The Central Bank of Nigeria (CBN) has instituted a significant policy shift, barring Deposit Money Banks (DMBs) from accepting foreign currency-denominated collateral to secure naira loans. This directive, conveyed through a letter signed by Adetona Adedeji, the acting Director of the Banking Supervision Department, seeks to reshape lending practices within the banking sector.
In the circular addressed to all banks and released on Monday, the apex bank outlined stringent guidelines restricting the use of foreign currency as collateral for naira-denominated loans. Exceptions to this rule include Eurobonds issued by the Federal Government or guarantees from foreign banks, including standby letters of credit.
Furthermore, the CBN mandated lenders to wind down all existing loans secured with dollar-denominated collateral within 90 days. Failure to comply will result in these exposures being subject to a 150% risk weighting for Capital Adequacy Ratio computation, alongside other regulatory penalties.
"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..." the circular stated.
Market analysts interpret this move as a protective measure to safeguard the stability of the banking system amidst the naira's recent appreciation. The local currency has witnessed a significant surge against the dollar, prompted by CBN's policy adjustments, including interest rate hikes in February and March, and the removal of restrictions on foreign participation in fixed-income auctions.
Reuters reported analysts suggesting that the CBN's actions, such as permitting foreign investors to pre-fund their accounts and access naira at prevailing exchange rates for bill auctions, are contributing to the naira's strengthening.
Previously, banks encountered challenges in meeting foreign investors' bids, incurring additional costs on settlement day if they resorted to borrowing from the CBN's discount window to settle bill transactions. The regulatory changes aim to streamline foreign exchange operations and enhance the efficiency of the financial system.
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