Banks Get Three-Month Deadline To Stop Forex-Backed Loans

The Central Bank of Nigeria Intensifies Efforts to Bolster Forex Liquidity: Orders Banks to Halt Use of Foreign Currency as Collateral for Naira Loans within 90 Days

In a bid to enhance foreign exchange liquidity within the economy, the Central Bank of Nigeria (CBN) issued a new directive on Monday instructing Deposit Money Banks to cease utilizing foreign currencies as collateral for naira-denominated loans, granting a grace period of 90 days for compliance.

This move coincided with a strengthening of the naira against the US dollar in both official and parallel markets on the same day.

The CBN has persistently pursued strategies to alleviate the scarcity of dollars within the financial system, employing various tactics to bolster the naira against the US dollar.

Under the leadership of Olayemi Cardoso, the CBN unveiled a fresh circular addressing concerns regarding the use of foreign currencies as collateral for naira loans. The circular, titled “The use of foreign-currency-denominated collaterals for naira loans” and referenced as BSD/DIR/PUB/LAB/017/004, was disseminated via the CBN’s official website.

Although this directive isn’t novel, the CBN highlighted the ongoing usage of foreign currencies as collateral for naira loans by bank customers, prompting the decision to prohibit such practices.

In a confidential communication to commercial lenders dated August 17, 2023, signed by the Director of Banking Supervision, Mr. Haruna B. Mustafa, the CBN explicitly warned against naira overdrafts backed by foreign currency deposits following a supervisory review.

Despite prior warnings, the persistence of such practices led to the issuance of the latest directive, signed by the acting Director of the Banking Supervision Department, Adetona Adedeji. This directive mandates banks to adjust all existing loans secured by foreign currency collateral within 90 days or face a 150 per cent capital adequacy ratio computation penalty, among other regulatory repercussions.

Consequently, borrowers will no longer be able to utilize dollar deposits in their domiciliary accounts as collateral for obtaining naira loans, except in cases involving Federal Government of Nigeria-issued Eurobonds or guarantees from foreign banks, including standby letters of credit.

The CBN’s stringent stance against such practices stems from concerns regarding currency mismatch risks, which could pose significant financial challenges for banks.

While some borrowers opt to borrow in naira to hedge against potential spikes in foreign currency costs, this approach may contribute to speculative tendencies affecting exchange rates.

The CBN reaffirmed its commitment to ensuring adequate forex supply in the market, even amid the naira’s strengthening trajectory.

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