The Central Bank of Nigeria has issued a circular, titled “The use of foreign-currency-denominated collaterals for naira loans,” addressed to all banks in Nigeria.
The circular, signed by Adetona Adedeji, the acting Director of the Banking Supervision Department, was published on the apex bank’s website. It prohibits the practice of using foreign currency (FCY) as collateral for naira loans, except in cases involving Eurobonds issued by the Federal Government of Nigeria or guarantees of foreign banks, such as standby letters of credit.
Loans currently secured with non-qualifying foreign currency collaterals must be phased out within 90 days, failing which they will face a 150 per cent risk weighting for Capital Adequacy Ratio computation, along with other regulatory sanctions.
The CBN emphasizes its commitment to ensuring adequate foreign exchange in the market while strengthening the naira. Eurobonds, as defined by the Hong Kong and Shanghai Banking Corporation (HSBC), are offshore bonds denominated in a currency other than that of the issuer’s country, often in US dollars.
Letters of Credit, explained by the International Trade Administration, are commitments by the foreign buyer’s bank to pay upon receipt of required documentation once the exporter ships the goods. These tools aim to safeguard both exporters and importers in trade transactions.
Previously, the CBN, in a circular signed by Ibrahim Mu’azu, the former Director of the Corporate Communications Department, addressed the increasing use of foreign currencies in the domestic economy for payments by individuals and corporates.
It noted instances where institutions priced their goods and services in foreign currencies, contrary to the legal tender in Nigeria, which is the Naira.
The CBN highlights the provisions of the CBN Act of 2007, specifying that the currency notes issued by the bank are legal tender in Nigeria, and any contravention of this provision is punishable by a prescribed fine or imprisonment of up to six months.
