circular, which was then posted on the bank’s website on Monday.
The top bank stated that it has seen FCY being used as collateral for naira loans by its clients and, as a result, it forbids it going forward.
Consequently, banks were instructed to reduce all current loans with foreign currency collateral to 90 days or face a computation of 150 percent for the capital adequacy ratio as part of the bank’s risk.
“The Central Bank of Nigeria has observed the prevailing situation where bank 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 computation, in addition to other regulatory sanctions,” the circular read.
The CBN maintained that it is on a mission to ensure that there is adequate foreign exchange in the market even as the naira is being strengthened.
Eurobonds, according to the Hong Kong and Shanghai Banking Corporation (HSBC), are bonds issued offshore by governments or corporates denominated in a currency other than that of the issuer’s country.
Eurobonds are usually long-term debt instruments and are typically denominated in US dollars.
Letters of Credit, according to the International Trade Administration, are contractual commitments by the foreign buyer’s bank to pay once the exporter ships the goods and presents the required documentation to the exporter’s bank as proof.
As a trade finance tool, Letters of Credit are designed to protect both exporters and importers.
In the apex bank’s previous circular to all the banks signed by its former Director, Corporate Communications Department, Ibrahim Mu’azu, the bank said its attention was drawn to the increasing use of foreign currencies in the domestic economy as a medium of payment for goods and services by individuals and corporates.
It also observed that some institutions price their goods and services in foreign currencies and demand payments in foreign currencies rather than the domestic currency (the Naira), which is the legal tender in Nigeria.
CBN stated, “For the avoidance of doubt, the attention of the general public is hereby drawn to the provisions of the CBN Act of 2007, which states inter-alia that “the currency notes issued by the Bank shall be legal tender in Nigeria…for the payment of any amount.”
Furthermore, the Act stipulates that any person who contravenes this provision is guilty of an offence and shall be liable on conviction to a prescribed fine or six months imprisonment.
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